Examples of Structured Finance Products
Structured finance products are a broad category of financial instruments that provide investors with exposure to underlying assets, typically by investing in a small amount. These products may offer high returns but also come with high risks and costs.
The products can be based on market indices, currencies, commodities, interest rates or a combination of these. They can also incorporate embedded derivatives such as options and futures.
Guaranteed Deposits
A deposit is a sum of money that a customer keeps in his or her bank account. A deposit guarantee scheme protects the deposits of all depositors, regardless of their citizenship or place of residence.
The European Union has harmonised deposit-guarantee schemes since 1994. This is in response to the financial crisis, which showed that bank failures did not stop at national borders.
Directive 94/19/EC requires all Member States to have a deposit guarantee scheme for at least 90% of the deposited amount, up to 20,000 euros per person. The new directive, Directive 2014/49/EU, maintains this level but increases the maximum compensation to EUR 100,000.
Depositors are informed when a bank becomes insolvent and the deposit guarantee scheme is triggered. This is done through public information, such as press releases and the bank’s website.
Credit Default Swaps (CDSs)
Credit Default Swaps (CDSs) are derivative contracts that allow buyers to shift the risk of default on debt securities. They’re often used to protect against the default of high-risk government bonds, corporate debt and sovereign debt.
CDSs can be bought and sold by banks, insurance companies and others in the financial industry. They can be purchased for hedging, arbitrage and speculation.
The CDS market was a major contributor to the global financial crisis of 2008-2010. The market’s opacity allowed some firms to hold more risk than they could handle and others to be …
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