Structured certificates of deposit, or SCDs, are financial instruments representing a deposit of a specified amount of money for a fixed period of time. Like traditional certificates of deposit, SCDs entitle the holder to his or her principal investment, plus possible additional payments. However, unlike traditional CDs, which usually pay interest periodically based on a fixed or floating rate, SCDs often pay an additional payment of principal and/or interest based on the performance of an underlying market measure.
Over the past few years, the markets have seen an increased demand for SCDs. In response to this growth in popularity, in May 2012 the Federal Deposit Insurance Company (the “FDIC”) published a consumer alert titled “Market-Linked CDs: Don't Let the Possibility of Higher Returns Cloud Your View of the Potential Risks.”20
The alert highlights some of the risks associated with SCDs. In sum, SCDs may possess complex features that may not be present in conventional CDs. According to the FDIC, investors should keep in mind the following questions before investing in SCDs:
- Is the principal amount of the SCD guaranteed against loss? Specifically, are the SCDs insured by the FDIC?
- When will the SCD mature?
- What are the restrictions or penalties on early withdrawals?
- How are returns on the SCD calculated?
- If applicable, when will interest payments be made on the SCD?
- Are the SCDs redeemable before maturity by the issuing bank?
The issues raised in the alert are not necessarily new, and to some extent, the alert repeats some of the prior points made by other regulators.21 However, the alert is a useful reminder that the FDIC is one of the many regulators that has taken an interest in ensuring that structured products are properly marketed and sold.
For a further discussion of structured certificates of deposit, see Volume 1, Issue 13 of Structured Thoughts at http://www.mofo.com/files/Uploads/Images/101004-Structured-Thoughts-Issue-13.pdf, as well as our Frequently Asked Questions at http://www.mofo.com/files/Uploads/Images/Frequently-Asked-Questions-about-Structured-Certificates-of-Deposit.pdf.