The legal nature of structured financial products

Mindaugas Gedeikis's picture

Investors and other market participants are interested in adequate understanding and implementation rights and obligations arising from investments in structured financial products.



There are currently no legal definitions of structured financial products in the legislation of Lithuania or European Union. In practice briefly structured financial products are defined as products that are based on an underlying security such as a single equity, a basket of stocks, an index, a commodity, a debt issuance or a foreign currency.

The main structural features of structured financial products are as follows: structured financial products combine variety of financial instruments and other financial products, and are issued into the market as a separate product; the return on structured financial product is based on an underlying security such as a single equity, a basket of stocks, indices, funds, commodities, a foreign currency, etc. and not on the discretion of the product provider; the investor of structured financial products assumes the counterparty risk; the structured financial product excluding unit-linked life insurance policies relies on the use of derivatives to generate the return.

Structured financial products in accordance with their legal form include the following groups: structured securities, structured term deposits, investments packaged as life insurance policies (unit-linked life insurance policies).

Structured securities may be sold to investors as certificates, structured notes (bonds) or warrants. Structured securities are derived from or based on a single security, a basket of securities, an index, a commodity, a debt issue or a foreign currency. Structured securities are developed with the use of derivatives. Similarly structured term deposits offer a combination of a term deposit with derivatives. In unit-linked life insurance policies a portion of the premium is used to purchase life cover (the sum assured) with the balance invested in a fund. Therefore, the return on the policy is linked to the performance of the funds.

There is no specific regulation of structured financial products market in Lithuania. Its regulation is based on the legal form structured financial products are offered. The legal forms include a bond or other non-equity securities, term deposits, life insurance.

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