Cross-border Structured Products and Certificates: Opportunities for Retail Investors in Europe

In an increasingly globalized financial market, retail investors are seeking investment opportunities across various jurisdictions to diversify their portfolios and maximize returns.

Cross-border structured products and certificates have emerged as a popular alternative to traditional investment vehicles, offering exposure to different asset classes and markets.

We will explore the opportunities and challenges faced by retail investors when investing in structured products across different European jurisdictions, highlighting the role of global online brokers in facilitating access to these products, and discussing the need for a unified European investment framework.

Opportunities

Diversification

Investing in structured products across different European jurisdictions allows retail investors to diversify their portfolios by spreading their investments across various asset classes and geographical regions. This can help reduce the overall risk of their portfolios and improve long-term returns. For example, an investor based in Germany might invest in a structured product linked to the performance of an equity index in France, a commodity index in the UK, and a fixed income index in Spain.

Innovative investment strategies

Structured products offer retail investors access to innovative investment strategies that may not be available through traditional investment vehicles. These products often combine multiple underlying assets, payout structures, and investment horizons, allowing investors to tailor their investments to meet specific risk-return profiles. For example, a retail investor might invest in a certificate with a capital guarantee feature, offering protection against losses in the underlying assets while still providing exposure to potential gains.

Access to professional portfolio management

Many structured products are managed by professional portfolio managers, who utilize their expertise to select and manage the underlying assets. This can help retail investors gain access to professional portfolio management services, which may be difficult to obtain otherwise. Additionally, online brokers can provide investors with sophisticated tools and research to help them analyze and select structured products that best suit their investment goals.

Challenges

Regulatory differences

One of the main challenges faced by retail investors when investing in structured products across different European jurisdictions is navigating the complex regulatory landscape. Each jurisdiction has its own rules and regulations governing the issuance, distribution, and taxation of structured products, which can create confusion for investors. For example, the regulatory requirements for a structured product issued in Italy may differ significantly from those in the Netherlands, making it difficult for an investor to understand and compare the products.

Currency risk

Cross-border investments expose retail investors to currency risk, as fluctuations in exchange rates can impact the returns on their investments. For example, if an investor based in Germany purchases a structured product denominated in British pounds, they face the risk that the value of their investment may decrease due to adverse movements in the GBP/EUR exchange rate.

Limited access to information

Retail investors may face difficulties in accessing comprehensive information about structured products issued in different jurisdictions. This can make it challenging for them to analyze and compare the products, potentially leading to suboptimal investment decisions. Additionally, language barriers can further exacerbate the problem, as important documents and information may not be available in the investor’s native language.

The Role of Global Online Brokers

Global online brokers can play a crucial role in helping retail investors overcome these challenges by providing a platform for accessing structured products across different European jurisdictions. These platforms can simplify the investment process by offering standardized and user-friendly tools for comparing and analyzing structured products, as well as providing access to professional research and portfolio management services. Furthermore, online brokers can facilitate the onboarding process, enabling clients to subscribe to various country primary markets of structured products and certificates.

A Vision for a Unified European Investment Framework

Given the opportunities and challenges associated with cross-border investments in structured products, there is a growing need for a unified European investment framework that simplifies the process for retail investors, regardless of their domicile. Such a framework could involve harmonizing regulations across jurisdictions, creating standardized documentation and reporting requirements, and promoting greater transparency in the industry. This would not only enhance investor protection but also foster greater cross-border investment flows, contributing to the growth and development of the European financial market.

Key components of a unified European investment framework could include:

Harmonized regulations

Establishing a common regulatory framework for structured products across European jurisdictions would help reduce the complexity and confusion associated with cross-border investments. This could involve creating a centralized authority responsible for overseeing the issuance, distribution, and taxation of structured products, ensuring that investors are subject to a consistent set of rules and regulations.

Standardized documentation and reporting

Developing standardized documentation and reporting requirements for structured products would make it easier for retail investors to access and compare information about these products. This could include creating a common prospectus format and requiring issuers to provide regular updates on the performance of their products. Additionally, offering translations of key documents in multiple languages would help overcome language barriers and ensure that investors have access to essential information.

Greater transparency

Promoting greater transparency in the structured products industry would help retail investors make more informed investment decisions. This could involve requiring issuers to provide detailed information about the underlying assets, payout structures, and risks associated with their products. Furthermore, establishing a centralized database of structured products available across European jurisdictions would enable investors to easily compare and analyze

Global online brokers can play a pivotal role in addressing these challenges by providing access to various country primary markets and facilitating the onboarding process.

However, to truly unlock the potential of cross-border investments, a unified European investment framework is needed, fostering greater harmonization, standardization, and transparency in the industry.