Securitised derivatives to be available in the UK

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:

"I am pleased that we have been able to create a suitable regulatory regime to help facilitate innovation in the UK markets by making securitised derivatives available to UK investors. These rules will ensure there is an appropriate degree of protection for consumers both through disclosure of the risks and safeguards on the selling of these products."

Details of the protections for retail investors built into the regulatory regime include:

• Detailed disclosure of the risks associated with the product, the product itself and how the return is calculated in the listing rules; and

• Firms that sell or recommend securitised derivatives to private customers will be required to provide a risk warning which will highlight the risks associated with these products and be able to show that the customer has considered the risk warning.

The FSA believes there is the potential for the market in the UK for these products to be susbstantial if UK investors show a similar appetite for these products as they have for other products such as spread betting and options. There are significant markets in these instruments already in other European countries. The largest market in Europe is Germany, which began in 1989 and currently has over 20,000 warrants issued annually from just 25 issuers.

Notes for editors

1. The FSA today publishes a Policy Statement Proposed Listing and Conduct of Business Rules for Securitised Derivatives. It includes feedback on Consultation Paper 114 and made rules which will come into force from 1 August 2002.

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 financial risk associated with some of these products is that an investor may lose their entire initial investment. This could occur because the product may be structured in such a way that an investors return depends on whether or not the underlying instrument reaches a set level or price.

4. Firms which intend to sell securitised derivatives will need to be authorised by the FSA and be permitted to advise and sell contractually based investments.

5. Securitised derivatives will be treated as derivatives for the purpose of Training and Competence rules. But, in the longer term, the Training and Competence regime will be amended, after consultation, to reflect the hybrid nature of these products.

6. 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.

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