Did You Lose Money Investing in Steepeners?


Erez Law is currently investigating brokers at brokerage firms across the country who recommended their clients invest in Steepeners.

Steepeners are a type of structured product. Structured products are complex securities derived from or based on a single security or index, basket of securities or indices, a debt issuance, a commodity and/or a foreign currency. Most structured products pay an interest or coupon rate based on certain defined parameters. Structured Products typically consist of a note and a derivative, most often an option. While the note pays interest, the derivative defines the payment at maturity. Despite the fact that structured products most often involve options, they are typically marketed as debt securities. Structured products can offer a form of principal protection and frequently cap the upside participation in the underlying investment. Additionally, structured products do not trade on an exchange and are generally not liquid investments. Structured products are issued by brokerage firms and are registered with the SEC. Structured CDs are issued by banks and are not registered with the SEC. Given the complexity of these structured products and their similarities to options, securities regulators have required brokerage firms to specially approve clients for structured products.

Steepeners allow investors to bet on the shape of the yield curve. Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate that is derived from the difference between long and short term rates. Investors who invested in Steepeners at the recommendations of their broker may have suffered serious financial losses. It is alleged that brokerage at brokerage firms across the United States recommended their clients invest in Steepeners, which were unsuitable for their investment goals, causing significant investment losses. Steepeners are complex structured products, often with short-term teaser interest rates, long dated maturities and obscure features that caused them to lose capital rapidly along with greatly diminished interest payments.

When there is a large difference between the two rates, there is a steep curve and thus a higher return earned by the investor. Steepeners were appealing to some investors who sought returns. In fact, some of these structured products had initial fixed interest rates that were high. And as a bonus to investors, some of these products were also principal protected. These investments also have fixed rates that mantimes can change to floating rates based on the steepness of the yield curve, causing returns to vary and fall over time.

A Steepener is a complex financial instrument intended for sophisticated investors. It is a bet on the interest rate curve, predicting that it will steepen and not remain flat. Steepeners are not freely traded, are illiquid in many instances, and are often callable. Many investors have to sell their investments at significant losses.

Many investors who bet on Steepeners on the recommendation of their brokers have suffered catastrophic losses to their principal investments. It is alleged that brokers across the country who recommended Steepeners to their retail clients did not adequately explain how these investments work or the potential risks of these investments, some at 50% or greater losses to their investment. In fact, some investors reported that they thought they were buying bonds, when in fact they were investing in Steepeners. In this complex leveraged Steepener investment strategy, an investor would buy a short-term treasury as well as short a long-term treasury at the same time.

Brokers also may have over-concentrated their accounts in these products, which only served to further increase the risks to the investors.

Brokers across the country recommended their clients invest in structured products that were long term, illiquid debt that paid quarterly interest, if any, equal to a multiple of the difference between two interest rates less a spread. The structured products were generally callable at par plus accrued interest for part of a quarter, typically after just one year. Since the issuers would call the notes unless the interest, they were likely to pay were below market rates, investors were virtually certain to not be compensated for the risk of these structured products. Additionally, many of the structured products paid an attractive teaser interest rate for one or two years with no guarantee of additional interest payments.

These types of structured products generally had long maturities such as 20 years. Given that the securities are not listed on an exchange and therefore highly illiquid, investors would have to sell the Structured Products at significant discounts if they sold prior to maturity.

Recently in the current economic climate, brokers have been betting on economic growth and inflation, which would in turn lead to higher interest rates and creating a steep curve (a Steepener).

Brokers across the country recommended to their retail clients a variety of structured products, which caused investors to suffer massive and unacceptable losses, including but not limited to the following:

  • Structured CDs
  • Market-Linked CDs
  • Leverage Callable CMS Curve Linked Notes
  • Callable Quarterly CMS Spread-Linked Notes
  • Callable Variable Rate Range Accrual CDs
  • Callable Interest Rate Spread CDs
  • Senior Callable CMS Steepener Notes
  • Callable CMS Spread Notes
  • HSBC Callable Leveraged Steepener Notes
  • Merrill Lynch Strategic Return Notes
  • BNP PARIBAS Structured Notes
  • JP Morgan Chase Return Optimization Notes
  • JP Morgan Target Term Securities
  • Credit Suisse Structured Notes

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms across the United States may be liable for investment or other losses suffered by its customers.

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.

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Author: Jeffrey Erez

The founder of Erez Law, Jeffrey Erez, focuses exclusively on securities arbitration and litigation. Mr. Erez passionately believes in representing aggrieved investors and obtaining justice for his clients through litigation.