SPA-2008

Structured Products News from SPA

Thursday, July 3, 2008

Derivatives Week: Global Principles for SPs Go Final Next Week

by Sam Mamudi

The final version of a new set of principles for the structured product industry is due to be released early next week.

The Principles for Managing the Distributor-Individual Investor Relationship follows last year’s retail structured products provider-distributor principles. While those principles were focused on the relationships between firms, the latest principles address interactions with clients.

As with the previous principles, the new ones will be jointly released by five trade associations, the European Securitisation Forum, International Capital Market Association, International Swaps and Derivatives Association, London Investment Banking Association and Securities Industry and Financial Markets Association.

Timothy Hailes, managing director and associate general counsel at JPMorgan and Chairman of the Joint Associations Committee on Retail Structured Products who produced the principles, said in producing the latest set he had spoken with various regulators, including the U.S. Securities and Exchange Commission and Hong Kong’s Securities and Futures Commission.

He said the they should be read as a list of desirable outcomes, rather than a document that prescribes how things should be done.

The principles call for measures such as adequate risk disclosure to clients and training for financial advisors. “Although these principles are non-binding…and do not create enforceable obligations or duties, firms…are encouraged to reflect these principles in their policies and procedures,” states the document.

Anna Pinedo, partner at Morrison & Foerster in New York, said the document will not give firms in the U.S. reason to pause or reassess compliance procedures. “These are a nice reminder, nothing more than that,” she said.

However, the principles are “ahead of the curve in a number of [other] jurisdictions,” said Hailes.

Australia: Choosing products that are structurally sound

by David Jones-Prichard

LAST year Australians invested some $4 billion, with new products and providers continuing to emerge.

No longer confined to a simple choice between stocks, bonds and mutual funds, today's retail investors are using structured products to access a greater variety of asset classes previously the preserve of professionals.

Now, in one straightforward transaction, retail investors can use structured products to buy or leverage into international stocks, emerging markets, currencies, hedge funds, exchange traded funds and others.

The broad and growing appeal of structured products can be attributed to the careful balance between the exotic and the familiar. High gearing potential and capital protection offer the additional benefits of a tax-efficient strategy with built-in buffers.

Given this variety and "balance", it is not surprising that investors vary in their own individual circumstances and financial goals. However, to illustrate, two typical investor profiles are the High-Roller and the Saver.

For the full article in The Australian, click here.

Business Week: Absolute Return Notes Rule As Bear Mkt Scares Off Optimists

By Matthew Goldstein, Ben Steverman and Ben Levisohn

The first six months of 2008 ended with U.S. stock markets in the dumps. Now, with the major indexes in or near bear market territory after touching highs in October, hopes for a happier second half are fading fast.

A toxic brew of sluggish economic growth, rising unemployment, and spiking inflation-otherwise known as stagflation-is prompting market watchers to backpedal furiously on earlier predictions of a rally later this year. Noticeably absent from the discussion are the traditional stock market drivers of strong earnings and interest-rate cuts, neither of which seem to be on the horizon.

Economists, meanwhile, are beginning to tamp down expectations for global growth not only for the rest of this year but for 2009 as well-especially with oil surging to new heights.

All of which is leaving traders tossing around adjectives like "tired," "nervous," and "depressed" to describe the mood heading into the slow July-August months. "The market is in for a rough summer," says Gary Wolfer, chief economist with Univest's Wealth Management & Trust Group, who has been dialing down his once-optimistic outlook for corporate profits. Some pros are even seeking refuge in newfangled instruments known as absolute return barrier notes, designed to protect principal first and allow for capital gains second. In this environment, one can't be too safe.

If history is any guide, investors might need to hunker down for a while. James Swanson, chief investment strategist for mutual fund firm MFS Investment Management, notes that the average bear market lasts 406 days, during which stocks fall 31%, on average. Using that benchmark, we're only halfway through the pain.

Unhappy Anniversary
Much of the malaise, of course, stems from the credit crunch, which will soon mark its one-year anniversary. Banks are expected to notch an additional $600 billion in losses in coming quarters from the mortgage mess and the resulting economic troubles, bringing the total to $1 trillion. They're still ducking for cover: In a recent Federal Reserve survey, 70% of banks had tightened their lending standards for home equity loans.

Whether it's technically a recession or not, it certainly feels like one for many individuals and businesses. Credit-card delinquencies are on the rise, meaning banks will have to set aside money to cover a new round of losses from troubled loans. American Express (AXP), for example, issued a sobering statement on June 25, noting that the business environment in the U.S. continues to weaken as "credit indicators deteriorate beyond our expectations."

That's bad news for the broader stock market. Usually, financials and consumer discretionary stocks lead the way in a recovery, but both sectors are heading south now.

The Philadelphia KBW Bank Index, which tracks banking stocks, was down 34% in the first half of 2008, compared with 12.8% for the Standard & Poor's 500-stock index. And consumer-related companies from Starbucks to Kohl's are reeling.

In fact, few sectors are showing signs of life. Technology-industry analysts are fretting about a slowdown in corporate spending, while health-care stocks are being pummeled on fears of policy changes in Washington after the 2008 election.

On July 2, for example, medical insurer UnitedHealth Group cut its profit outlook for the year. The lone bright spot: energy, especially coal stocks and oil drillers.

With so much uncertainty swirling, some money managers are pushing instruments designed to limit investors' exposure to volatility.

Absolute return barrier notes tie up a wealthy client's money for 18 months. If a specific benchmark, such as the Dow Jones industrial average, stays within a certain range over that period the notes pay a hefty interest rate.

Should the index deviate from the target range, the investor in these sophisticated products doesn't collect the yield, but the principal remains intact. "It's an opportunity to get an above-market return with protection," says Keith Styrcula, chairman of the Structured Products Assn. "You either get everything or nothing but your principal." Given the way the market has been performing, just treading water may be enough for many investors.

For the full Business Week article, click here.