Financial Products: Orientation within the Product Universe

• Silvan Thoma
  Director Financial Services – Legal, Regulatory & Compliance
  PwC Schweiz

Part 1: Regulatory Considerations in Product Structuring

Fundamental questions at the start

Structuring is the starting point for every product launch. The primary objectives are to determine the appropriate jurisdiction for the issuer, select a suitable vehicle and design the product in a way that is viable from a regulatory and tax perspective. For example, depending on the objective of the product a derivative may be more suitable than an ETF or vice versa. For example, an ETF offers the advantage that retail investors can easily trade it on a stock exchange. From a regulatory point of view, however, establishing an ETF is considerably more demanding and costly than structuring and completing a bilateral derivative transaction.

The most important criteria for the decision are the investment strategy, the geographical target markets and the target investors. Other factors follow from these criteria, such as whether liquid secondary market trading is necessary, how the shareholder structure of the issuer is designed and whether there must be a legal and regulatory distinction between the issuer and group companies.

Weighing up the pros and cons

Each structuring option has advantages and disadvantages which must be weighed against each other. For example, the active management of a financial product may trigger an authorisation requirement under financial market law, and the choice of a particular vehicle may restrict the permissible investment strategies. In addition, stock exchange regulations or financial market regulations typically stipulate that underlyings with leverage or illiquid underlyings such as private equity may not be used in products targeted at retail investors, or may only be used to a limited extent. For this reason, the target market for the intended product must be clearly defined from the outset. The target group and country of distribution largely determine how extensively the product must be documented and who is permitted to market it. All these factors determine whether a launch is financially worthwhile and should be clarified as early as possible.

Selecting partners and planning costs

Once the basic features of the product have been defined, it is important to identify suitable partners for the structure. The type of partners required depends on the vehicle chosen. These may include custodians, calculation agents, paying agents, market makers, creditor representatives, asset managers or index providers. Depending on the target market and target group, it is also advisable to approach distribution partners at an early stage and factor their fees into the planning. This is the only way to reliably estimate whether the product will ultimately be economically viable.

Part 2 examines the tax treatment of ETFs, ETPs, derivatives and Structured Products – and why it matters for market success.