FSA opens the way for new retail investor opportunities

Securitised derivatives are derivative products such as covered warrants and certificates, that are freely traded and are listed on stock exchanges. They enable investors to have exposure to a wide range of underlying products such as shares, indices, commodities and interest rates without investing directly in the underlying product.

Ken Rushton, Director of Listing at the FSA, said:

We want to ensure the UK has a flexible listing regime which keeps up with market demand. We are facilitating innovation in the UK markets by proposing to list securitised derivatives.

Market participants believe that there will be a demand for these products, which are very popular in some European countries. The FSA believes that there is the potential for the market in the UK for these products to be substantial if UK investors show a similar appetite for these products as they have for other products such as spread betting and options.

Our proposals should help maintain UK competitiveness whilst at the same time ensuring an appropriate degree of protection for consumers.

The key points of the FSAs proposals are that:

• A retail investor can only purchase a securitised derivative once his or her suitability has been established. All investors will be issued with a risk warning. IFAs and brokers selling these products will have to be qualified to advise on derivatives.

• The listing particulars of securitised derivatives will also include a risk warning on the front page with full disclosure of the risks associated with these products. Details of the product, how it works and how the investors return is calculated will also be included.

• Any firm, which wants to issue securitised derivatives, must be regulated by the FSA and permitted to conduct business in derivatives.

• The listing rules ensure that retail investors who are unfamiliar with the settlement procedures of these products are not penalised financially. There will be automatic exercise of products that are in the money at their expiry date.

The consultation paper is the result of extensive discussions with market participants and international regulators. It sets out in detail the proposed listing and conduct of business rules. The listing rules set out who can issue securitised derivatives and the information about these products that must be disclosed. The conduct of business rules given the sale of these products should be sold to retail investors.

Notes for editors

1. The FSA has today published Consultation Paper 114 Proposed Listing and Conduct of Business Rules for Securitised Derivatives. The idea to list retail covered warrants, which is one type of securitised derivative, was first raised by the FSA in January this year, in Consultation Paper 81. The proposal in this Consultation Paper 114 is a wider and more flexible regime in that it includes other types of derivatives.

2. Securitised derivatives (which is a generic term used by the FSA to cover the broad range of derivatives that may be listed and sold to retail investors) all work in the following way:
   • the investor pays money up front in return for a right to receive a return, either in cash or by the physical delivery of some underlying instrument.
   • the investors return is always linked to the performance of that underlying instrument which could include shares, indices like the FTSE 100, foreign exchange, commodities and interest rates.
   • these products will enable investors to gear their exposure to the underlying instrument without having to invest directly in it. For example, an investor who buys a securitised derivative over 1000 BT shares can gain the same exposure to the movement in the share price as a shareholder of 1000 BT shares, but without having to buy the shares outright.

3. The FSA is the principal regulator of the UK financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.