The Shadow Market like mortgage-backed securities ends up in retail investments

Complicated but largely unregulated derivatives like mortgage-backed securities (MBS), Credit Default Swaps etc had found its way to ordinary investments such as unit trusts. I recalled in 2008, even money market funds had MBS inside it. Because Investments-linked policies (ILPs) basically invest in underlying unit trusts, even ILPs can be considered complicated. To make things worse, the plain vanilla and simple to understand Exchange traded funds (ETFs) have become complex because a very large number of ETFs these days are synthetic (swap based) with no real underlying securities.

In Singapore, investors who wish to invest in ‘complex’ products are required to undergo the Customer Assessment Knowledge (CKA). The CKA aims to protect investors in the light of these complicated products. However, those who wish to buy stocks need not go through the CKA because shares are ‘less complicated.’ I disagree that ordinary shares are less complicated. Just look at the way S-Chips are performing and you can figure shares are no less complicated.

Here is a video on mortgage-backed securities and credit default swaps. This CBS report looks at the so-called shadow market, where complex financial instruments are privately traded, with little disclosure and very low levels of transparency.

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