SPA-2008

Structured Products News from SPA

Monday, July 7, 2008

Financial Times: Downside protection gains popularity

By Steve Johnson
Published: July 7 2008 03:00

One of the key selling points of structured products is that, in many cases, they offer risk-averse investors the chance to shield themselves from falling markets.

The capital guarantees embedded in structured products can be absolute, promising the investor all their money back irrespective of the losses suffered by the underlying assets. However, to stand a stronger chance of delivering meaningful returns, more often than not the downside protection is limited - if asset markets suffer particularly sharp falls, the end investor will suffer as well.

For example, equity-linked products may offer capital protection providing an underlying equity market does not fall by more than 50 per cent during the fixed term life of the product.

If this "soft floor" protection barrier is breached, and the market fails to recover during the product term, the investor may end up shouldering losses on a one-for-one basis, just as they would had they entered the market in a traditional, naked, manner.

Some products, such as many of the precipice bonds sold en masse to UK retail investors in the early years of the millennium, had an even nastier trick in the smallprint.

When these soft barriers were breached, as they were in many cases, investors often lost money on a leveraged two-for-one basis - losing up to 80 per cent of their investment in some cases.

The industry has cleaned up its act since then, and few reputable issuers would market such leveraged downside products to retail investors, certainly not without adequate risk warnings.

But despite this episode, the provision of downside protection is a crucial selling point for the structured products industry, particularly when investors are cautious, as they are at present.

For the full article from Financial Times, click here.

Financial Times: Fledgling SPs flying into a harsher climate

By Hannah Glover
July 7 2008 03:00

Structured products have established a foothold in the US retail markets, but some analysts say even leading issuers such as DWS parent Deutsche Bank, UBS, Barclays and Citigroup may struggle to maintain momentum.

Indeed, the fledgling industry has gained traction in recent years, growing from $64bn (£32bn, €40bn) to $114bn between 2006 and 2007, according to estimates from the Structured Products Association. But tax issues, distribution challenges and investor mindset will make it difficult for banks offering the products to keep that growth going.


Current markets and investor perception of the products pose one challenge. "With all the negative perception of derivatives, they really have fallen out of favour in the US," says Darlene DeRemer, who leads the advisory practice at Boston-based Grail Partners, a merchant bank specialising in the investment management industry.

"Clients don't really understand the products; therefore, financial advisers might not want to sell them," she says.

Adviser advocacy is critical to the sale of structured products in the US, where distribution is dominated by financial advisers and retail brokerage houses. By contrast, in Germany and France, retail investors can buy structured notes from local banks, post offices, or even using their mobile phones.

The US system required the first firms to try to break into the American market - mainly banks with European parents - to pay for shelf-space, sometimes even paying a third-party broker to access their broker-dealer clients. The result was higher costs and compressed profit margins.

Christopher Warren, managing director and head of structured products at DWS Scudder in New York, says: "We weren't talking to the end client, and we didn't know what they wanted."


For the full article in Financial Times, click here.

Financial Times: High SP inflows show US playing catch-up

By Paul O'Dowd
Published: July 7 2008

Structured products, long popular in Europe, are now taking hold in the US as markets spook investors and baby boomers look to protect their wealth. Last year, assets in structured products climbed to $114bn (£57bn, €72bn) in the US, up from $64bn in 2006, according to the Structured Products Association.

Last year, Merrill Lynch was the top issuer with $6.1bn in sales followed by Citigroup with $3.1bn, Morgan Stanley with $3bn, Barclays with $2.6bn and UBS with $2.3bn. These numbers represent the above firms selling only their notes and not competing firms' notes.

Some examples of structured products are: principal-protected notes, index-linked notes, performance-leveraged upside securities and reversed-convertible notes.

This year's inflows are so far keeping pace with last year, says Philippe El-Asmar, head of solution sales for the Americas at Barclays.

Structured products, formerly investments mainly for the wealthy, have since come down-market and are now available in the retail space.

Generally these products are created by combining or snapping-on additional financial products to a traditional security, such as a bond.

These snap-on products can be selected to have low correlation to the underlying investment, which gives the advantage of increasing diversification of the final structured product. If one component of the structure deteriorates, other components will serve to offset or dilute this loss, providing a safety net to investors.

The primary driver behind the high inflows into structured products seems to be that brokers and registered investment advisers (RIAs) are embracing the investment for the first time.

For the full article in Financial Times, click here.