German Derivatives Association Adopts Updated Fairness Code

Deutscher Derivate Verband (DDV), the German Derivatives Association, has confirmed that members agreed to adopt the new fairness code at their extraordinary meeting on 21 October.

The code is a voluntary undertaking by the members of the DDV, who represent 95% of the structured products market in Germany. The new code contains significantly stricter guidelines for structured products than the previous Derivatives Code.

“The term ‘fairness code’ places an even greater emphasis on the spirit of our voluntary undertaking, i.e. fairness in dealing with customers,” said Hartmut Knüppel, chief executive (CEO) and member of the DDV board of directors.

“The concept of transparency is particularly important in this context. Therefore cost transparency, in addition to product transparency, now also plays a crucial role in the fairness code. Structured products are now unequivocally one step ahead as regards cost transparency. No other industry is so open with its customers.”

As of spring 2014 the issuer estimated value (IEV) is to be shown in the product information sheets of the structured products. The issuer estimated value is essentially determined by the model price of the product components, the finance income and the necessary hedging costs. The issuer estimated value therefore reflects the market price of the product among professional market participants. A similar approach is adopted by the internationally recognised international financial reporting standard (IFRS) 13.

The structured products industry has also agreed that in future, where investment products with full capital protection are concerned which have a minimum and a maximum interest yield, the respective probabilities of occurrence must be indicated as at the date when the product conditions are determined in the relevant product information sheet.

“The crucial factor is and remains the market expectation of the investor, however the indication of the probability of occurrence is an important piece of additional information which helps the investor make a better assessment of the potential returns of the investment product,” said Christian Vollmuth, managing director at the DDV.

“It would be ideal, of course, if in future other providers of capital protected financial products with whom we are in competition were also to provide this information for private investors.”

The fairness code comes into effect on 1 November  and applies to new structured products offered publicly from that date onwards. The issuer estimated value and the probabilities for the minimum and maximum interest yield for investment products with full capital protection will be published at the latest as from 1 May 2014 in the product information sheets of new products offered publicly from that date onwards.


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