CoCos Investment Banned for Public

CoCos Investment Banned for Public.

The finance industry regulator, the Financial Conduct Authority (FCA) has banned the sale of CoCos investments for the general public from 1 October 2014.

What are CoCos?

CoCos stands for Contingent Convertible Securities.

They are highly speculative convertible stock options

A stock option is usually where you have an option to buy or sell a share when it reaches a particular price (put and call options).

In this case, CoCos are options for technically, the option to buy a company’s shares i.e. equities if the capital value of the business (the balance sheet) falls below a certain value. The CoCos option may be issued by companies looking to raise finance that perhaps they cannot do by offering company loan stock (i.e. corporate bonds) with the incentive that a coupon interest is payable and if the company capital drops off, the investor then gets to own shares in the companies at a discount price of the CoCos option.

The securities are designed to be written off or converted into equity when an issuer's capital position falls below a certain level. This may result in:

• Capital value of company falls, you have to option on the shares
• Capital value of company rises, your CoCos option is worthless and written off

The FCA has deemed these investments high risk and has regulated to make them only available to professional investors, institutions and experienced “high net worth” investors only and not the general public for the next 12 months.

Comment

We do not like structured investments full stop. They are highly speculative and much of our market misery will wild swings in stockmarkets are not caused by a lack of confidence in large companies quoted on stick exchanges but caused by speculative moves by professional investors in hedge funds, futures and options market.

We have seen this many times, the classic example being the banning of “naked short selling” during the economic crisis in 2008/09. In very basic terms, naked short selling is where you sell a share (that you do not even own yet), driving the price down and on the same day buy it, after the price has fallen, meaning that you profit even though on the day you still finish not owning the share but you have driven the market price down creating huge market swings.

We welcome the FCA getting involved early in CoCos and we hope they keep better control to avoid speculators driving capital value, balance sheets of larger companies which will affect market confidence in larger companies on a very big scale. Professional traders are getting too clever for their own good, making millions at the expense of others and need to be controlled.