Risks
The risks associated with many structured products, especially those products that present risks of loss of principal due to market movements, are similar to those risks involved with options. The potential for serious risks involved with options trading are well-established, and as a result of those risks customers must be explicitly approved for options trading. In the same vein, the U.S. Financial Industry Regulatory Authority (FINRA) suggests that firms "consider" whether purchasers of some or all structured products be required to go through a similar approval process, so that only accounts approved for options trading would also be approved for some or all structured products.
In the case of a "principal protected" product, these products are not always insured in the United States by the Federal Deposit Insurance Corporation; they may only be insured by the issuer, and thus have the potential for loss of principal in the case of a liquidity crisis, or other solvency problems with the issuing company. Some firms have attempted to create a new market for structured products that are no longer trading. These securities may not be trading due to issuer bankruptcy or a lack of liquidity to insure them. Some structured products of a once solvent company have been known to trade in a secondary market for as low as pennies on the dollar.
The regulatory framework with regard to structured products is also hazy. These may fall in grey areas legally. In India, equity related structured products seem to be in violation of the Securities Contract Regulation Act (SCRA). SCRA prohibits the issue and trade of equity derivatives except those that trade on nationally recognized stock and derivatives exchanges.
Read more about this topic: Structured Product
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