The FSA's plans to allow a market in securitised derivatives looks set to be a winner if European ap...
The FSA's plans to allow a market in securitised derivatives looks set to be a winner if European appetites for this type of product are anything to go by, however the London Stock Exchange is warning that investors will have to do their homework in order to avoid paying the same 0.5% stamp duty as levied on ordinary share purchases.
Securitised derivatives are a way of taking a punt on the future price of shares without actually buying those shares.
Unlike spread betting, however, it involves stumping up cash to buy products, derivatives, which will promise to return cash or shares if the bet turns out to be correct.
They are also different from futures contracts in that the investor can only loose his or her initial investment, and this holds true regardless of any gearing effects.
Because the products are traded like shares, they also mean that investors can go short, although the FSA says that this is not a course to be taken unless the investor can be reasonably sure that the derivative is sufficiently liquid to ensure that the investor shorting the stock can get their hands on some at the relevant price.
The London Stock Exchange says that securitised derivatives that are exchanged for cash will not be affected by stamp duty, but where the investor receives shares such duty is liable to be paid.
This is because a contract for a derivative promising to pay the investor back in shares could be seen as a roundabout way of buying shares, which would be subject to stamp duty.
"Participants are advised to obtain advice from their tax consultant on their own tax position," the LSE warns.
The FSA says its rules clearly state that advisers must have the relevant authorisation to make recommendations on derivatives products.
But it does not seem overly concerned about the tax implications for investors, instead pointing out that securitised derivatives are big business in Germany, and that we may yet see general collective investment schemes using these products to hedge risks.
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