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UK: Retail structured products attract record sales

2009-01-15T07:50:00.000-08:00

Story by: Daniel McAllister
FT InvestmentAdviser Magazine

Sales of retail structured products hit a record £9.7bn in 2008 as investors sought to combat low interest rates and stock market volatility, according to Blue Sky Asset Management (BSAM).

The 25 per cent jump in sales was driven by a combination of increased client demand, and a rise in providers and products on the market.

The total number of products issued in 2008 rose by 20 per cent to 985 in 2008.

Chris Taylor, chief executive at BSAM, said investors and wealth managers were increasingly seeking investment options that dealt with the effects of low interest rates and a fluctuating stock market.

He said client demand would continue to drive growth in the market, with retail sales exceeding £10bn for the first time in 2009, despite the tough market conditions.

"A 25 per cent increase in sales, in the current investment climate, proves advisers and investors recognise and value the ability of structured investments to potentially reduce and control exposure to risk, while defining and enhancing future investment returns."

Taylor warned the UK was heading for the exotically titled 'zirp environment', referring to a zero interest rate policy.

He added: "It is abundantly clear wealth managers will need innovative investment products in 2009, if options that can counter non-existent returns on cash and risk/return challenges for traditional equity funds are to be provided to investors, many of whom feel they are now between ‘a rock and a hard place’ in terms of viable and appealing investment options."

Click here for the original article in FT InvestmentAdviser magazine.

SPA Letter in Response to Chicago Lawyer Article on Structured Notes

2009-01-15T07:45:00.001-08:00

The following is the SPA's response to an article concerning Structured Notes in Chicago Lawyer Magazine. http://www.chicagolawyermagazine.com/2009/01/14/financial-services-sales-of-structured-notes/

Dear James,

Your article is generally well-reasoned, but it is important to point out some significant inaccuracies.

Under federal securities law, if an underwriter has conducted the proper due diligence of an underwriter, it has no strict liability for the material misstatements or omissions in the issuer's prospectus. UBS was as much a victim as its investors -- to suggest that UBS should have "inside information" about Lehman's financials is unsupportable.

You seem to suggest that because UBS sold structured notes mere weeks before Lehman's demise, it should have known about Lehman's financial condition. UBS does not have a legal right to have superior knowledge than the rest of the market simply because it is an underwriter -- to suggest otherwise is to open the door to a form of insider trading.

Moreover, the statement that investors "didn't know" they were purchasing "unsecured debt" of Lehman is, quite frankly, preposterous. The front page of the prospectus makes that abundantly clear, and the federal securities laws do not provide strict liability protections to investors who don't bother to read the prospectus of investments they purchase.

Also, a few words about structured products. If credit risk is now the major concern of purchasers of structured investments, they should also steer clear of corporate bonds, equities, convertibles, preferreds and any other security issued by a corporate entity. From a credit risk perspective, structured products are no worse than any of the other securities. In fact, arguably, the holders of unsecured debt are better off than the holder of equity -- yet we don't hear much about the credit risk of equities vs structured products.

Structured products are exceptionally useful investment vehicles that have tremendous utility in repairing portfolios devastated by conventional investments such as equities and bonds. The constant stereotype about all structured products being "dangerous" or "too complex" has been an intellectually lazy way certain money managers have simply dismissed the entire investment class. This is unfortunate -- structured products are to Europeans what mutual funds are to Americans. The difference is that mutual funds charge an average of 1.37% per year, and structured products are closer to .55% per year.

That said, everyone agrees with the FINRA Notice to Members, and by and large, you'll find that all constituents in the structured products industry devotes enormous effort and resources to best practices in the marketing of these investments. I believe that UBS was as much a victim of Lehman's default as investors, and it will prevail in any class action lawsuit that seeks to impose liability in its role as an underwriter.

Sincerely,
Keith Styrcula
Chairman
Structured Products Association

UK: Structured products slip in survey ranks

2009-01-13T08:13:00.000-08:00

by Nick Rice
FT Investment Adviser Magazine
January 12, 2009

Compared with earlier poll data, fewer advisers now recommend structured products

A Morgan Stanley survey of advisers has indicated just more than half are recommending structured products to their clients, down from more than 90 per cent in a Keydata poll in early August.

However, the Keydata Investment Services research covered only Keydata's current client lists, while the Morgan Stanley survey, which was conducted in December, covered other advisers as well as existing buyers of Morgan Stanley products.

According to the Morgan Stanley poll, 55 per cent of Morgan Stanley's clients were recommending structured products. Sixty-four per cent said they were recommending up to 20 structured products a year.

This compared with the 71 per cent of advisers favouring bonds, 57 per cent mutual funds, 56 per cent cash alternatives and 21 per cent direct equity investment.

More than 90 per cent of advisers in the Keydata poll were maintaining or increasing allocations to cash, 76.1 per cent to fixed income, 42.9 per cent to corporate bonds, 19.1 per cent to UK equities and 16.7 per cent to international equities.

However, 40 per cent of the respondents to the Morgan Stanley poll said they would be more likely to recommend structured products if markets remained volatile. Thirty-eight per cent said volatility would not affect their recommendations.

The Morgan Stanley poll also revealed slightly more advisers were considering emerging market growth products over US equity market recovery products, at 42 per cent compared with 41 per cent, although many UK fund managers have said they favour the US over emerging markets at present.

UK equity market recovery was the most popular category at 58 per cent.

Of the characteristics of a structured product, advisers considered capital protection the most important at 32.2 per cent. Credit rating came in second at 30 per cent, with participation third at 26.2 per cent. Consistency, administration, brand and sales support each received less than 6 per cent of votes.

However, not all providers agreed with this assessment. Laurent Ramsay, chief executive of Pictet Funds, said it was likely money would move out of structured products throughout Europe, partly as their workings were too opaque for investor tastes at present.

SP Mag: Indexed annuities face structured product regulation in US

2009-01-07T10:23:00.000-08:00

From Structured Products Magazine

Indexed annuities, a form of insurance contract in the US, are to be placed on a regulatory level playing field with structured products following a Securities and Exchange Commission (SEC) ruling on December 17, 2008.

Following the introduction of Rule 151a, which was originally proposed in June 2008, indexed annuities that meet certain conditions will no longer be exempt from securities regulation, as most insurance contracts are. Annuity contracts that meet two specific conditions can now only be sold by broker-dealers registered with the Financial Industry Regulatory Authority, and must be registered with the SEC and sold accompanied by a prospectus, in the same way as structured products. The two conditions refer to the issuer's payouts being referenced to a specific group of securities after a calculation period, and the likelihood of conditional payouts exceeding what the investor is guaranteed to receive under the contract.

The proposed rule came after media coverage earlier this year of several cases in which senior citizens lost large sums of money after allegedly being mis-sold indexed annuity products. The SEC received thousands of letters of comment during the rule's consultation period from the insurance industry, who wanted regulation to remain in the hands of state insurance bodies. One of the SEC's commissioners, Troy Paredes, also voted against the rule, saying he felt it went beyond the reach of the SEC's intended authority.

See Structured Products Magazine's website for a full analysis of the new rule and its impact on the US structured products industry.

MTN-I: BoA begins ML assimilation with 1st structured note filings

2009-01-06T07:34:00.000-08:00

Special report from mtn-i.com.

mtn-i has identified the first stirrings of structured note activity from Bank of America following shareholder approval of its merger with Merrill Lynch in early December last year.

Bank of America, which took ownership of Merrill's broker dealer and private client network under the terms of the sale, is in the pre-marketing stage with former Merrill Lynch structured note brands Accelerated Return Notes (ARNs) and Strategic Accelerated Redemption Securities (STARS), according to an SEC filing, ARNs give buyers an opportunity to earn a multiple of the upside (or downside) potential of an underlying asset, up to a specific cap, while bearing one-for-one downside (or upside) exposure.

STARS, meanwhile, are auto-callable structures which allow the investor to benefit from a fixed premium through an automatic call, which may be triggered by the price performance of the underlying asset. If note called prior to maturity, the investor will receive par so long as the underlying is at or above a threshold level, while bearing one-for-one downside exposure if asset has declined below the threshold.

Bank of America has yet to specify the underlying asset and payoff rationale in either case. The dealer was unavailable for further comment.

Exclusive access to its 15k retail brokers gave Merrill a significant competitive advantage in the US structured note market. SEC-registered issuance into this captive network accounted for nearly two-thirds of its league-table topping USD33bn sales total for the period 2006-2008.

During the same period Bank of America reported USD8.3bn of structured note sales across all issuers, or a quarter of Merrill's underwriting activity.Furthermore, Merrill Lynch was one of the most active issuers of US structured notes of recent years, raising USD19bn of capital from its brokerage clients since 2006, according to usmtn-i data. In 2008 alone, Merrill issued USD6.5bn across more than 160 deals into its private client network.Some USD5.4bn of equity index linked product accounted for 39% of its 2008 total, with ARNs accounting for the majority of the reported flow, according to mtn-i data. Merrill also applied the ARN rationale to commodity underlyings.

The new filings, which bear both Bank of America and Merrill Lynch corporate logos, provide the firmest evidence yet that the Merrill Lynch retail brokerage will retain its brand identity. The combination of Merrill's and Bank of America's private wealth management operations will yield a 20,000-strong financial advisor sales force with more than USD2.5trn of assets under management, according to official figures, presenting a significant market share opportunity for Bank of America's forthcoming structured product effort.

Access to this largest of distribution channels that Barclays Capital sought to gain in August with an agreement to both issue and underwrite structured product into the ML & Co brokerage. That initiative has since been sidelined by the merger.

Private clients demand diversification

Nordic agency Eksportfinans is the latest third-party borrower to gain access the Merrill Lynch network. SEC-filed documentation reveals that Eksportfinans will issue STARS linked to any one of the major asset classes as well as basket underlyings via Merrill. According to usmtn-i, Eksportfinans has supplied structured US MTNs through at least 14 underwriters on an all-time basis. Most active arrangers include Goldman Sachs, Wachovia and Morgan Stanley.

Access to the Merrill network has helped Nordic rival Swedish Export Credit become the most active foreign (non-broker) issuer in the US structured note market after the dealer last year accounted for more than half the borrower's USD5.2bn structured funding haul.

Log onto www.usmtn-i for full coverage and data search.

UK Debate: Are structured products the way to play a recovery?

2009-01-01T08:59:00.000-08:00

by Oliver Ralph, Investors Chronicle (UK)

There's little consensus about what the stock market will do in 2009. For some, the pre-Christmas rally was a pause for breath in the longer bear trend. For others, we've reached the bottom already. So are structured products, which offer a combination of capital protection and exposure to upwards movements in the stock market, the ideal choice?

YES, says Nick Lee, sales manager, NDFA:

"When is the recovery going to start? Will we see further substantial falls? There’s a good chance but of course I may be wrong. So what can structured products offer that other funds cannot?

Simplicity. They do what they say on the tin. They don’t "aim to" or "target" a return. They offer a clearly defined return with a known level of risk. They are also much cheaper than most funds – typically 6 per cent in total over a 5 year term compared to possibly 5 per cent upfront and 1.5 per cent per year using funds, totalling 12.5 per cent over the same period.

I suspect a number of investment commentators will take issue with me. I’m writing this having read a Sunday paper money section which was dotted with the usual negative comments regarding structured products: "With these products you are limiting your upside and with the market where it is arguably this is the worst time to buy a guarantee". This referred to a product which offered five times the first 20 per cent of any rise in the FTSE capped at 100 per cent growth. I would suggest that any investor would be delighted with a 100 per cent return. It also limited any losses unless the FTSE fell by more than 50 per cent, at which point you are exposed to market risk. Experienced fund managers will charge a lot more than the structured product with full market risk from the outset. How many will outperform the market by five times?

Another ill informed gem: "The main point of the marketing spin on structured products is that you can have the return without the risk". We lay out the potential returns along with the potential risk, yet I am dumbfounded that so called financial advisers take so little time to look at how these work, therefore depriving investors of what are some of the best value opportunities available.

I firmly believe structured products are as good a way to be prepared for a recovery as any other fund."

NO, says Richard Saunders, chief executive, Investment Management Association

"Many structured products offer you a guarantee that you will underperform cash when the markets go down and underperform equities when the market goes up. So, if you think a recovery is coming, why on earth would you want to be in something that is guaranteed to underperform?

Not all structured products fit that description of course. But they all cater to the natural human wish to earn a decent return without running risk. That is certainly something that would be very nice right now, with interest rates plunging towards zero, house prices continuing to fall, and hugely volatile equity markets.

But hard experience shows that reward without risk is a chimera. If you do not want to take risk you should stick to low risk assets, even if the yield is unattractive. And if your time horizons are long enough, you can afford to invest in higher risk assets.

Structured products seek to offer the best of both worlds. A common product is the Guaranteed Equity Bond (GEB), which offers participation in the growth of an index, together with a money-back guarantee. IMA’s analysis of returns on maturing NS&I GEBs suggests that they have in rising markets underperformed index tracking funds by 3-4 per cent a year. This is of course more or less what many people think is the equity risk premium. In other words, over time they seem to be delivering only a risk-free return. But they do not even achieve that when markets decline.

The more sophisticated products, offering a set return provided certain conditions are met, may be attractive to those seeking absolute return. But they are not a way to take advantage of a rising market. And as many investors have discovered to their cost in the wake of the Lehmans failure, they introduce a completely new set of counterparty risks that many did not realise they were running.

I do not know when the bear market will end. But once you’ve called it, an equity fund is surely the logical way to back your judgement."

To access the original article from Investors Chronicle, click here.

Structured Products Mag: Closer regulatory links needed, says US structured products industry

2008-12-19T08:16:00.000-08:00

by Sophia Morrell
Structured Products Magazine

An overwhelming majority of members of the US structured products industry are calling for closer links with regulators in the wake of the financial crisis, a survey by the US Structured Products Association (SPA) has shown. The survey, which was conducted throughout the last fortnight, saw 82% of the 114 participants call for enhanced relationships with regulators in the future.

Other regulatory initiatives also proved to be popular as means of contributing to the progress of the industry. Nearly 70% of those surveyed were in favour of a single Financial Industry Regulatory Authority (Finra) approved standardized disclosure and educational document, which would cover the industry. Half of all respondents were in favour of establishing a centralized clearing house, which would guarantee the payoff of structured products and ETNs regardless of issuer credit.

The development of a certification system program for marketers was also approved of by over half of those surveyed, while 66% of respondents expressed a desire to see more educational advertising in mainstream newspapers. When participants were asked to rank the initiatives in order of importance, regulatory interaction topped the bill, while certification exams were deemed the least important.

The group surveyed was made up of a mix of industry professionals, of which sell-side members were most prevalent, followed in size by wholesalers and distributors, third-party vendors, and lastly internal and external counsel.

The SPA has subsequently announced that it will set up four executive committees in January 2009 that will meet quarterly to discuss how to meet the goals laid out by the results: a front-office executive committee, a distribution committee, and internal and external counsel committees.

To access the original article from Structured Products Magazine, click here.

SPA Recruiting Industry Executive Committee Members

2008-12-19T05:56:00.000-08:00

In the wake of recent market events, several senior level executives of the structured products industry have approached the Structured Products Association about creating a single, cohesive voice to address concerns expressed by regulators, the press, investors and distributors of structured products.

Concurrently, a recent poll taken of structured products professionals, 81% stated that the industry needs to be more proactive with regulators in shaping its future course. Almost 70% stated that there should be a single, model disclosure document for structured products used by issuers, and approved by FINRA. A majority of those polled agreed there should be more education through advertising in mainstream publications such as the Wall Street Journal, a centralized clearinghouse for structured products and ETNs and a certification examination for marketers of structured investments.

Accordingly, the SPA is seeking to create an executive committee of senior structured products professionals. The executive committee are expected to meet once a quarter to discuss current issues and take appropriate action. It will also create executive committees for in-house counsel, external counsel and distributors of structured products.

The first meeting of the Executive Committee will convene in the third week of January 2009 with place and date to be announced. The SPA looks forward to the industry's collective contribution to strengthening efforts to bring structured products into the mainstream of investment opportunities, along side mutual funds, ETFs, closed-end funds, hedge funds and other vehicles.

SPA Industry Poll - 82% Call for Regulatory Focus

2008-12-18T08:59:00.000-08:00

Final Results of SPA Industry Initiatives Poll: 82% of Members Call for More Interaction with Regulators, Two-Thirds of SPA Members Also Support Educational Advertisements, Industry Directory and Single Disclosure Document

The results of the SPA's December 2008 have been tabulated, and a large majority (82.0%) of the members of the US structured products industry are calling for enhanced relationships with regulators in the wake of recent market disruption events.

Also, majorities of participants in the survey called for a single,FINRA-approved disclosure document for the industry (66.7%), more educational advertising in mainstream newspapers (65.5%), and a directory of structured products providers, services and professionals (65.8%).

Approximately half of the respondents agreed that a centralized clearinghouse was a primary objective (51.3%) and that a certification program for marketers was a worthy initiative (54.5%).
When asked which of the six initiatives would be most important to their respondent's employer, with an opportunity to make multiple choices, the regulatory initiative was again the most prominent answer.

Regulatory interaction - 44.3%
Single disclosure document - 39.8%
Clearinghouse - 35.4%
Advertising - 23.01%
Certification examination - 19.5%

The poll was conducted over the last two weeks among a diversified group of 114 structured products professionals. The group was comprised of sell-side professionals (39.4%), wholesalers/distributors (20.2%), third-party vendors (13.1%), internal/external counsel (12.1%).

As a result of the poll, the SPA will be setting up four executive committees in January 2009 to consider how best to accomplish these objectives: a front-office executive committee, a distribution committee, as well as internal counsel and external counsel committees to meet on a quarterly basis.

A full copy of the report will be made available shortly for those who sign up at [http://spa-2008.blogspot.com/2008/12/form-for-participants-on-spas-state-of.html]http://spa-2008.blogspot.com/2008/12/form-for-participants-on-spas-state-of.html

Compliance Update: Bad Week for Ethics Affects Everyone in the Industry

2008-12-18T06:45:00.001-08:00

Special report by
Janaya Moscony, CFA

Last week witnessed yet another terrible week for the United States with mind-blowing breaches of fiduciary duty. The governor of Illinois allegedly attempted to sell a senate seat to the highest bidder and then had the audacity to show up for work the following day. Marc Dreier, the Yale graduated, highly regarded securities lawyer is accused of swindling more than $100 million by selling bogus investments to hedge funds. Then Bernard Madoff, a giant on Wall Street and former Chairman of the board of directors of NASDAQ (we all know who he is by now), admitted to a massive fraudulent scheme that Charles Ponzi would appreciate.

While Charles Ponzi attracted 30,000 investors in 1920 and issued notes totaling $15 million, the Form ADV filed my Madoff on behalf of his business stated that he advised between 11 and 25 clients. He has apparently admitted to fraud potentially exceeding $50 billion. The SEC complaint states that Madoff informed two senior employees that he planned to surrender to authorities in a about a week, "...but before he did that, he had approximately $200 - 300 million left, and he planned to use that money to make payments to certain selected employees, family and friends."

Can we blame the public for its cynical view, if not total disgust, of our industry? We can only keep saying "99% of the profession is upstanding" for so long.

As professionals working in compliance, how do we react when fiduciary breaches are at the highest level, premeditated and extensive? The best compliance programs require a pervasive attitude of compliance which must demand cooperation from the top. Where was the breakdown in this case? We will find out the details in the coming weeks.

Compliance begins with transparency. The Compliance Department must be able to monitor equally at all levels including the pinnacle of the organization. Of course, for competitive proprietary reasons, access to the records at the top may be limited to a few. However, the actions and records of the top executives of any organization must be reviewed and monitored just the same as they are reviewed for every other member of the organization.

We know with the current environment that all departments are under pressure and resources are limited. However, it is imperative to not only ensure compliance with your existing program, but to continually monitor and evaluate the program in light of any changes to your business model and after considering relevant regulator feedback. Take a step back from the day to day compliance routines and give some thought to how well the compliance program addresses all relevant potential risk. Is management disclosing all relevant information in order for you, as a CCO, to do your job sufficiently? With the New Year approaching, this is a good time to document such a review. Having a qualified unrelated third party assist with such an evaluation or mock audit is always a prudent idea.

The financial markets can't survive without ethics. Last week the very foundation of our industry was severely shaken and the damage will be far reaching. As a nation, we are already drifting towards increased regulation and it is becoming very clear that this may in fact be necessary in order to maintain the integrity of certain players.

We wish our final issue for 2008 was not on such a somber note. However, as an industry, we will adapt and survive. Frauds tend to be discovered in the subsequent crash after an excessive upward move. It is a game of musical chairs on the way down.

Happy Holidays and cherish your time with family and friends. They are the ones who will help us get through these difficult times.

Janaya Moscony, CFA
SEC Compliance Consultants, Inc.
Ph: 610-415-9261 x1
cell: 484-802-0208
fax: 610-415-9262
www.seccc.com

Form for Participants on the SPA's "State of the Industry" Call

2008-12-01T09:32:00.000-08:00

December 4, 2008 at 4:15 PM EST.

Nov-5: WSJ Publishes Special Section on Structured Products

2008-11-05T14:06:00.000-08:00

The Structured Products Association offers its congratulations to everyone who participated in the Special Section on Structured Investment Products on page C-11 of today's Wall Street Journal.

As written by StructuredRetailProducts.com's reporter Lori Pizzani, the one-page special section provided an important primer on what structured products are -- as well as what they are not. It was an exceptionally well-balanced piece that included a chart on the various types of structured products, including the risks and attributes of each category.

The story included quotes from DWS Scudder's Chris Warren, Eksportfinans' Martine Mills Hagan, SPA Leading Edge Advisor award-winner Tony Proctor of Proctor Financial and Dean Erickson of Erickson Capital.

Given the post-Presidential election excitement, this issue of the Wall Street Journal is likely to be the most highly read issue of the entire year. Typically, the Journal reaches more than 2 million readers.

The SPA acknowledges Eksportfinans' contribution as a lead sponsor of the section and its role as a catalyst for what we expect to be the first of an annual tradition.

For those who missed the article in the print version, click here for a PDF of the section.

MTN-i: Obama's Victory and Structured Notes

2008-11-05T13:43:00.000-08:00

Barack Obama has won the U.S. presidency with an historic 21-month march to the White House. But as the next U.S. president, his inevitable changes to the federal tax system will have implications for how efficiently structured notes produce returns -- as well as the desirability of
structured notes as an investment alternative.

In a special report being made vailable to SPA members, mtn-i's Thomas Reggiori Wilkes explores how the likely scenarios for capital gains and income tax reform may alter how notes are structured and the effect of tax treatment on the relationship between capital appreciation and coupon driven returns.

To access this report, click here.

For a special free trial subscription to mtn-i's US structured note news and data service either email us@mtn-i.com, or click here: http://www.usmtn-i.com/.

An excerpt from the report:

Trading tax treatments

Currently, structured products are taxed under a combination of capital gains and income tax codes. Non-principal protected products, and some partially protected products are subject to capital gains tax and are currently tax efficient versus their principal protected peers. Principal protected products, including FDIC insured structured certificates of deposit pay ordinary income tax on coupon payments. Regardless of whether Obama won the election, changes to tax rates will have an impact on structured notes.

“Higher tax rates are an assault on the investor class and structured products will no doubt feel the resultant pain. There may be nuanced increases or decreases on issuance of different species of structured products as tax policies may favor interest income over capital gains exposure. However, there may be very real differences in issuance levels of structured products given whether the election cuts to the left or the right,” said one broker dealer.

Thomas A. Humphreys, a tax partner at Morrison & Foerster, who specialises in the U.S. federal income taxation of capital markets transactions explains that the relationship between the two taxes is a key determinant of which instrument investors chose to invest in. "Should a higher tax environment include both higher capital gains and higher income tax rates, say from the current 15% to 20% and 35% to 40% respectively, then the relative benefits of investments that produce capital gain over those that produce ordinary income should remain the same."

"Historically there has always been a gap between the two tax rates. However, should the case be that the capital gains rate rises and moves closer to the ordinary income tax rate, the relative benefit of investments that produce capital gains decreases. There would be less of an incentive for opting for one type of investment over the other," says Humphreys.

SPA-MoFo: Special NYC Event on Thurs. Dec-4

2008-11-05T13:08:00.000-08:00

Dec. 4: SPA / Morrison & Foerster to Host Special Event and 5th Annual SPA Holiday Toast

Save the date for a special final event of the year from the Structured Products Association and Morrison & Foerster.

Given the litigation climate and the tax/regulatory changes expected from a transitioning presidency, the SPA and MoFo will host a year-end round-up of the extensive changes sweeping the structured products industry's legal-compliance-regulatory environment.

Prior to the event, the SPA will be holding its first full meeting of the SPA Legal and Compliance Committee -- with the purpose of getting out in front of critical regulatory issues that will soon be confronting the industry.

Two panels will present in the one-hour session:1) external counsel on the sweeping changes and status of class action lawsuits targeting the financial services industry; and 2) in-house counsel/compliance departments, and how they are contending with the rapidly changing environment.

The session will conclude with the fifth annual SPA Members' Holiday Toast -- hosted at the offices of Morrison & Foerster. More details to follow.

In the meantime, save the date: Thursday, December 4, 2008. For more details or to register, email MoFo's Michelle Paitich at mpaitich@mofo.com.

SRP: US, Canada Exclude Structured Notes from Gov't Guarantees

2008-10-25T11:42:00.000-07:00

by Lori Pizzani
StructuredRetailProducts.com

US and Canadian officials have clarified the terms of their temporary liquidity guarantee programmes, each of which excludes traditional structured products from the list of debt securities qualifying for insurance coverage.

SRP has confirmed with both the Federal Deposit Insurance Corporation (FDIC) in the US and the Department of Finance in Canada that structured notes and other structured investments issued by banks and bank holding companies will not qualify for the temporary insurance coverage afforded to other senior unsecured debt over the next three years.

The US FDIC clarified its position in a board meeting yesterday afternoon, at which Art Murton, the FDIC’s director of the Division of Insurance & Research, explained “Not covered are contingent liabilities, derivatives, derivative-linked securities such as structured products and a variety of other instruments outlined…” Later in the day FDIC issued an official interim rule reiterating this position.

FDIC announced the liquidity guarantee programme on 14 October, saying at the time it would include senior unsecured debt issued by qualified banks. That memorandum raised the hopes of members of the US structured products industry that its investment products would be included under the plan.

On 21 October the Structured Products Association (SPA) sent a letter to the FDIC noting that with $120bn in new issuance per year, the issuance of structured products represents a significant component of issuers' funding operations and requesting specific clarification.

“I think reasonable minds can differ. I do respect their opinion,” SPA founder and chairman Keith Styrcula told SRP. “I hope they’re open to hearing our comments,” he added, in response to the FDIC’s simultaneous announcement that it will open a 15-day comment period.

Separately, the Department of Finance Canada yesterday announced a similar, parallel, 'lenders assurance facility' to provide temporary insurance for “new issues of certain senior unsecured marketable wholesale debt instruments…” SRP’s request for clarification prompted a spokesman for Finance Canada to confirm “The plan will not extend to retail structured investments issued by Canadian banks – only to non-complex wholesale debt obligations.”

For a free trial to the Structured Retail Products website, click here.

Prospect News: Structured industry grapples with FDIC exclusion from debt guarantee program

2008-10-25T11:33:00.000-07:00

by Kenneth Lim
Prospect News

Boston, Oct. 24 – The Federal Deposit Insurance Corp.’s decision to exclude structured notes from its temporary liquidity guarantee program could encourage more structured certificates of deposit and a rethink of nomenclature, industry practitioners said Friday.

The FDIC this week issued an interim ruling that structured notes will be excluded from the temporary liquidity guarantee program. The program was set up to guarantee senior debt issued by U.S. banking institutions until 2012. Non-U.S. banks are not covered under the program, and structured certificates of deposit, which are already insured by FDIC under most circumstances, are not affected.

“The primary purpose of the program is to provide liquidity to the interbank lending market and promote stability in the unsecured funding market for banks,” said FDIC spokesman David Barr. “The purpose is not to encourage innovative, exotic or complex funding structures or to protect lenders who make high risk loans in hopes of high returns.”

The public has 15 days after the rule appears in the Federal Register – expected to be early next week – to comment, after which “you’re probably stuck with it,” said Morrison & Foerster attorney Oliver Ireland.

“After that, you can go back and ask them to change the rule, but whether you’re going to get it changed at that point is a lot tougher,” Ireland told Prospect News after a conference call hosted by his firm and the Structured Products Association.

Trying to get FDIC to possibly include some structured notes could be worth the effort because the insurer’s ruling appears to have room for clarification, Ireland said.

“The line they’ve drawn, in my opinion, is arbitrary at best,” he said.

Noting that FDIC is necessarily creating and adjusting rules on the fly, Ireland said the structured products industry can help the insurer to make a clearer distinction.

“What they say in the rule is that they’re not trying to encourage innovative or exotic or complex funding structures,” he said. “They don’t present an analysis of what kind of funding structures are being used, what roles they have…it’s not a data-based distinction.” But getting the FDIC to change its mind may not be easy.

"There’s a suspicion especially among the bank regulators about derivative products even today…You’re probably working against some old prejudices,” he said.

Keith Styrcula, chairman of the Structured Products Association, acknowledged that not all structured notes will probably be included even if FDIC can be persuaded to extend the scope of the program.

“The objective is to enhance liquidity for the banks,” he said at the conference call.

“I think some structured products arguably more than others achieve that goal.”

Language, CDs in spotlight
Styrcula also noted that this could be an opportune time to rethink the nomenclature that is typically used with structured products so pertinent distinctions between different types of products are clearer.

“The concept to non-structured product practitioners is that these are complex products,” he said. “Maybe we should be paying attention to nomenclature…to align it more with what they’re trying to do.” Styrcula also said that the ruling could hasten the growth of structured certificates of deposit, which enjoy FDIC insurance coverage, as an alternative to principal-protected structured notes.

“I think you’ll see more of a shift toward CDs,” he said.

But the impact of the ruling on the market may not be significant, a structured products distributor told Prospect News.

“The way I understand it, it’s basically business as usual for us, right?” the distributor said.

“Structured notes weren’t guaranteed in the past, now they’re still not guaranteed. It’s not like they took away guarantees.” Structured notes could, when compared to other investments that enjoy FDIC insurance, appear less attractive, but the wrapper is not going anywhere, the distributor said.

“If you want a structured product that’s guaranteed by the FDIC, you’ll have and always have had CDs,” the distributor said. “But there are well-known limitations to CDs. There’s a cost to providing the insurance, and there’s a limit to how much can be insured. So I don’t think structured notes will become obsolete. I do think CDs, which have been growing recently, will continue to grow regardless of whether they ruled one way or the other.” As to whether FDIC can be swayed to include structured notes, the issuing banks of structured products are likely in the driving position, the distributor said.

“The FDIC is concerned about market liquidity and creating market stability, and the bottom line is they’ll need to be convinced that the banks really need this source of capital to be guaranteed,” the distributor said.

“I don’t know if anyone other than the banks will be able to convince them about that. The banks have to take the lead on this one.” A participant in the conference call also wondered if the FDIC could be persuaded to include some structured notes.

“There’s a distinction that they’re trying to draw, which is the types of funding that are essential to maintaining the liquidity of banks…I think it would be hard to argue that structured funding does that,” the participant said.

For a free trial to Prospect News’ Structured Products Daily, click here.

MoFo Report: FDIC Issues Interim Rule to Implement Temporary Liquidity Guarantee Program

2008-10-25T11:24:00.000-07:00

On October 23, 2008, the Board of Directors of the Federal Deposit Insurance Corporation (the “FDIC”) announced that it had approved an interim rule under the FDIC’s systemic risk exception process (the “Interim Rule”) to govern its newly created Temporary Liquidity Guarantee Program (the “TLGP”).

The Interim Rule is effective immediately but comments will be taken for the 15-day period after publication in the Federal Register. The Interim Rule provides further detail on the operation of the TLGP, and this Client Alert expands upon and supersedes the discussion contained in our earlier Client Alert about the TLGP. Further, some of the provisions of the Interim Rule are different from those discussed by the FDIC in its informational briefings (the “Technical Briefings”) and it is important to review the rule carefully. We have noted certain of those changes in the Morrison & Foerster Client Alert.

To read the Morrison & Foerster client alert, click here.

SPA Seeks Confirmation from FDIC on Liquidity Guarantee for SPs

2008-10-21T12:33:00.001-07:00

[The following is the text of an October 21, 2008 letter the Structured Products Association's Law and Compliance Committee submitted to the FDIC seeking confirmiation that the recently announced Temporary Liquidity Guarantee Program applies to debt-based structured products.]

The Structured Products Association (the “Association”) seeks confirmation from the FDIC regarding an aspect of the announced FDIC Temporary Liquidity Guarantee Program (the “Temporary Guarantee Program”). As to eligible institutions that are participating, the FDIC guarantee would apply to all newly issued senior unsecured debt of those entities issued on or before June 30, 2009. The Association seeks confirmation that structured products are indeed included within the scope of the "senior, unsecured debt obligations" to which the FDIC guarantee would be applicable. Structured products predominantly are senior, unsecured debt obligations and clearly fit within this definition.

The Structured Products Association is a New York-based trade group. The Association’s mission includes positioning structured products as a distinct investment class, developing model “best practices” for members and their firms, and identifying legal, tax, compliance and regulatory challenges to the structured products industry. The Association was the first trade organization for structured products in the United States and now has more than 4,200 members, including members from securities exchanges, self-regulatory organizations, law firms, compliance professionals, investor networks, family offices, and buy-side and sell-side structured products firms. The Association counts among its members some of the largest and most active international banks, investment banks and distributors in the U.S. structured products market.

The Association is committed to promoting the development and growth of the structured products market in the United States, and to ensuring that investors in structured products understand the terms and risks of their investments.

We believe that structured products fall within the scope of the FDIC’s Temporary Guarantee Program and that it is important that the FDIC provide confirmation of this to the structured products market. Financial holding companies are some of the most prolific issuers of structured products. The market for structured products in the United States is $120 billion in new issuances per annum, on a percentage basis the fastest growing investment class in the United States. Most financial holding companies have financed some of their operations through the issuance to the public of structured products that are debt securities (usually through medium-term note programs, or other continuous offering programs) that derive some or all of their value based on the performance of a reference asset. For example, a debt security for which interest payments are linked to the performance of the S&P index. The range of reference assets is varied and includes equities, interest rates, commodities, currencies, indices, as well as other economic measures. Some of these senior, unsecured debt obligations are principal protected, while some have limited principal protection. Structured products also provide an important means for both retail and institutional investors to access investment classes that they otherwise would not be able to access and to diversify their holdings.

For many financial institutions, the issuance of structured products represents a significant component of their funding operations. In return for responding to investors’ demand for exposure to certain reference assets, structured products issuers often are able to obtain medium term financing at advantageous funding rates. Confirming the status of structured notes under the Temporary Guarantee Program will help preserve this low cost funding source at a time when the lack of interbank liquidity and access to credit make such sources all the more important. Such confirmation also would prevent unnecessary confusion and instability in the structured products market, which generally has presumed that structured products, as senior unsecured obligations, would benefit from the Temporary Guarantee Program (not unlike the way in which indexed certificates of deposit, a type of structured product, have for many years benefited from the FDIC deposit insurance program). Finally, by confirming the widely held view of the investment community, the FDIC will alleviate the otherwise significant potential for market confusion and uncertainty that would likely otherwise result given the difficulty in defining what is or is not a senior, unsecured debt obligation.

Very truly yours,

/s/ Keith A. Styrcula
Chairman and Founder
Structured Products Association

/s/ Anna T. Pinedo
Co-head of the Structured Products Association
Law and Compliance Committee

/s/ Joseph Inzerillo
Co-head of the Structured Products Association
Law and Compliance Committee

SPA Announces Call for Nominees in 2nd Annual Leading Edge Advisors Awards

2008-10-19T14:27:00.000-07:00

NEW YORK, October 17 -- The Structured Products Association (SPA) is pleased to announce its nationwide call for nominees for the Second Annual Leading Edge Advisors Awards beginning today.

With the LeadingEdge Awards, the SPA seeks to commemorate financial advisors who recognize that a fiduciary responsibility to clients can be well-served by utilizing structured investments in a diversified portfolio.

On Monday, February 23, 2009, five honorees will receive the crystal awards at the sixth annual SPA-2009 event at the Grand Hyatt hotel. The recipients will be chosen by an executive committee, based on strategic use of structured products to enhance yield, magnify returns, preserve principal or manage tax efficiencies -- all while setting a "leading edge" standard for the next generation of modern portfolio theory.

The nomination form for the LeadingEdge awards can be accessed on the LeadingEdge Awards website. Both self- and third-party nominations are acceptable.

The process of nomination customarily takes less than 10 minutes to complete. The first deadline is December 1, 2008, but additional nominations may be considered through January 3, 2009. Click here to access the nomination form.

Last year's winners were: SPA CHAIRMAN'S AWARD: J. Scott Miller (Blue Bell Private Wealth Management); Thomas Balcom (Foldes Financial Management); Steve Braverman (Harris myCFO Investment Advisory Services); Tony Proctor (Proctor Financial) and Frederick S. Wright (Smith and Howard Wealth Management).

For the May 20, 2008 press release on last year's winners, click here. The SPA coverage of the awards can be found by clicking here.

US Structured Products Move Toward CD Form

2008-10-19T12:38:00.000-07:00

Investment is FDIC-insured up to $100K

By Jeff Benjamin
Investment News

The structured-products industry, which has proved to be uniquely vulnerable to recent Wall Street meltdowns, is expected to promote increased shelter and regain some momentum by wrapping certificates of deposit around debt instruments.

"We'll likely see an increase in CD wrappers around structured products going forward," said Mark Kolodzinski, director of structured products at Bonds.com Inc. in Boca Raton, Fla.

Lehman Brothers Holdings Inc.'s filing for bankruptcy protection this month was a "game-changing event," he said.

"Lehman failed the first stress test on principal-protection products," Mr. Kolomynski added. "People will be paying a lot more attention to the credit quality of the issuing firms from now on."

While New York-based Lehman's problems are still a long way from being settled, the idea of an issuing firm going belly up ranks among the worst-case scenarios for structured-product investors.

"[Expect to see] a massive paradigm shift toward CD wrappers," said Keith Styrcula, chairman of the Structured Products Association in New York. "The dealers are already shifting toward CD wrappers as a market reaction."

CREDITWORTHINESS
As debt instruments that use derivatives to achieve various investment objectives, structured products are dependent on the creditworthiness of the issuing firms. In the event of a default, as is potentially the case with Lehman, holders of structured products fall in line along with all other creditors.

But by placing certain structured-product strategies inside CDs, the investment is insured like any other bank deposit for up to $100,000 by the Federal Deposit Insurance Corp. in Washington.

For example, a CD could be wrapped around a structured product that offered upside of an equity index such as the Dow Jones Industrial Average.

As with plain-vanilla CDs, the investment returns are determined by the terms of the agreement. The performance of the underlying structured product is affected to reflect the FDIC insurance feature.

Unlike an ordinary CD, which will lock in a designated rate of return for a specific term, the structured-product feature includes the risk of zero return beyond the guarantee of principal.

FDIC-INSURED
The initial investment of up to $100,000 is guaranteed by the FDIC, but the performance of the underlying structured product is dependent on the market.

For instance, a six-year note inside a CD might offer an investor a 10% return depending on the performance of the index. In the event that the index underperforms, the investor receives just his or her principal.

Compare that with a non-CD structured product, where a principal-protection guarantee is tied to the strength of the issuing company's balance sheet.

"I would never say a CD wrapper is the end-all, but they are very attractive for investors that need market exposure but are concerned about the risks," said Brad Livingston, vice president at Advisors Asset Management Inc., a Boerne, Texas-based platform that distributes structured products to brokers and advisers.

The CD wrappers were first introduced to the U.S. market a few years ago by European banks looking for access to the structured-product market.

Since CDs are exempt from U.S. securities laws, some foreign banks found that opening a commercial-bank branch here was the easiest means of selling structured products in the U.S. market, Mr. Styrcula said.

Prior to the CD wrapper, there was even a short-lived effort by some firms to wrap structured products with private insurance as a way to guarantee principal, according to Mr. Kolodzinski.

These days, virtually every commercial bank is equipped to offer CD wrappers around structured products.

Meanwhile, as the structured-product industry enjoyed a couple of years of explosive growth, the CD wrapper lost some of its appeal — until recently.

"I've been gravitating toward the strongest names and looking at CD-backed products, but I made that decision before the latest disaster," said Frederick Wright, chief investment officer at Smith & Howard Wealth Management LLC, an Atlanta-based firm with $225 million under advisement.

The structured-product industry enjoyed record sales of $114 billion last year, reflecting a 78% increase over 2006 and a 300% increase over 2003.

The financial crisis has already derailed much of the industry's momentum, but as the dust settles, the hope is that the CD wrapper will gain appeal among financial advisers and brokers — the primary distribution channel for structured products.

"Right now, we're seeing a lot of paralysis, period," Mr. Livingston said. "But banks issue CDs because they need money, and we're hoping there will be enough banks to issue enough CDs."

For the original story in Investment News, click here.

SRP League Tables: 6,000 Deals YTD on Structured Products

2008-10-18T08:36:00.000-07:00

At the request of the Structured Products Association, structuredretailproducts.com has provided a summary of the structured products deals done year-to-date. The survey contained several surprises:

::: Despite market conditions, the number of deals done in the first three quarters is just under 6,000 (total = 5,942).

::: SRP now counts 75 issuers of structured products in the United States, with new regional banks coming into the structured CD market.

::: The Top Three players accounted for 48% of all new deals -- nearly half the market of issuances (Barclays, JPMorgan and ABNAmro/Royal Bank of Scotland). On a monthly basis, Barclays is averaging over 130 deals; JPMorgan, 80; ABNAmro, 75.

::: The Top 20 players accounted for 4,953 deals, or 84% of all new deals done. The remaining 55 issuers only accounted for the remaining 16% of deals.

::: Lehman Brothers continues to remain in the Top 5 issuers of structured products even though it is no longer in the business.

The following league table was provided by structuredretailproducts.com. For a free 14-day trial, please click here.

SRP Structured Products League Tables
(by number of deals)
through October 15, 2008

Issuer ................................Deals ..... % of Mkt
Barclays Bank ......................1274 ........21%
JPMorgan Chase ..................804 ........14%
ABN Amro Bank ...................748 ........13%
HSBC Bank ............................322 .........5%
Lehman Brothers .................247 ..........4%
Morgan Stanley ....................244 ..........4%
Eksportfinans ........................225 .........4%
UBS .........................................193 ..........3%
Deutsche Bank .......................182 .........3%
Credit Suisse ..........................126 .........2%
Merrill Lynch .........................125 .........2%
Goldman Sachs...................... 104 .........2%
Citigroup ...................................92 .........2%
Fortis Bank ...............................76 .........1%
Swedish Export ........................66 .........1%
SG Str Pdts ...............................61 .........1%
Bank of America .......................39 .........1%
Bear Stearns .............................25 .........1%

TOTAL of Top 20 Issuers
4953 deals . . . . 84% of overall issuance.

SPA AutumnExpo, NYC's Grand Hyatt Hotel October 2, 2008: Photo Gallery

2008-10-09T12:00:00.000-07:00

SPA AutumnExpo: Oct 2 Event Draws Record Crowd to Assess "Challenges and Opportunities"

2008-10-09T10:29:00.000-07:00

By Kenneth Lim, Prospect News

New York , Oct. 2 – The structured products market is going through an industry-changing period and must grapple with investor risk aversion, greater concern about credit risks and challenges in education and transparency, panelists at the Structured Products Association fall conference said Thursday.

But the future also presents opportunities in up-and-coming products and new distribution channels, the panelists said.

Train went off-track

The collapse of Lehman Brothers Holdings Inc. in September and the domino-restructuring of U.S. banks that followed have created a significant “disruption event” for the structured product industry, SPA chairman Keith Styrcula said in the conference opening address.

The events were not the making of the industry but are likely to cause major changes, he said. “We know that the landscape will never be the same,” Styrcula said.

Drop in volume

Many industry insiders at the conference reported that volume had slowed after Lehman Brothers’ bankruptcy.

One distributor said the distributor’s firm was mostly in “service mode” because the investment advisors who had taken a hit were “shellshocked” and not doing much.

Mark Kolodzinski, who holds the newly created post of director of structured products at Bonds.com, Inc., acknowledged that the current market problems hit at a bad time for him. “It’s certainly slowed things down,” he said.

Brad Livingston, vice president of structured products for Advisors Asset Management, said many investors were not sure about where to put their money and were awaiting greater clarity in the markets. Many of the wary investors are still waiting to understand the fallout from the Lehman collapse, which has left holders of the bank’s structured notes unsure about where they stand in the bankruptcy proceedings, Livingston added.

Capital protection gains ground

Principal-protected products are experiencing a surge in demand, many panelists said.

Certificates of deposit, in particular, which are insured by the FDIC, are on the rise.

“Having that FDIC insurance in a very challenging environment is very important,” Livingston said. “We can go out with a triple A rating andthey don’t want to hear about it.” Other panelists also reported better interest in some absolute return structures, such as long-short products, negative correlation asset classes and strategy-replicating indexes.

One issuer noted that some clients, rather than shying away from capital-at-risk products, were seeking leveraged notes that could allowthem to pursue opportunities thrown up in the turbulence.

An industry-supported ETN?

Joe Inzerillo, a legal executive at BNP Paribas who focuses on structured products, also suggested the possibility of a “next generation”exchange-traded note.

The idea would be to offer the same product through multiple issuers withissuers guaranteeing one another’s ETNs. If one of those issuers defaulted, the rest could help to support the product, Inzerillo said.

Transparency, simplicity key

Some distributors saw the current slowdown as an opportunity to improve education efforts. Transparency and simplicity were also repeatedly highlighted as key challenges for the industry to gain better acceptance.

Inzerillo noted that the industry has made “tremendous progress” over the past years in terms of documentation, with greater consistency ofnomenclature and more reader-friendly brochures and prospectuses.

But fellow panelist Anna Pinedo of Morrison & Foerster also said better standardization of nomenclature would make it easier for investors tounderstand structured products and help to reduce any misunderstandings about the complexity and risks of structured products.

Panelists also warned of closer scrutiny from regulators. The Financial Industry Regulatory Authority (Finra) was drafting an investment alert on structured products. Finra could not be reached for confirmation.

From hedge funds to bank branches

The industry continues to explore new ways to offer structured products to issuers. Wavecrest Asset Management, a new investment firm believed to be one ofthe first that will focus on structured investments, launched its firsthedge fund earlier in the week.

Wavecrest managing partner and co-founder Jeremy Berman said the new fund, called Wavecrest Partners Fund I and with less than $10 million in assets under management, was started even in these tough fundraising times so that he could establish a track record.

Ideon, a relatively young entrant to the U.S. market from Spain , is also hoping to open new channels through commercial banking retail branches. The company is working with commercial banks to offer simply structured products – structured CDs, for example – linked to well-followed indexes that can be customized for clients through a convenient system, Ideon managing director Matt Murphy said.

For a free trial subscription to Prospect News, please click here.

SPA AutumnExpo: Panelist Presentations

2008-10-08T11:03:00.000-07:00

Anna Pinedo
Morrison & Foerster
"Structured Products and Market Turbulence"

David Blitzer
Standard & Poor's Indexes
"Indexing in the Current Market Environment"

Joseph Inzerillo
BNP Paribas
"Market Turbulence and the Legal, Regulatory and Compliance Landscape"

Lori Barnes
City Securities
"Growth in Alternative Investments"

Bloomberg: Lehman 100% Protection = Pennies

2008-09-29T08:08:00.000-07:00

Lehman's `100% Principal Protection' Means Pennies for Notes
By Bradley Keoun

Sept. 29 (Bloomberg) -- A brochure pitching $1.84 million of notes sold by Lehman Brothers Holdings Inc. in August, a month before the firm filed for bankruptcy, promised ``100 percent principal protection.''

Buyers had ``uncapped appreciation potential'' pegged to gains in the Standard & Poor's 500 Index, the brochure said. In the worst case, they would get back their $1,000-per-note investment in three years. Only the last in a list of 15 risk factors mentioned the biggest danger:

``An investment in the notes will be subject to the credit risk of Lehman Brothers.''
Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other unsecured creditors for what's left of their money. The collapse has rattled Wall Street's $114 billion structured-notes business, which Lehman, Merrill Lynch & Co., Morgan Stanley and Goldman Sachs Group Inc., all based in New York, used to raise cheaper funding as the credit crisis drove bond yields higher. About three-fifths of the $68.1 billion sold this year were bought by individual investors, according to data compiled by mtn-i, a London-based firm that tracks the market.

``Investors are going to be a lot more concerned about the credit of the issuers of these notes,'' said James Angel, an associate professor of finance at Georgetown University in Washington. Until recently, ``the buyers may have been mesmerized by the bells and the whistles,'' he said.
The market for structured notes -- constructed by Wall Street firms from a combination of bonds, stocks, commodities, currencies and derivatives -- has mostly avoided fallout from the slump in sales of mortgage-backed collateralized debt obligations and auction-market preferred securities.

For the full article from Bloomberg, click here.

New Restrictions

2008-09-22T08:48:00.000-07:00

On September 18, the SEC issued a series of emergency orders to address short sales and reporting of short positions. Click here for the full version provided by Morrison and Foerster.

SPA Statement on Structured Products Careers

2008-09-16T15:35:00.001-07:00

The extraordinary events of the last several days have reshaped our industry in ways that were once unimaginable. The Structured Products Association is working to find opportunities for highly talented professionals in the US structured products industry who are being displaced in the wake of the reshaping of our business.

If you are an internal human resources professional or a recruiter with opportunities in the structured products arena -- whether in the US or not, kindly email career.opportunities@structuredproducts.org. The SPA will make the opportunities available on its website, and -- if permissible -- via email to its 8,000 members.

The SPA's October 2, 2008 AutumnExpo at New York's Grand Hyatt Hotel will also feature a panel on the reshaping of the financial services industry and how it will impact careers in structured products.

Click here for the agenda.

Click here for the form to sign up for the single-day October 2, 2008 event.

For the New York Times' blog on this post, click here.

FT Analysis: A brave decision on Lehman

2008-09-15T13:39:00.000-07:00

by Avinash Persaud

It was a brave decision. By abandoning Lehman Brothers, a 158-year-old piece of Wall Street furniture, and refusing to remove their hands from their pockets when Merrill Lynch came calling, US Treasury Secretary Hank Paulson and New York Fed Governor Tim Geithner had one of the busiest weekends of dispassion on record. There will be much fall-out in financial markets over the next few weeks and even more uncertainty.

Two questions come immediately to mind. Why give guarantees to JPMorgan to help it to buy Bear Stearns in March 2008 but decline to do so six months later for Lehman Brothers, a larger institution? Second, will Lehman’s bankruptcy make financial conditions better or worse? There is rhyme to the reasoning behind saying no to Lehman Brothers and while things will get worse over the short-term, the alternative may have been the same pain, drawn out for longer.

There were reasons for saying no to Lehman that were not there for Bear. First, there is the distinction between solvency and liquidity. The liquidity arrangements the Fed put in place after the Bear Stearns collapse means that institutions that fail now are more likely to have a solvency problem than a temporary liquidity issue. The policy mistake that contributed to a decade of missing growth in Japan in the 1990s was allowing insolvent institutions to limp along, while praying for a revival in market prices that never came.

Second, there is the issue of moral hazard. While central banks have been offering liquidity on generous terms and stopping institutions from going bankrupt, some banks were not engaged in hard restructuring, but gaming the system. They were busy hoarding liquidity and pushing risky instruments into the hands of the authorities. Why did it take the edge of bankruptcy for Lehman to draw up plans to hold $30bn of hard-to-sell commercial property assets into a separate entity? The situation was complex and changing but bankers will recognise today that the game is not about luring sovereign wealth funds to invest before markets recover, but how to restructure for a brave new world in which the financial sector is smaller.

Third, there was a new and alarming factor not present at the time of Bear that argued strongly against new government guarantees. Since the August rescue of Freddie Mac and Fannie Mae, credit markets have begun to price in the possibility of a default by the US government – the implied probability remains a fraction of 1 per cent but it is an unprecedented development.

Finally, there is the systemic risk. Bankers always argue that if they are not redeemed of their sins that hell and damnation will fall upon the rest of us. This normally works. When Bear Stearns was tottering on the edge, it was argued that as it was the leading investment bank in the mortgage business, letting it fail would spread woe from the cloisters of banking to Main Street. The mortgage market still fell apart and a large chunk of it – Freddie and Fannie – has in effect been nationalised. Officials may have felt that the failure today of Lehman, an institution not heavily involved in residential mortgage lending, was not going to make much difference.

There will be systemic fall-out from the Lehman bankruptcy, however.

For the complete analysis from FT.com, click here.

Fire Sale: Lehman Indexes Unit (IndexUniverse.com)

2008-09-15T13:29:00.000-07:00

by Murray Coleman

Even after Lehman Brothers filed for bankruptcy protection on Sunday, the investment banks' asset management business was being shopped Monday to a host of interested parties.

Along those lines, a still-lucrative part of Lehman that could also help attract buyers is its indexing products group. The unit, which began some 35 years ago, maintains and publishes thousands of indexes that are used around the world by both active and passive money managers to track different markets.

According to Lehman's estimates, the group had a total of roughly $6.9 trillion benchmarked to those products by the end of last year.

In particular, the Lehman brand has become known for its expertise in covering fixed-income markets. It was the first to publish a total return bond index, and the Lehman Brothers Aggregate U.S. Bond index remains the de facto standard for broad indicators of fixed-income markets for advisors and managers domestically.

The indexing group is considered part of Lehman's fixed-income research unit. That's separate from the firm's asset management group and part of the broker-dealer side of the business. On Monday, The Wall Street Journal reported that several rivals could be interested in buying different parts of Lehman. Specifically, it pointed to the asset management arm. The report listed Bain Capital, Hellman & Friedman and Clayton Dubilier & Rice as possible suitors.

"Everyone uses their bond indexes. You'd have to assume that would be a pretty attractive asset to come out of bankruptcy or attract another party if Lehman decides to sell-off parts of its business," said Raymond Benton, a Denver-based advisor.

Portfolio managers at Compass Efficient Model Portfolios aren't too concerned about the fate of Lehman's indexing services, either. The Nashville, Tenn.-based money manager oversees about $3 billion in assets for advisors and institutions around the country.

"To us, having Lehman on the name of an index is similar to walking into a stadium with a company's name on the outside," said Steve Hammers, chief investment officer at Compass.

"Lehman doesn't own every bond in their indexes. So this is more of a marketing and services story than anything."

Big institutions pay Lehman to get data to put together and keep their bond indexes running, he noted. "If Standard & Poor's goes under, it's not going to impact the companies in the S&P 500," said Hammers. "It might affect the market, but Lehman's indexing group is still going to be a valuable commodity."

He points out that while stock indexes have been plummeting this year, fixed-income benchmarks tied to Lehman's most popular products have largely been in the black. "Lehman's indexing group is a long-standing name in the industry," Hammers said. "As Lehman tries to liquidate its assets, their brand is still going to be worth something."

He thinks a possible suitor might be Citigroup. "We have 2,200 indexes in our database, and they're the largest provider of fixed-income benchmarks," Hammers said. "So it would make a lot of sense for Citigroup to really take advantage of this situation."

Lehman used to be the biggest provider in fixed-income, he says. But since the early 1980s, when Citigroup started publishing its U.S. fixed-income indexes, the firm has come on strong.

"Lehman had a better-than 10 year jump on Citigroup in terms of getting into the U.S. bond indexing market," Hammers said. "But Citigroup now has 380 major U.S. fixed-income benchmarks that we're aware of through our various subscriber services. So it's fair to say that Citigroup has really built out their fixed-income indexing operation."

But he says that Lehman still has the advantage of being able to attract monster assets and fees from a smaller number of popular longstanding industry benchmarks. That gives the indexing pioneer a large asset base that could prove enticing to possible buyers.

"In sheer numbers of indexes, Citigroup actually has built a bigger presence in the bond world," Hammers said.

Credit Suisse is another major player in bond indexes that might be a possibility, he adds. So could Dow Jones, which is big in the equity world, according to Hammers.

Other notable indexing players he lists as possibilities include Merrill Lynch, which his analysts estimate has about 60 major bond benchmarks. "But I doubt they'd be interested right now. They've got too much going on right now and it would probably come down to Bank of America's decision in the end," Hammers said.

Gary Gastineau, head of ETF Consultants, notes that Lehman's index services business probably makes more sense to suitor already in the bond industry. But anyone interested in moving into the fixed-income brokering arena, he adds, might want to double-dip.

"Somebody who wanted to get into the bond industry might find Lehman's index business a nice add-on," said Gastineau. "But I don't think they'd want to do the index piece without also picking up Lehman's bond trading operation. And both are very strong parts of the existing company."

Some of the most popular bond exchange-traded funds use Lehman indexes. Those include the iShares Lehman Aggregate Bond index (NYSE: AGG) and the Vanguard Total Bond Market ETF (AMEX: VTI).

"Even if it goes to bankruptcy, Lehman doesn't hold any of the assets - iShares and other ETF providers do. So what investors need to worry about is the remote possibility that Lehman stops providing the underlying indexes," said Michael Krause, president of AltaVista Independent Reasearch in New York City.

In that case, the bond funds would simply convert to using another firm's benchmarks since plenty of competitors are waiting in the wings to snatch some of Lehman's market share, he added.

Krause doubts that's going to happen, however. "Someone will be interested in a healthy and I'm sure profitable Lehman indexing services business," he said.

For the original posting on IndexUniverse.com, click here.

Does The Lehman Filing Damage ETNs? (Index Universe)

2008-09-15T13:24:00.000-07:00

Matthew Hougan

Kudos to Murray Coleman for his timely story last Friday on the threat posed to investors in the Lehman Brothers' Opta ETNs.

Since the first exchange-traded note launched in 2006, we've been reminding investors that ETNs are debt notes. And as debt notes, if the underwriting bank goes bankrupt, you lose out. That may happen with Lehman and its trio of Opta-branded ETNs, unless another firm steps in to make good on the promises, or the notes are otherwise excluded from the bankruptcy filing.

Remember: With an ETN, you don't own any share in physical assets. All you own is a promise from the underwriting bank. Unless the notes are somehow "made good," any investor holding a Lehman ETN today will be a creditor of the firm, just like folks holding other forms of Lehman debt. The likelihood that noteholders will receive full value for their shares in a liquidation is close to zero.

Importantly, this credit risk does not apply to exchange-traded funds at all.

An ETF is required to hold physical assets on its books, which are kept separate from the product issuer. For instance, the S&P 500 SPDR (AMEX: SPY) owns shares in each of the 500 stocks in the S&P 500 Index. If you own a share of SPY, you own a pro rata stake in each of those 500 stocks. Even if the product issuer (SSgA) went bankrupt, you would still own those shares.

That is not the case with an ETN.

That said, all the other ETN issuers appear to be in good shape on the credit front. The list of banks backing ETNs besides Lehman includes Barclays Capital, Deutsche Bank, Goldman Sachs, HSBC, Merrill Lynch (now Bank of America), Swedish Export Credit Corp. and UBS. All those banks appear to be solid right now, assuming the Merrill Lynch merger goes through.

Perhaps that's one of the reasons there were few assets in the Lehman products; people may have had those concerns already. This is a situation where investors must look at the credit issuer on an individual basis.

As Jim said, I have a bet with Don Friedman right now that the DJIA will dip below 10,000 before it rises above 15,000. We made the bet about a year ago. $100 is on the line.

I don't want to win the bet, for obvious reasons. And despite the current developments, I'm not sure I will. Things are really bad, but you get the feeling (as Jim suggests) that we're closing in on a point where there will be significant money to be made in the stock market.

Interesting times.

FALLOUT - M-Stanley, Goldman Credit Default Premiums Surge (Bloomberg)

2008-09-15T12:57:00.000-07:00

by Abigail Moses and Bryan Keogh

Sept. 15 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc. led a record surge in the cost of default protection and a slump in bank bond prices after Lehman Brothers Holdings Inc. filed for bankruptcy.

Credit-default swaps on Morgan Stanley soared to a record and the New York-based firm's senior notes fell the most since they were sold six month ago. Goldman's senior notes plummeted to a record low and the cost of protecting its bonds against default rose to an all-time high.

Sellers were demanding upfront payments for protecting American International Group Inc. and Washington Mutual Inc. on rising concern that they would default.

Investor speculation that Lehman's bankruptcy may trigger further takeovers or mergers roiled credit markets after the Treasury and the Federal Reserve declined to rescue Lehman, as they did in March with Bear Stearns Cos.Merrill Lynch & Co. agreed to be bought by Bank of America Corp. as the credit crisis threatened the global financial industry.

Goldman and Morgan Stanley, the two remaining major Wall Street investment banks, ``made the same mistakes'' as Merrill and Lehman, and ``anybody in that business is at risk,'' said Gregory Habeeb, a portfolio manager at Calvert Asset Management Co. in Bethesda, Maryland.

``The dangers have intensified,'' said Habeeb, who manages $8.5 billion in fixed-income assets and doesn't own Lehman bonds. `` There was a lesson of Bear Stearns and apparently Lehman didn't learn it. The lesson at Bear Stearns and Lehman may have precipitated Merrill to do something.''

Upfront Payments

Credit-default swaps on Morgan Stanley soared 189 basis points to 453 and its senior notes now yield more than a typical bond rated BB, or seven grades lower. Contracts on Goldman jumped 119 basis points to 318 basis points. Credit default swaps on Merrill, the world's biggest brokerage firm, dropped after it agreed to the Bank of America purchase.

Increased credit-market turmoil is forcing 17 financial companies' credit-default swaps to trade upfront, meaning those seeking protection must make an initial payment as well as premiums, signaling rising default concern, according to CMA Datavision.

Sellers demanded 47 percentage points upfront and 5 percentage points a year to protect the bonds of Washington Mutual from default on concern that the biggest U.S. savings and loan won't survive the credit crisis, according to CMA Datavision prices in New York. That compares with an upfront cost of 40 percentage points on Sept. 12 and means it would cost $5 million initially and $500,000 a year to protect $10 million in bonds for five years.

AIG Bonds

The upfront cost to protect AIG bonds from default soared 16.5 percentage points to 29 percentage points after earlier rising to 34 percentage points, CMA data show. The insurer's 5.85 percent notes due in 2018 fell 14.5 cents to 55 cents on the dollar to yield 14.9 percent, according to Trace, the Financial Industry Regulatory Authority's bond-pricing service.

The U.S. government's decision not to bail out Lehman reduces the ``moral hazard'' introduced when Bear Stearns was rescued and the Bank of England nationalized mortgage lender Northern Rock Plc, according to Juan Esteban Valencia, a credit strategist at Societe Generale SA in London.

``The get-out-of-jail-free card turned out not to be worth what they thought,'' said Matt King, head of quantitative credit strategy at Citigroup Inc. in London. ``This makes it much, much harder for financial institutions to get the financing they need.''

Contracts on Wachovia Corp., the fourth-biggest U.S. bank, surged 129 basis points to 582 and JPMorgan Chase & Co. rose 42 to 185, CMA data show. Wachovia's 5.75 percent notes due in 2018 fell 3.9 percent to 73.3 cent on the dollar, while JPMorgan's 6.4 percent bonds due in 2038 trade at 92.6 cents on the dollar after losing 3.7 cents.

Merrill dropped 139 basis points to 319 basis points. Bank of America increased 53 basis points to 212.

Morgan Stanley Notes

Morgan Stanley's 6.625 percent senior unsecured notes due in 2018 fell 10.9 cents to 81.3 cents on the dollar for a yield of 9.7 percent, according to Trace. Debt rated BB on average yields 9.1 percent, according to Merrill's U.S. High-Yield BB Rated index. Morgan Stanley's notes are rated A1 by Moody's Investors Service and A+ by Standard & Poor's.

Goldman's 6.15 percent notes due in 2018 dropped 7.3 cents to 88.3 cents on the dollar to yield 7.9 percent, Trace data show. The New York-based securities firm's 6.35 percent bonds due in 2034 fell 10.6 cents to 71.7 cents on the dollar, for a yield of 9.3 percent.

In Europe, HSBC Holdings Plc, Europe's biggest bank, and Barclays Plc led a jump in the cost of default protection, driving the benchmark Markit iTraxx Financial index of 25 banks and insurers a record 32 basis points higher to 127, according to JPMorgan.

HSBC, Barclays

The Markit CDX North America Investment Grade Index, linked to the bonds of 125 companies in the U.S. and Canada, rose 38 basis points to 189 as of 2:49 p.m., according to broker Phoenix Partners Group. Earlier they traded as high as 190 basis points.

Credit-default swaps on London based HSBC soared 22 basis points to 93, the most ever, according to CMA Datavision prices in London. Barclays, the U.K.'s third-biggest bank, rose 34 to 166, Zurich-based UBS AG jumped 28 to 164 and Spain's Banco Santander surged 22 to 122.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline signals the opposite.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Source: Bloomberg.com.

UK: IFAs fear losses on Lehman structured products (MoneyMarketing.co.uk)

2008-09-15T12:48:00.000-07:00

by Hannah Stodell

IFAs are bracing themselves for potential losses on clients' capital invested in structured products underwriitten or powered by the bankrupted investment bank Lehman Brothers.

Lowes Financial Management managing director Ian Lowes currently has 32 clients with exposure to Lehman contracts and says it is too early to gauge the final outcome of the bank’s collapse on their investments. He says: “Communications from Lehman on Friday said the proposed sale of the investment arm wouldn’t affect the structured products division. They can sell it as much as they like but something’s going to be affected. “

Meteor Asset Management has confirmed it has invested in securities issued by various Lehman Brothers subsidiaries.

Money Marketing understands that NDF also had exposure to Lehman contracts as recently as two months ago and calls to the consumer line of Isa/plan manager DRL were answered by a Lehman Brothers answer phone message.

At this stage Meteor says it does not know how the Chapter 11 filing in respect of the holding company will affect these products. It says: “At present, we understand that all other Lehman companies are still trading, and it appears likely that it is intended to undertake an orderly liquidation of the group, selling off each business unit. We have been in contact with Lehman Brothers in London this morning, but as yet they can give us very little information.”

Source: MoneyMarketing.co.uk.

BLACK SUNDAY: Lehman Files For Bankruptcy; BofA To Buy Merrill (Dow Jones)

2008-09-15T12:39:00.000-07:00

AT A GLANCE, the events of yesterday:

THE EVENTS: Two of Wall Streets' venerable investment giants have been brought to their knees - and an insurance powerhouse hangs by its fingertips. Lehman Brothers Holdings Inc. (LEH) filed for bankruptcy protection, while Merrill Lynch (MER) agreed to be acquired by Bank of America Corp. (BAC) for $50 billion.

Meanwhile, another victim of the ongoing credit and housing crunch, insurance giant American International Group Inc. (AIG), is desperately trying to raise capital.

MARKET REACTION:

Merrill shares gained 14% to $19.51 as investors expressed relief, but Bank of America fell 18% to $27.65. Lehman stock fell 95% to 19 cents a share and AIG dropped 53% to $5.67.
The Dow Jones Industrial Average was down 279 points at 11142, Nasdaq was off 45 at 2216 and the S&P 500 fell 32 at 1219.

Treasurys soared as investors scrambled for safety.

The U.S. dollar was flat against the euro.

Oil futures slid to a seven-month low as speculators fled for perceived safe havens amid turmoil on Wall Street.

LEHMAN BROTHERS SEEKS PROTECTION:

Wracked by massive real-estate-related losses, Lehman Brothers Monday filed for Chapter 11 protection after a feverish weekend of negotiations failed to snag a potential buyer. The two most likely suitors, BofA and Barclays PLC (BCS), walked away after the U.S. government said it would not backstop Lehman's troubled assets to facilitate a sale.

Federal regulators assured Lehman brokerage customers that their accounts will be protected and transferred to other brokerage firms.

Lehman continues to seek buyers for some assets, including its U.S. broker- dealer business and its investment management arm, The Wall Street Journal reported. Barclays remains interested in buying the U.S. broker-dealer unit. Lehman is moving to sell its investment-management division as soon as this week, possibly to Bain Capital LLC, Hellman & Friedman LLC or Clayton Dubilier & Rice Inc.

MERRILL ABSORBED AMID CRISIS:

Merrill, in a rushed bid to ride out the storm sweeping Wall Street, agreed to be taken over by BofA in a $50 billion all-stock transaction. Through the weekend, federal officials strongly encouraged the deal, fearing Merrill would be the next financial house to approach the brink after Lehman.

Bank of America Chief Executive Ken Lewis said he felt "no pressure" from federal government regulators to acquire Merrill.

AIG SEEKS CAPITAL:

AIG - hobbled by credit default swap investments that have gone sour - spent the weekend trying to raise $40 billion to avoid a credit downgrade which would let counterparties pull their capital from deals with the firm. AIG Chief Executive Robert Willumstad made an extraordinary appeal to the Fed for temporary funding to tide it through the crisis.

AIG received permission from the governor of New York to access as much as $20 billion in capital from its subsidiaries to cover operating needs.

WALL STREET CIRCLES THE WAGONS:

Ten major commercial and investment banks announced Sunday they would pool $70 billion of their own money to create a borrowing facility that they could tap into to help them ride out the crisis.

U.S. TAKES STEPS TO SUPPORT FINANCIAL MARKETS:

U.S. regulators Sunday announced a series of steps - including an expansion of the Federal Reserve's credit facilities - in hopes of stabilizing financial markets after a tumultuous weekend. The moves are designed to make it easier for banks to gain access to emergency credit.

WHAT THEY SAID:

U.S. Treasury Secretary Henry Paulson said he "never once" considered using taxpayer money to bail out Lehman. "It's important that regulators remain very vigilant, we're very vigilant," he said. "But we do not take lightly ever putting the taxpayers...on the line to support an institution."

"In the long run, I'm confident that our capital markets are flexible and resilient to deal with these adjustments," said U.S. President George W. Bush.

Source: Money.CNN.com.

UK Food Fight: SP Provider Slams IMA (fundstrategy.co.uk)

2008-09-15T11:29:00.000-07:00

by Tomas Hirst
FundStrategy.com

A structured product provider has called the Investment Management Association's (IMA) warning on the use of such products "thinly veiled provocation".

This follows suggestions the IMA's warning ignores the fact almost 10% of funds in its sectors use structured products in their portfolios.

Last week the IMA sent out a press release entitled "Structured Products - Not To Be Taken At Face Value" which states that disclosure practices for the performance of structured products make them risky investments.

The release compared the performance of National Savings & Investment guaranteed equity bond (GEB) issues with the performance of the FTSE 100 index, finding that on average GEBs underperformed the index by 4.5% annually.

Chris Taylor, the chief executive of Blue Sky Asset Management, a boutique investment firm that specialises in structured investments, says to extrapolate an analysis of GEBs to the whole structured investment universe is unhelpful.

"We view it as both simplistic but also as thinly veiled provocation and we can't see the value of the information provided," he says. "If the IMA only analyses savings and investment products they are not qualified to comment on other products."

For the original article from FundStrategy.co.uk, click here.

WSJ Opinion: LEH, MER Wall Street Reckoning

2008-09-15T11:18:00.000-07:00

The only thing anyone knows for certain is that today will be tumultuous for financial markets, after a historic Sunday that has remade Wall Street. With Lehman Brothers probably on the road to liquidation, and Merrill Lynch to be acquired by Bank of America, we are getting a Category 5 test of our financial levees.

In the event of a Lehman bankruptcy, we will also get a test of whether a major broker-dealer can fail without triggering a systemic crisis. As of last evening, the Federal Reserve and Treasury had refused to offer the same taxpayer guarantees to Lehman paper that it had for Bear Stearns last March. That was enough to cause Barclays and other potential Lehman acquirers to walk away.

The result will be a very rough Monday, but the government had to draw a line somewhere or it would have become the financier of first resort for every company hoping to buy a troubled firm. Especially with the Fed discount window now wide open to many more financial institutions, and to many kinds of collateral, Treasury Secretary Hank Paulson's refusal to blink won't get any second guessing from us. If Lehman is able to liquidate without a panic, and especially if its derivative contracts can be safely undone, the benefits would include the reassertion of "moral hazard" on Wall Street. The Merrill acquisition before it faces a Lehman-like run should also reduce the risk of contagion.

In the days ahead, Treasury will have to take more aggressive steps to protect the banking system -- including, perhaps, another Resolution Trust Corp. that can acquire real-estate and mortgage assets when there are no other buyers, provide some floor under prices, and liquidate or sell them in more orderly fashion. Whatever happens today, we'd rather not repeat the exercise.

Click here for the WSJ online version of this editorial.

FTAdviser.com (UK): SPs an Easy Adviser Sale?

2008-09-09T13:50:00.000-07:00

by Sharon Flaherty
FTAdviser.com

There’s never a dull day (well not too many anyway) working in the financial services industry and here's a fine example.

Structured products, seemingly simple and boring on the outside, suddenly became rather interesting after the Investment Management Association (IMA) threw its two pennies worth into the ring.

In a statement to journalists across the industry, Richard Saunders, chief executive of IMA, warned against structured products because of their lack of transparency.

Source: FTAdviser.com

He said promotional literature on the products should not be taken at face value because promoters are under no obligation to report performance, making it hard to assess the accuracy of claims about product returns.

His comments, however, promoted a storm of both opposition and support.

Structured Products 101: Frequently-Asked Questions

2008-09-09T12:49:00.001-07:00

by the Structured Products Association

How do structured products work?
A structured product can come in any one of several forms -- notes, units, shares, CD or trusts. Structured products typically provide exposure to an asset class with some additional feature that is desirable to an investor (and for which the investor is willing to pay a modest premium). These features include principal protection, moderate leverage, above-market yields, alternative investment exposure or tax advantaged returns.

If there's a "derivative" embedded in the investment, what are my risks?
All structured products have a derivative element , which provides the additional feature desired by the investor. Although many advisors generally have a negative reaction to an investment with an embedded "derivative," it should be noted that the derivative exposure often takes away risk from an investment (for example, principal protection). Indeed, many vanilla securities have "embedded derivatives" such as callable bonds and convertible securities. The most prominent risk of a derivative-added investment is a misunderstanding of how the ultimate payout formula on the structured product works.

What are the fees?
Predictably, the fees vary considerably, based on the term of the investment, the reference asset and the complexity of the structured product. A recent survey by the SPA demonstrated that most structured products charge between 25 to 50 basis points per annum, considerably lower than the 1.26% fees charged by mutual funds. This figure does not take into account the cost of distribution -- or the fee charged by the broker-dealer or investment advisor.

What are the investment minimums?
Many structured products are listed on exchanges, and on the initial offering can be as low as $10 per unit. A round lot of a structured investment (100 shares) would cost an investor $1,000 plus commissions. The trend over the last five years has been to reduce the minimums for the more vanilla structured investments for retail investors to smaller sizes, in part to reduce "concentration risk" and permit diversification of issuers.

Are the investments liquid or are investors locked in for long periods?
With over 60 issuers of structured investments, competition has compelled all firms to provide at least daily liquidity for their offerings. The top structured products distribution firms such as Advisors Asset Management and Incapital will not permit access to their platforms unless the issuers meet their high standards of liquidity-on-demand. Exchange-listed securities have 15 second pricing and instant liquidity. Investors are generally not locked in, however, because of the potential complexity of some structured investments, it is important to emphasize that these are buy-and-hold securities. The benefit of a particular structured product typically comes at maturity. Such is the case with a principal protected note where the protection is guaranteed only upon maturity.

Isn't this kind of like Las Vegas? When I lose, the house wins?
Contrary to the belief of even some of the more sophisticated brokers and advisors, structured investments are not a "zero-sum game" where the issuer wins only if the investor loses. The structured products industry is very keen to create products that will have superior risk-adjusted returns that outperform other investments; the growth of the market is highly attributable to the positive returns experienced by structured products investors. The majority of growth in the $120 billion-a-year structured products business comes from repeat investors.
If structured products are so great, why doesn't everyone have them in their portfolio?
Structured products have traditionally been available only to wealthy investors of private banks. After the dot-com market decline, many investors came to learn that structured products could repair portfolios, protect capital and enhance yield. Many of these investment strategies were then made available to retail investors beginning around 2003. Much like the ETF market, it takes awhile for a revolutionary idea to go mainstream. That said, MIT Professor Zvi Bodie sees the structured products market as a $1 trillion industry in the next several years, primarily because of its applicability to boomer wealth.

Don't I have credit risk with the firm issuing the product?
Generally speaking, yes. Much like any corporate bond, the return of the security is dependent upon the creditworthiness of the issuer. This time last year it was unthinkable that a structured products issuer with the global footprint of a Bear Stearns would experience a flash-bankruptcy over the course of a single week. (Of course, structured products had nothing to do with Bear Stearns' deteriorating balance sheet, which was actually occasioned by a toxic mix of leverage and subprime mortgage-linked investments.)

What happened to the holders of Bear Stearns structured products?
Happily, holders of Bear Stearns ETNs, structured products and corporate debt are better off now than they may have been previously. Ironically, the federal government now stands behind Bear Stearns credit, meaning its outstanding debt has the explicit backing of the US Treasury. But investors would be wise to not rely on Uncle Sam in case other financial firms falter. Many investors are purchasing structured product-linked CDs in amounts under $100,000 to take advantage of FDIC insurance.

4th Annual SPA AutumnExpo: October 2 at NYC's Grand Hyatt Hotel

2008-08-30T15:35:00.000-07:00

Despite the challenging markets of 2008, the Structured Products investment class appears headed for another record year (Source: Barclays Capital and MTN-i.) Structured products are now being used extensively by asset managers, pension plans, family offices, RIAs, wirehouses, insurance companies, 401(k) plans, college savings plans, mutual funds, closed-end funds, UITs, 1940 Act wholesalers and hedge funds.

On October 2, 2008 the Structured Products Association will hold a single day event focused entirely on "Structured Products Distribution – New Channels, New Opportunities."

If you’ve attended any of the SPA’s semi-annual conferences, you’re familiar with the caliber of speakers, topics, networking and knowledge attained at the New York events.

The SPA is committed to providing valuable insight and market intelligence, while growing the size and the profile of structured products in the Americas. Over 100 buy-side firms have been invited to this special one-day event – a budget-conscious discount rate is available for first-movers through Sept. 15.

Don’t miss this watershed event that will explore all areas of potential distribution: pension plans, family offices, new wholesalers, insurance companies, 401(k), structured settlements, and college savings plans.

Full agenda and confirmed speakers available shortly. Details on discounted rates available by clicking here.

RIA Wright Opts for Short-Dated Protection (structuredretailproducts.com)

2008-08-30T14:19:00.000-07:00

by Lori Pizzani
structuredretailproducts.com

A US wealth manager has said it is buying shorter dated equity-linked notes with capital protection for its clients as volatile conditions persist.

Frederick S Wright IV, chief investment officer of Smith & Howard Wealth Management told SRP he favors structured notes with performance linked to the S&P 500 (as a way of hedging against large cap stocks) and the Russell 2000 (to hedge against small cap stocks).

“We use them as equity replacements,” he said. He also likes those linked to the MSCI EAFE as stand-ins for international equities. Wright said his firm has used structured notes since late 2006/early 2007.

What he finds most appealing are notes with short maturities of two years or less.

The firm’s primary use for structured products is to reduce downside risk. “Most important to us is principal protection or partial protection, more so than a leveraged upside,” he said. “We look at it as a risk reduction tool versus enhanced return notes.”

While Wright says he has reviewed some structured notes linked to oil and global infrastructure indices, “there is nothing well priced [at present].” What he would like to see is a principal protected oil note that can provide positive returns whether oil prices rise or fall within a 30% to 35% range.

Smith & Howard usually works on a discretionary basis with clients, investing without specific security approval, but due to the relative novelty of structured products on the US market, Wright believes in discussing them with clients prior to purchasing.

Structured notes that provide returns even in down markets do not always get a strong reception, he said: “You’d think they would be attractive now. But clients’ credit concerns have eclipsed the potential benefits.

“I actually find it more difficult now because they are being issued by the banks with credit crisis [involvement],” he said. One question he repeatedly hears is: where do structured products fall in terms of the order of debt obligations of the issuer? “It’s a concern I’m hearing from clients and I don’t see this addressed in the product literature,” he said.

For a trial subscription to StructuredRetailProducts.com, click here.

Research Magazine: Q & A with the SPA

2008-08-29T14:49:00.000-07:00

By DAVID MACCHIA, WEALTH2K
ResearchMag.com

Last year structured products sales in the U.S. increased to $117 billion. And while most sales of structured products have occurred in the institutional and high-net-worth markets, the movement of structured products into the retail marketplace is clearly underway. What are the implications for competing products? According to Boston University Professor, Zvi Bodie, “The total amount of wealth that will be converted to structured products is in the trillions of dollars.”

The potential impact on other industries from the rise of structured products is one that the Structured Products Association, tackles in this interview. It’s not hard to imagine that the impact of structured products could be significant given the potent appeal of principal protection combined with investment growth potential.

----

DAVID MACCHIA (davidmacchia.com): I'm most interested in exploring the whole issue of structured products, the industry and the SPA's role in it. And I'd like to start with sort of a foundational question, if I could. Which is, given the fact that in the financial services world, apart from the sector that deals with structured products regularly, I think there’s a lot of wonder and mystery about what structured products really are? Could you start at the beginning and define what structured products are?

SPA: David, it’s a privilege to be speaking with you today. Structured products are fundamentally a variation on a direct investment in a particular asset class. Equities, fixed income, commodities -- any type of traditional asset class can be the basis of a structured product. For example, a structured note linked to the S&P 500 might provide two times the upside up to a cap, or protection of your principal 100%, or the first 15% of the downside risk in the investment. Structured products may be described as enhanced ETFs – similar index exposure, but with a desirable benefit to the payoff profile that the investor values enough to pay for.

MACCHIA: The notion of delivering equity-linked returns combined with a principal protection is a concept that's I’ve written about a lot. Among others the Retirement Income Industry Association has certainly identified what we refer to as the transition management phase. Let's describe that as the period beginning roughly 10 years before retirement and continuing until 10 years after retirement. It’s becoming well understood that investment losses during this period will, at the very least, diminish for life the amount of retirement income that can be generated. Or, depending on when the investment loss occurs, potentially lead to portfolio ruin. So when I think about the benefits that structured products can provide, I become pretty excited because you can see a role for them in the lives of potentially millions of boomer clients. So what I'm describing here is the context for the migration of structured products to the retail market. Is this something that the industry is focused on? Is it a high priority? How would you describe the urgency, if there is one, to enter that marketplace?

SPA: Our belief is that we’re at the ascendancy of structured products as the pre-eminent vehicle for the massive pool of boomer retirement wealth. Interestingly enough, the U.S. lags behind the rest of the world – Europe, Asia, Australia, South America and the rest of North America for that matter -- is far behind the rest of the world in terms of principal protected exposure with guaranteed income. For Europeans, principal protected structured products are the equivalent of mutual funds to American investors. Europeans, by and large, value capital preservation over picking stocks and going for outsized returns. Americans have a different investment mentality. We believe that you can “asset allocate” risk out of your portfolio through diversification. Unfortunately, we have found that the fixed income and equities markets have a tendency to move in lockstep. The dot-com market break in 2000 proved how fallible that theory could be.

When indexes take 30, 40 and 50% hits and interest rates are so low that you get only 1 or 2% of return on your investment for a year without taking exceptional credit risk, structured products are simply the superior investment vehicle. You can repair your portfolio by selling call options in an automated structure, by purchasing high-yielding reverse convertibles.

The top 5 or 10 percent of cutting-edge investment advisors have embraced the structured products investment class and consider it to be the secret weapon that sets them apart from their competitors.

On the subject of principal protected notes, they would be a core holding in investor portfolios. But in the U.S. , there’s something of a tax disadvantage if they are held outside of retirement accounts. The Structured Products Association has engaged Congress and the Treasury on revisiting this adverse tax treatment, but in the meantime, they are optimal investments for tax-free retirement accounts.

Certain structured products that with a ten year horizon, if managed the right way, can give you more than 100% exposure to the S&P 500. It can give you more than 100% principal protection. In fact, it'll pay you a coupon of up to 1 or 2% per year at a minimum and give you full leveraged exposure to the S&P 500. As a core holding in your retirement account, it’s a very powerful value proposition for those who have that time horizon in their retirement accounts.

MACCHIA: What you're describing in terms of economic benefit seems obvious and important. And of course, John Bogle would think that investing in the S&P 500 is exciting. But what occurs to me is that because, for instance, you may think in terms of a ten-year timeframe for these products, with limited liquidity-- I'd like to come back to the liquidity issue later-- then having them in a strategic asset allocation within a retirement account framework seems to make a lot of sense. Do you agree?

SPA: David, that’s absolutely right. Advisors who haven’t made the effort to understand the new technology have inaccurately stated that structured products are “gimmicks” with “high fees.” Such thinking is a disservice to their clients and their fiduciary responsibilities to provide the client with the best possible investment allocation. To disregard structured products is potentially a disservice to the client. To be clear, not all portfolios call for structured investments, but the advisor should arrive at that decision only after a careful assessment of her client’s needs.

MACCHIA: If you accept the notion that accumulation planning is inherently different than income- generation planning, then you have to say that the majority of financial advisors in the U.S. remain in the accumulation mode mindset.

SPA: Agreed. You could say that Modern Portfolio Theory is no longer so modern, and that structured products represent the next wave of MPT.

MACCHIA: This implies, to me at least, that maybe the largest challenge the structured products industry faces is a communications challenge, in terms of recasting people's thinking about these products. Educating advisors and investors about their use in proper income distribution planning, and getting people to focus on critical benefits that they currently they don't see. Do you agree that communications is a huge issue for the structured products industry?

SPA: It's our number one priority as an industry. And I think you touched upon a very important point – it’s not simply education of the brokers and advisors on the utility of structured investments, it's more about winning over hearts and minds. I’m going to be a bit controversial here: a good number of brokers and advisors have been intellectually lazy about learning about the investment class and have resorted to denigrating the investment class to the clients by saying, "Oh, it's too high fee, too high risk, too complicated for you. So I’m going to do you a favor and steer you away from that.”

Some advisors sell their own portfolio management skills by selling against structured investments. As an industry, we have our work cut out for us. And I spend a lot of time with the chief investment officers of the major wealth management firms advocating for this investment class, telling CIOs they should have structured products available to their top producers. So it's a top-to-bottom/bottom-to-top education challenge before us.

For the full interview in Research Magazine, click here.

SPA MarketColor: Recent Headlines - September 2008

2008-08-28T06:40:00.000-07:00

UK: 88% of Advisors Recommend SPs Over the Next 12 Months

2008-08-26T06:59:00.000-07:00

by Nick Rice
FT Advisor

IFAs have said they will increase their allocation to structured products more than to any other mainstream asset class over the next year, according to Keydata Investment Services.

A Keydata telephone poll of 50 advisers this month revealed 88.1 per cent would recommend that clients put more money in structured products over the next 12 months. Just 2.4 per cent of advisers would recommend clients maintain their current weighting and 7.1 per cent would tell clients to decrease it.

Other defensive asset classes will receive lower boosts. Cash was the most heavily favoured after structured products, with 83.3 per cent of advisers recommending clients increase their exposure, 9.5 per cent saying they should maintain it and 2.4 per cent suggesting they decrease it.

Fixed income received a higher recommendation than pure corporate bonds. Sixty-nine per cent said they would advise clients to increase their weighting to fixed income against 38.1 per cent for corporate bonds.

Cautious Managed funds, which have seen high inflows over the last year, would see allocation increases from 66.7 per cent of IFAs, less than fixed income as a whole. UK equities, international equities and property were at the bottom of the recommendation list at 16.7 per cent, 14.3 per cent and 4.8 per cent, respectively.

Mark Owen, director of sales and strategy at Keydata, said he had anticipated a large move into fixed income and cash, but was surprised at the allocation to structured products, although Keydata itself is a structured-product provider.

He said the move indicated a greater awareness of structured products among advisers, particularly in terms of their return profiles and objectives.

For the full article from FTAdvisor.com, click here.

NYSE Regulation: ETNs and the Informed Investor

2008-08-19T10:29:00.000-07:00

An Exchange Traded Note (ETN) is a relatively new type of investment vehicle that is unfamiliar to many investors. Before you decide to invest, there are some basic questions which you should consider in order to make an informed investment decision.

What Is An Exchange-Traded Note? An Exchange Traded Note (ETN) is a common name for a senior unsecured debt obligation designed to track the total return of an underlying market index or other benchmark, minus investor fees. The creditworthiness of an ETN is itself not rated, but instead is based on the creditworthiness of the issuer.

Thus, the issuer’s credit rating is an important consideration for ETN investors. Typically, ETNs have a repurchase feature, providing qualified investors the election to redeem notes of at least a specified minimum denomination or value with the issuer on a daily or weekly basis at a predetermined price. The details of this feature are in the ETN prospectus. Individual investors, not qualified for redemption election, can purchase or sell their ETNs in the secondary market, sell at a specified issuer call event, or allow them to mature.

ETNs can offer investment exposure to market sectors and asset classes that may be difficult to achieve in a cost-effective way with other types of investments. ETNs can also act as an effective hedging tool.

An ETN allows individual investors to buy an obligation, similar to a forward contract, which is traded on an Exchange. ETNs may be linked to a wide variety of assets. Today there are many types of ETNs linked to indexes and/or single reference assets based on a variety of products such as commodity futures (e.g., energy, grains, industrial metals, livestock, and petroleum), foreign currencies (e.g., Euro, yen), and equities (grouped by such categories as industry sector, strategy or geographic location).

For the entire NYSE Informed Investor educational piece, click here.

Credit Suisse: Cap-Raising with Fund Linked PPNs (FINalternatives.com)

2008-08-19T10:23:00.001-07:00

By Steven Krawciw and Irene Aldridge

Prime brokerages and their partner private banks provide hedge fund managers with services ranging from execution to capital introductions to lending. One of the areas least utilized by hedge fund managers, however, is a banks’ structuring capability.

The main advantage of structured products is that it allows a fund manager to raise capital from a vast pool of untapped investors. In addition, the bank performs due diligence and finds an appropriate way to package the product, acts as a clearinghouse of the product, and potentially assumes credit liability at maturity of the product. With the number of wealthy retail investors rising worldwide, we are likely to see an increasing number of structuring deals that may benefit hedge fund managers.

“Structuring” refers to the process of creating, packaging and distributing structured products.

“Structured products” is a moniker for a vast array of hybrid, or financially-engineered, products that banks distribute through their networks of financial advisers to their clients. Private clients consider structured products as a credible and affordable way to access a fund, perhaps with principal protection. These retail distribution capabilities comprise an important value-added service by banks that hedge fund managers may not be fully utilizing.

Structured products are typically sold “over the counter” (OTC), which means that unlike their exchange-traded cousins—Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs)—structured products are private placements. Still, the Securities and Exchange Commission oversees the distribution of structured products, and one needs to have all the proper SEC registrations in order to sell these securities. Another value add by the prime broker is that the broker’s licenses cover a fund’s product and spare the manager having to register with the SEC.

Unlike ETFs, structured products are typically underwritten by a bank. During the underwriting process, the bank performs due diligence analysis, structures the product, and often assumes the counterparty risk. It is also possible for a bank to securitize obligations outstanding on structured products. Whether securitized or not, underwriting of the structured product backed by a fund is the third benefit a bank delivers a fund manager through structuring.

The “structured” part in “structured products” refers to bundling the underlying exposure to a fund with various financial instruments. A typical goal of structuring is to create a product with a custom payout that is appealing to retail investors with a specific risk appetite. For example, a class of structured products known as Principal-Protected Notes (PPNs) provide the retail investor with either a portion of the payout, say, from a fund if it meet its targets. If the fund does not meet its performance targets, then the retail investor holding a PPN will receive his principal back along with the pre-agreed interest rate on that principal. With such a PPN, the retail investor gains exposure to a fund, but is protected from any downside.

So how does the actual structuring work?

For the complete article on FINalternatives.com, click here.

India: Structured Products 'Pick Up' In Tough Market (Economic Times)

2008-08-16T16:18:00.000-07:00

Interview with Pradeep Dokania, MD & Head, Global Private Client, Merrill Lynch

With the stock markets showing heightened volatility, high net worth investors are looking at ways of fortifying their portfolio. Pradeep Dokania, managing director and head of Global Private Client at DSP Merrill Lynch.

How has the volatility in the stock markets impacted the investment decisions of the wealthy? Is there a loss of confidence in equities as an asset class?

Well, it would be unfair to say that equities are losing their sheen because of the market correction. In some ways this correction was very much due.

If you look at the case of the Chinese stock markets, it went up to an all time high in January this year, but has corrected about 50% already. The Indian stock market has corrected about 40% in the same time. This just goes to show that globalisation has linked all of us together; no one is insulated. Typically, our clients would have a balanced portfolio, with about 55% of their money in equity and the remainder in debt. With the correction in the markets, we would have seen a 5-10% change in the portfolio.

What are the new products that high net worth investors are looking at to invest in?

Structured products have picked up quite significantly with more investors gaining comfort with them. Structured products allow clients to take a view on an underlying (indices, stocks, interest rates, etc.,) asset class depending on their risk appetite. So if a client has a positive view of a particular asset class from a 1-2 year horizon but doesn’t want to directly take exposure, he can do so via a structured product. These are mostly capital guaranteed and fortify an investor’s portfolio to a large extent.

Other products like gold funds and gold exchange traded funds are also becoming popular. Offshore investments are a huge area where we see growth and Merrill Lynch has the most comprehensive global platform to offer these to our clients. In markets like the United States leverage products are a huge business, but they are high-risk products and are not very popular here.

What are the offshore investments options available to investors today?

Global products available to Indian investors include hedge funds, global mutual funds, private equity, commodities and real estate. The option to invest directly in equities in different markets is also available. For instance, two years ago a lot of investors put their money in eastern Europe. Products like alternative energy funds, mineral funds, water funds, gold funds and BRIC funds were pretty popular. More recently, markets like Brazil have done well and it makes sense to invest there.

Even in the US, certain stocks have done pretty well. Prime examples include stocks like Apple Computer and Nintendo.

In ideal circumstances, how much of an investor’s portfolio should be diversified into offshore investments? What are the tax implications?

In ideal circumstances, 15% of an investor’s portfolio should be diversified into offshore products and the rest in domestic investments. At the moment, maybe only 1% of an investor’s portfolio would be exposed to overseas investments. It is also important to remember that people are just beginning to experiment with global products because they have very little exposure or experience of investing abroad. There is no additional tax burden of investing overseas. A high net worth individual would pay at his marginal tax rate, 33% in most cases.

What is the impact of exchange rate fluctuations for an investor looking at putting his money overseas?

Well it’s not that big a deal really. I mean for someone who is wary of putting his money in the dollar, we can give them the option of investing in the euro. Private bankers overseas say that India doesn’t have the product suite to offer to clients. Is that true? Well there is no doubt that in certain developed markets the product basket is quite wide. For instance, structured products are huge business offshore but they are built on over the counter derivatives (OTC), which are not allowed here. Similarly, hedge funds and theme-based funds give investors a lot of options. However, every market evolves over a period of time and our wealth management industry is still at a nascent stage of growth. In the next five years our product basket will match the best in the world.

For original article, click here.

China: Overseas Banks Grab Bigger Share (ShanghaiDaily.com)

2008-08-16T16:14:00.001-07:00

By Zhang Fengming

OVERSEAS banks grabbed a bigger slice of the yuan wealth management products market in Shanghai in the first half of the year, the local regulator said yesterday.

Nine overseas banks, including HSBC, Citi, Standard Chartered and Bank of East Asia, had launched yuan-backed wealth management products by the end of June with an outstanding products value of 7.3 billion yuan (US$1.06 billion), up 65.82 percent from the beginning of the year, said the Shanghai Bureau of the China Banking Regulatory Commission.

The outstanding products value grew 3.76 times the level of a year ago. Overseas banks took in 5.14 billion yuan in the first half, already more than last year's total, the local banking watchdog said.

"Domestic banks still lead the yuan wealth management products market," said the regulator. "However, the rapid expansion recorded by overseas players is worth more attention."

Yuan-backed products contributed 78.06 percent of the total wealth management products in the city in terms of outstanding value. Yuan products accounted for 84.91 percent of products launched in the first six months.

Overseas currency-denominated products grew sluggishly in the city.

Overseas banks dominate in the structure products and qualified domestic institutional investors, while domestic banks have a bigger say in the trust-investment and currency products.

With more overseas banks offering yuan-backed trust products and more lining up to do so, this may change. Overseas players accounted for 49.53 percent of the city's total structured products, such as those linked to stock or commodities, with an outstanding products value of 13.2 billion yuan.

New products launched in the first half of this year have already surpassed last year's total in value.

Derivatives Week: Ex-Countrywide Structured Pros Hunt New Home

2008-08-12T07:53:00.000-07:00

A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.

by Katy Burne
Derivatives Week

A team of nine structured products officials recently let go by Countrywide Securities is in talks to join a new firm.

“We’re looking to attach our group to a broker/dealer or a dealer/bank,” says Kevin Mahon, former senior v.p. at Countrywide in Ft. Lauderdale , Fla. “We’re talking to several firms,” he added, declining to elaborate. The structured products team specialized in underwriting equity-linked and principal protected notes and also focused on reverse convertibles.

Bank of America bought Countrywide in July but opted not to keep its securities arm due to overlaps in the businesses, Mahon said. He spent 10 years at the firm and was supported by six salespeople—five at the v.p. level and one a senior v.p.—as well as two traders. Three staffers were based in Calabasas , Calif. , and their last day will be Sept. 9. The others’ last day was Aug. 10.

All are serving non-working notice periods with non-competes. “We were told we were free to look for jobs. They are not trying to see anyone unemployed,” said Mahon , who is leading discussions with potential employers.

Countrywide’s main rivals as a structured products wholesaler were Barclays Capital and LaSalle Bank’s broker dealer services division.

Bonds.com to Distribute Structured Products (StructuredRetailProducts.com)

2008-08-08T09:31:00.000-07:00

BOCA RATON, Fla. -- Bonds.com Group, Inc, through its subsidiary Bonds.com, Inc., provider of an innovative comprehensive online trading platform providing execution, liquidity and competitive pricing to the fragmented fixed income marketplace, announced today that it was recently the subject of a feature article on StructuredRetailProducts.com, the leading online resource for the structured products market. The article highlights the Company's recent major announcement that it will shortly be adding structured products to its offering.

"We have had a tremendous amount of reverse inquiries," Bonds.com CEO John Barry told SRP. "We realized that eventually we wanted to roll into this product segment." Until now, Bonds.com offered only plain vanilla fixed-income securities (specifically corporate agency securities, corporate retail notes, municipal bonds and fixed-rate certificates of deposits).

"Adding structured retail products (including commodity-, currency-, equity- and interest rate-linked securities) allows Bonds.com to help clients diversify their portfolios beyond fixed-income products and gives the firm a whole new revenue stream and business to grow," Barry said. "Bonds.com can offer the one-stop-shopping everyone is looking for."

Click here to read the entire article.

IndexUniverse.com: DB ETNs Replicate Graham Strategies

2008-08-07T16:31:00.000-07:00

Written by Heather Bell
Thursday, 07 August 2008 14:19

Deutsche Bank is further expanding its offering of exchange-traded notes - this time through its association with the ELEMENTS platform rather than its agreement with Invesco PowerShares.

Thursday saw the launch of three ETNs tracking the Benjamin Graham Intelligent Value indexes through the ELMENTS platform. The indexes, according to a press release from Deutsche Bank, are "based on the investment philosophy of Benjamin Graham, which seeks to identify businesses with strong, liquid balance sheets that trade at a discount to their implied intrinsic value."

Benjamin Graham, an economist and investor considered to be the originator of the value investing concept, is an icon in the financial world. He was a strong influence on the opinions of many of the world's best-known financial minds, including and especially Warren Buffett. Graham died in 1976.

The indexes are designed by Hyde Park Group, which is owned by Nuveen Investments.

The three value-oriented funds cover the total market and the large-cap and small-cap segments. They include the following:

== Benjamin Graham Large Cap Value ELEMENTS (NYSEArca: BVL)
== Benjamin Graham Small Cap Value ELEMENTS (NYSEArca: BSC)
== Benjamin Graham Total Market Value ELEMENTS (NYSEArca: BVT)

It's not clear who these ETNs are targeted at, although there are plenty of investors who still take Graham's philosophy to heart more than 30 years after his death. It's also unclear how the indexes will replicate Graham's philosophy.

Each fund charges an expense ratio of 0.75%.

Source: IndexUniverse.com. Click here for original posting.

WSJ: FAQs on ETNs - What You Need to Know

2008-08-04T17:56:00.000-07:00

Here's what you need to know about exchange-traded notes. Starting with: What are they?

By SHEFALI ANAND
August 4, 2008; Page R2

Wall Street firms may be facing all sorts of financial woes, but that hasn't stopped them from churning out a new type of product: exchange-traded notes. The big question: Should you buy?
Exchange-traded notes, or ETNs, are basically debt instruments in which the issuer promises to pay a specified return, usually based on a market index's performance, minus specified fees. Similar to their exchange-traded-fund cousins, ETNs trade throughout the day like stocks.

The issuer typically is a large financial-services firm such as an investment bank or commercial bank. Staking out market share have been Deutsche Bank AG, Goldman Sachs Group Inc., Lehman Brothers Holdings Inc., Morgan Stanley and UBS AG, among others.

So far this year, 63 ETNs have been launched, compared with 22 in all of 2007. In contrast, ETF issuance has slowed, with about 104 launches so far this year, below the pace that resulted in 259 new ETFs last year. Research firm Morningstar Inc. now tracks 89 ETNs with $7.3 billion in assets, versus 732 ETFs with about $586 billion under management.

A majority of ETNs provide exposure to commodities, while others focus on currencies and the
stock markets of single countries. For whom are these investment vehicles best suited? And are they dicey if they are issued by Wall Street firms? Here is what you need to know:

Q: What is the history of these products?

A: These aren't new inventions. Since the 1990s, banks have created "structured notes" for wealthy clients and institutional accounts, often with bells and whistles. For instance, a note might promise an investor 1.2 times the return of the Standard & Poor's 500-stock index over two years, up to a capped amount, and it might promise to give investors at least some of their principal back in the event of a decline.

When stock markets are distressed, think exchange-traded funds -- specifically bond funds.

In 2006, Barclays Bank PLC, a unit of Barclays PLC, issued a fairly simple structured note that could be traded on a stock exchange in small units. Its first two ETNs focused on well-known commodity-basket indexes: iPath S&P GSCI Total Return Index ETN, which tracks the Standard & Poor's Goldman Sachs Commodity Index, and iPath Dow Jones-AIG Commodity Index Total Return ETN, which tracks an index from American International Group Inc. and Dow Jones & Co., a unit of News Corp. and the publisher of this newspaper.

Q: Who uses them and why?

A: ETNs have become popular among financial advisers looking for ways to put their clients into certain asset classes that previously were difficult to tap.

For instance, only a handful of mutual funds and ETFs provide exposure to commodities. This is partly because mutual funds and ETFs are governed by mutual-fund regulations that prohibit direct ownership of commodities and restrict the level of financial futures and debt leverage that can be used to juice returns. (The well-known SPDR Gold Shares is often referred to as an ETF, but it actually is a complicated "grantor trust" in which gold bullion is held in trust for the benefit of shareholders.)

Since ETNs aren't governed by the same laws, they have more liberty to invest in complex financial derivatives and use heavy leverage. "A lot of these [ETNs], you just couldn't pull them off in an ETF structure," says Brian Kazanchy of financial-advisory firm RegentAtlantic Capital LLC, in Chatham, N.J.

Of the 54 commodity ETNs on the market, some track a diversified commodity index and others
focus on a single commodity, like coffee or sugar. The largest is iPath Dow Jones-AIG Commodity Index Total Return, at nearly $3.4 billion.

Some ETNs issued by Deutsche Bank promise to double the return of a commodity, like gold, and others promise to double the inverse of the returns, making it an ultrabearish bet.

Two-thirds of ETNs currently hold less than $10 million apiece, according to Morningstar.

Q: Should small investors buy ETNs?

A: Financial advisers say investors should fully understand these products before jumping in. They say individuals probably should steer clear of the niche ones, such as single-currency or single-commodity ETNs, or those that promise to double the returns of an index or double the inverse of a commodity's performance.

Lou Stanasolovich, a financial adviser in Pittsburgh, believes that all investors should have commodity exposure of 5% to 10% in their portfolio. He recommends that individuals stick to a broad-based ETN like the iPath Dow Jones-AIG Commodity Index Total Return.

He says investors should start with a 1% to 3% allocation, and add another percentage point or two as they get more comfortable with these instruments.

Investors also should diversify among ETN issuers to reduce exposure to the debt of any single firm. "You'd want less than 5% in any one counterparty," says RegentAtlantic's Mr. Kazanchy. Investors might want to build up to a 10% allocation to commodities by using commodity ETNs in conjunction with commodity ETFs and mutual funds.

"It is important not to put all your eggs in one basket," says Nelson Lam, an investment adviser in Lake Oswego, Ore.

For the complete article from the Wall Street Journal, click here.

Happy Birthday, iPath ETNs (seekingalpha.com)

2008-08-02T16:07:00.000-07:00

By Brad Zigler
Reprinted from June 10, 2008 edition of seekingalpha.com

Slice the cake, pour the punch and let's hope we're not headed into the "terrible twos" now that two groundbreaking exchange-traded notes are celebrating their two-year anniversaries. The iPath S&P/GSCI Total Return Index ETN (NYSE Arca: GSP) and the iPath Dow Jones-AIG Commodity Index Total Return ETN (NYSE Arca: DJP) reached that milestone Friday.

Owners of the notes have reason to celebrate, too. The benchmarks tracked by both ETNs have sharply outdone both the stock and bond markets since their launch. The S&P/GSCI, for example, has risen at a compound annual rate of 21.9% since GSP's inception. The Dow-Jones-AIG Commodity Index, meanwhile, has cranked out a 16% annual return. Compared against the S&P 500's average annual return of 5.8% and the Lehman Aggregate Bond Index's 6.6% average gain, a dollop of commodity exposure, in retrospect, would have been a wise choice for most portfolio allocators. The commodity benchmarks' further value as portfolio diversifiers is manifested by their low correlations - 3.8% for S&P/GSCI and 10.4% for DJ-AICGI - to the S&P 500. Both commodity indexes are negatively correlated against the Lehman bond benchmark.

Issued by Barclays Bank plc, an operating unit of British financial-services giant Barclays plc, the iPath ETNs are 30-year senior zero-coupon debt securities that promise to pay investors their underlying commodity index returns, less annual fees of 0.75%.

ETN investors, thus, rely on Barclays to remain solvent until they liquidate their ETNs, trading off portfolio tracking error for credit risk. Unlike exchange-traded funds, there's no physical portfolio to manage with an ETN. Therefore, there are no frictional transactions to cause returns to vary from the benchmark: no commissions, no spreads and no timing error.

ETNs are more tax efficient than exchange-traded funds, too. Commodity ETFs hold futures contracts in portfolio that must be rolled forward, creating taxable events. In addition, portfolio positions open at year-end must be "marked to market" for tax settlement. Any capital gains realized from rolls and marking to market are treated as 60% long-term gains and 40% short-term, translating into a top blended tax rate of 23%.

Futures ETNs, though, are presently taxed as prepaid contracts, exposing investors to a tax liability only if a gain is recognized upon the ETNs' sale or when the notes mature. Holding the notes for more than a year, then, means the tax bite on gains max out at 15%.

For the full article from SeekingAlpha.com, click here.

SPA Asks SEC to Distinguish SPs from Asset-Backeds (StructuredRetailProducts.com)

2008-08-02T11:52:00.000-07:00

by Lori Pisani
August 1, 2008

The US Structured Products Association (SPA) has written to the US Securities and Exchange Commission requesting that the regulator make a clearer definitional and regulatory distinction between structured products, and structured finance and credit products at the heart of the US subprime crisis.

The SPA says it does not want the growing structured institutional and retail industries to become entangled in the recent regulations proposed by the SEC regarding credit rating agencies deciding and awarding credit ratings to structured credit products.

“We do not believe that the Commission intended to address… the ratings process for other securities, nor do we believe that the proposed rules… are appropriate for structured products, in light of their different structure, economics and risks,” said SPA chairman Keith Strycula in a letter dated 25 July.

He added that press citations often confuse structured products with the controversial structured credit products, which are continuing to cause turmoil for investors in the US.

“There are many… important differences between asset-backed securities and structured products, which suggest that it is important for any new rules and regulations to make a distinction between them,” said Styrcula. “If the Commission were to determine not to specifically exclude ‘structured products’ from the application of these proposed rules, the Association is concerned about the chilling effect these will have on the market.”

“It’s fair to assume that the SEC was focused on structured finance products, but in the release, the language used was pretty general and broad,” said Anna Pinedo, partner in US law firm Morrison Foerster’s and a member of the SPA committee addressing this issue. “Our intent is to have the SEC take a look at definitions.”

The SPA’s stated mission is to promote the development of the structured products market in the US, distinguish them as a separate asset class and ensure that investors understand the terms and risks of their investments.

DWS Scudder Doubles S-Notes Sales to $600 Million (Investment News)

2008-07-29T12:23:00.000-07:00

Excerpt: DWS Scudder has launched 155 structured notes since 2006, including 59 through June 30 of this year, with another 61 expected by the end of the year. It expects to sell $600 million in structured notes this year, compared with $300 million last year.

By Aaron Siegel
Investment News

In a bid to increase its market share among retail investors in the United States, DWS Investments has pursued a branding strategy and broadened its product line.

Its parent company, Deutsche Asset Management Inc. of New York, changed the name of its U.S. retail unit to DWS Investments, from DWS Scudder. The name switch means that the company will operate under a single brand.

"It makes sense for DWS to have a global brand ... so the brand positioning is consistent with the rest of the world," said Howard Schneider, a former Scudder employee and president of Boxford, Mass.-based Practical Perspectives LLC. "Having multiple brands just causes confusion as to who you are, unless you are creating a certain brand for a certain way of managing money."

The company has been pushing to penetrate the U.S. adviser market long before the re-branding. It has expanded its sales organization to 200 wholesalers, from 172 in 2005, and plans to expand its head count next year.

Additionally, the firm plans "to play a bigger role in the U.S. market" and has expanded the company's product mix beyond mutual funds, said Axel Schwarzer, chief executive of DWS Investments.

The asset management firm wants to become a multiwrapper absolute-return manager that integrates retail, alternative investments, insurance and institutional businesses, the company said.

To attract advisers, New York-based DWS Investments has unveiled a slogan and a website to highlight its commitment to advisers.

Using the "Reshaping Investing" slogan, the company is emphasizing how it will help investors cope with lower-return expectations and higher volatility through investments in alternative investments, structured notes, absolute returns and structured products, according DWS Investments.

DWS has launched 155 structured notes since 2006, including 59 through June 30 of this year, with another 61 expected by the end of the year. It expects to sell $600 million in structured notes this year, compared with $300 million last year.

Additionally, DWS Investments launched the DWS RREEF Global Infrastructure Fund this year, after bringing to market in 2007 the DWS Disciplined Market Neutral Fund, DWS Alternative Asset Allocation Fund, DWS LifeCompass Protect Fund and DWS Life Compass Income Fund.

DWS Investments manages $817 billion in assets worldwide, including $345.9 billion of retail assets under management as of March 31.

Fully 71% of those assets are from European investors, while 24% are from the Americas, and 5% are from the Asia-Pacific region.

The figure also includes $80 billion in retail and retirement assets in the United States.

The company also wants to move up its asset rank to the top 10, from 24th, in the United States, and to the top five globally, from ninth.

However, Mr. Schneider questions whether DWS' strategy to focus on just niches will help propel it into the top 10 among asset managers. DWS Investments is "doing lots of innovative things, and the challenge is to get critical mass" in products such as alternatives and structured notes, he said.

A danger in creating these kinds of products "is that you can be successful but not raise enough assets to raise the core of your business," Mr. Schneider said. "If their goal is to become a top 10 asset manager, they have to hit the right niche, then they have to have the right product to bring to market."

Meanwhile, one analyst is taking a wait-and-see approach.

"DWS has made some positive changes to focus on their strengths, and we need to see them stabilize and deliver good results for shareholders," said Miriam Sjoblom, a mutual fund analyst for Morningstar Inc. of Chicago. "Just putting the changes in place is not good enough, and we need to see them actually work."

E-mail Aaron Siegel at asiegel@investmentnews.com.

SPA Comments to SEC on Proposed ABS' Credit Rating Rules

2008-07-25T14:04:00.000-07:00

July 25, 2008

Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-1090
Attn: Nancy M. Morris, Secretary
Re: Proposed Rules for Nationally Recognized Statistical Rating Organizations Release No. 34 57967 (File No. S7 13 08)

Ladies and Gentlemen:

This letter is submitted on behalf of the Structured Products Association in response to the request of the Securities and Exchange Commission (the “Commission” or the “SEC”) for comments on Release No. 34-57967 (the “Release”). The Release sets forth proposed rules that aim to increase transparency and avoid conflicts of interest in the credit rating process. We note that at or about the same time that the Commission published the Release, the Commission also published several other proposed revisions to the Commission’s rules and regulations that refer to and rely upon credit ratings. We are not commenting on those additional rule proposals.

The comments presented in this letter represent the views of the Structured Products Association (the "SPA" or the "Association"). The Structured Products Association is a New York-based trade group. The Association’s mission includes positioning structured products as a distinct asset class; promoting financial innovation among member firms; developing model “best practices” for members and their firms; and identifying legal, tax, compliance and regulatory challenges to the structured products industry. The Association was the first trade organization for structured products in the United States and now has more than 2,000 members, including members from securities exchanges, self-regulatory organizations, law firms, compliance professionals, investor networks, family offices, and buy-side and sell-side structured products firms. The Association counts among its members some of the largest and most active investment banks and distributors in the U.S. structured products market.

The Association is committed to promoting the development and growth of the structured products market in the United States, and to ensuring that investors in structured products understand the terms and risks of their investments. To our dismay, there has been a great deal of confusion in the popular business press regarding the nature of “structured products.” For example, in articles and commentaries on the current credit crisis, “structured products” have been frequently confused with products issued by securitization vehicles, including mortgage-backed and asset-backed securities, such as CDOs and CLOs.

Please note that, unlike the securities at the heart of the current credit crisis, the holders of these structured securities are subject only to the creditworthiness of the issuer of these securities. The issuer of structured products does not typically pass along (and therefore depend upon) the payments from the underlying assets, as would occur in the case of a securitization transaction.

The entire comment letter can be accessed from the SPA website by clicking here.

India: Equity SPs - Best of both worlds (Business Times)

2008-07-23T14:28:00.000-07:00

By: Akhilesh Singh

Over the years, investment managers have worked hard to develop products that suit various investor profiles. Asset managers in western countries have been offering products across asset classes such as equities, debt, foreign exchange, commodities , and so on, for a long time now. However, in India, the pace has been comparatively slow in innovating and offering such products, partly due to regulatory issues and partly due to the lack of investor awareness and acceptance.

In the last three years, there has been a significant effort by the investment managers to offer equity-linked derivatives structures in India, and many of the most sophisticated equity derivatives structured products have been introduced recently. They have developed significantly, largely due to constantly changing market dynamics, and therefore the changing investor appetite, which has encouraged the investment managers to innovate and modify constantly.

What they are

They are an effective and efficient way to invest in hybrid structures that allow one to invest in debt while also participating in equity markets, without risking one’s capital, and, in certain cases, even guaranteeing at least a minimum return.

Most structures in India offer 100% capital protection. However, if you’d like a more aggressive structure, capital protection may be a little less than 100%, depending on product design. As such, they are mainly used within the secure part of a portfolio to increase returns with limited risk on capital. Equity derivative structured products can also be customised to meet an investor’s risk or return profile.

Advantages

For one thing, they provide an opportunity to participate in equity markets coupled with capital protection or even return protection. This kind of product is best suited for investors who are very conservative , but who also want to enhance returns without taking any additional risk.

Secondly, equity derivative structured products enable risk-controlled access to volatile asset classes and alternative investments. In the current market scenario, these kinds of products offer a fantastic risk-minimised investment option in alternate asset classes.

Thirdly, they are an efficient diversification tool. They help diversify the portfolio management style, and hence provide a hedge in the portfolio in case of a difficult market situation.

Fourthly, they offer an efficient way for an investor to take advantage of a given market scenario. Fund managers have been constantly churning various structures that suit the prevailing market and economic situations, which helps the investor to adjust to the changed scenario and accordingly make her or his investment decisions.

And fifthly, equity derivative structured products let us minimise the frequency of interventions , which are too often guided by sentiment. These products are closed-ended and mostly follow a predefined investment strategy that is executed in the beginning. One cannot make any changes later in the structure. However, this can, in some situations, be detrimental to performance.

Types of products

There are several types of equity derivative structured products. Investors can choose from the palette depending on their risk profile.

High fixed return products:

These compare with debt products, and offer a high yield on the portfolio and keep a measured equity participation, to ensure low-to-moderate risk. Investing in such products also helps the investor get a higher post-tax yield, as these debentures attract long-term capital gains tax for such structures that mature over a 365-day period , where the tax rate is lower than on fixed deposits.

Market neutral products:

These are designed for investors who don’t have directional market views, and especially suited for highly volatile and uncertain market environments. These products are designed to yield betterthan-market returns if the markets rise, but—pleasantly enough—give similar returns even when the markets move downwards. Investors who have been historically investing in bank fixed deposits because of a strong aversion to risk should consider such product structures.

High equity participation:

These products offer a high level of equity participation. However, they still hedge or limit the downside risk on the capital. These structures are ideal for investors who are aggressive and want significant participation in a rising market , and are willing to sacrifice their fixed-income returns for that opportunity. However, these structures mostly do not allow positive participation if the markets are bearish. In my assessment, these products offer investors the best of both worlds, with riskadjusted returns. When the markets are volatile and directionless , they hedge or at least limit the downside risk, and eliminate the need to monitor one’s portfolio daily. They also eliminate the risk of impulsive decisions.

Akhilesh Singh is Business Head, Emkay Midas Wealth Management

Lawyer: The Hapless Members of Citi’s ELKS Club (Seeking Alpha)

2008-07-22T13:10:00.000-07:00

by Jake Zamansky, Esq.

It’s only a hunch, but experience tells me you can soon expect to be reading a lot about “ELKS” and other structured investments in the business press.

The name evokes images of a hardy, austere and stable animal able to withstand the harsh elements of the forest. But not in this story. For some Citigroup customers, ELKS might conjure images of a broker who duped you into buying risky securities that were inappropriate with your investment goals.

Citi’s ELKS (equity linked security) product is a risky derivative instrument where an investor is offered a specified return on a structured security tied to an individual stock. Providing the stock maintains a minimum value, the guaranteed return is paid. If the stock ever falls below the minimum value (sometimes around 80 percent), the ELKS immediately convert into shares of that stock. Then if the price of the underlying stock declines, the investor could receive a stock worth much less than the initial investment.

Here’s the catch: ELKS offer potentially higher returns, but the downside risk is unlimited if the stock goes south. If the underlying stock happens to dramatically increase in value, the investor only gets the guaranteed return.

For Citigroup, it’s a classic case of “heads I win, tales you lose.” The bank charges investors an upfront commission to buy ELKS and likely earns additional profits through hedging. Not surprisingly, brokerage firms were aggressively peddling structured derivative products like ELKS to unsophisticated retail investors a few years back, prompting FINRA to warn member firms of concerns that customers didn’t understand the inherent risks.

There’s evidence that FINRA’s warnings weren’t heeded. I represent a retired couple over 80 whose Citi broker last year bought $300,000 worth of ELKS on their behalf. The ELKS were highly unsuitable for retirees simply looking to preserve capital. The highly volatile stocks my client’s ELKS were derived from included Yahoo!, Cemex and Sandisk. The couple has lost nearly a third of their principal as the underlying stock’s value plummeted.

Admittedly, I have only encountered one ELKS case so far, but many brokerages firms peddled similar products using monikers such as PACERS, STRIDES, SPARQS, and ELEMENTS. Some commentators were critical of me when I sounded the early alarm about auction rate securities, but that warning proved quite prescient. Recall, that the SEC uncovered wrongdoing in the ARS market in 2006, but the activity persisted. Sadly, I can’t help but suspect that the experience of my elderly clients with ELKS is not an isolated incident.

Stay tuned.

This article is found on the SeekingAlpha.com website. For the original post, click here.

Reg. Rep: Structured Products - Bright Future for Securitization?

2008-07-21T17:03:00.001-07:00

By Christina Mucciolo
July 16, 2008

Securitization has gotten a bad reputation lately. But the securitization process—taking debt and pooling it into a derivative whose value is based on the underlying assets—was meant to reduce risk. Take collateralized-debt obligations (CDOs); they are a kind of derivative, a structured product, if you will, that put the lie to that concept. Indeed, given the current dismal state of the CDO market, you’d think that they might taint the entire derivative, structured product marketplace.

Of course, derivatives and structured products refer to a broad category of investments.

Basically, the definition of structured product includes any hybrid financial instrument—typically a registered note, bank deposit or private placement—linked to the performance of a derivative, i.e. an underlying asset, such as a stock, an index, a commodity, currency or other investment. If you don’t know about the vehicles, you may want to learn.

Advisors who use them say they allow an investor to enjoy upside potential on an asset while protecting the on the downside should the underlying asset value drop. Already popular in Europe, structured products have gained popularity at wirehouses and investment banks.

In fact, the retail market bought almost half (worth about $58 billion) of the structured products issued in the U.S. in 2007, according to the Structured Products Association (SPA). About $114 billion in structured products were issued in the U.S. in 2007, a jump of 78 percent over 2006. As of year-end 2007, the American Stock Exchange was trading 400 structured products, with 128 new listings.

While many advisors find them too complex and expensive (loads can reach 6 percent), structured products are being mastered and used by some advisors, such as Scott Miller Jr., managing partner at Blue Bell Private Wealth Management, a fee-only RIA in Blue Bell, Pa. Of the $300 million in assets managed by the firm, Miller estimates 30 percent of it is invested in structured products. Miller says structured products are good for clients who want exposure to equities, but who are willing to give up some upside return potential for some downside protection—they’re buy-and-hold investments. “It is just the nature of anything derivative-based; they may get too complicated for some people,” Miller says.

That’s why advisors specialize in the ones they understand best. Bradley Pace, president of Pace Capital Management, says they are suitable for HNW clients, and he only invests about 10 percent to 15 of any one clients’ portfolio in such products. Pace says he stays away from the risky structured investment vehicles (SIVs), such as reverse convertibles; he sticks to the equity-linked CDs that are more basic. “These are great for clients who are very nervous about the market, but don’t want to lock up all their money in a Treasury note, make 2 percent and lose against inflation for the next two or three years,” says Pace.

Too Good To Be True? The complicated nature of structured products has raised some concern that some advisors and banks understand these products as little as they understood CDOs and other credit swaps that caused the current financial meltdown. “Everyone is wondering about the future of securitization, and I think there is a great deal of concern about credit derivatives generally,” says Anna Pinedo, a securities and derivatives lawyer with Morrison & Foerster and co-chair of the SPA’s Best Practices Committee. “Even though I think structured products are relatively straightforward, there is the possibility that there could be a little bit of a market overreaction against anything that is perceived as being at all structured or complicated, and so that is something that everybody needs to watch out for.”

Still, industry professionals haven’t seen advisors or investors backing away from structured products. In fact, the credit crisis has highlighted the importance of credit quality, says Chris Warren, managing director and head of structured products Americas at DWS Investments, the U.S. retail division of Deutsche Asset Management.

For the full article from Registered Rep., click here.

WSJ: New ETNs Fail To Grab Investor Interest

2008-07-21T08:26:00.000-07:00

By IAN SALISBURY
July 17, 2008

This might have been the year of the exchange-traded note, with fund firms and investment banks launching more than 60 new ETNs.

As it turns out, investors have so far turned up their noses at most of these complicated ETF-like securities. While the bulk of new products focus on red-hot assets like oil and other commodities, drawbacks such as credit risk, complicated strategies and uncertainty about the securities' tax status have kept many investors on the sidelines.

"I've talked with a lot of [financial advisors] and they've been staying away," says Ronald DeLegge, a former financial advisor who now offers ETF investing advice to online subscribers. "You've got a lot of risks with these things."

Exchange-traded notes have collected about $7.2 billion in assets since the first ones were launched in 2006, according to fund researcher Morningstar Inc. But the bulk of that, about $6 billion, is in 30 ETNs by Barclays PLC, which invented the product.

Another 59 ETNs created by eight other providers, mostly this year, hold just $1.29 billion, collectively, or about $22 million on average.

In all, 78 of the 89 ETNs on the market have less than $100 million. Barclays couldn't be reached for comment.

Investors, of course, could warm to new ETNs over time. It sometimes takes new funds several years to build a following. Still, ETNs' struggles seem to mirror those of their close cousins exchange-traded funds, where fund companies launched hundreds of products hoping to replicate success of a few early blockbusters and garnered only mixed results.

For the full article from the Wall Street Journal, click here.

Final: SP Principles Released For Individual Investors

2008-07-10T14:12:00.000-07:00

Five leading trade associations, co-sponsors of the Joint Associations Committee (JAC), today released “Structured Products: Principles for Managing the Distributor-Individual Investor Relationship.” The global, non-binding Principles address a wide range of issues affecting distribution of retail structured products to individual investors.

The Principles complement the JAC’s “Principles for Managing the Provider-Distributor Relationship,” which were released in July 2007. The Associations issued the Principles for public comment on May 12 and are today publishing them in final form.

"The second set of JAC Principles represents many months of thorough memberdiscussion and wider syndication, and articulates the values that market participants share as they promote the continued development of a healthy market in retail structured products,” said JAC’s Chairman, Timothy Hailes, Managing Director and Associate General Counsel at JP Morgan Chase in London.

“As with the July 2007 Provider-Distributor Principles, the key will be intelligent and proportionate application to local regimes."

The JAC comprises the following trade associations: European Securitisation Forum (ESF), International Capital Market Association (ICMA), London Investment Banking Association (LIBA), the International Swaps and Derivatives Association (ISDA®) and Securities Industry and Financial Markets Association (SIFMA).

The principles were based on extensive work and collaboration with the associations’ member firms, and on consultation with distributor associations.

The Principles can be accessed by clicking here.

Bloomberg: Bridgewater predicts $1.6 trillion in subprime losses

2008-07-10T14:09:00.000-07:00

Bridgewater Associates has warned of a massive $1,600bn (€1,020bn) of banking losses from the global credit crunch, four times official projections, according to a report in Swiss newspaper SonntagsZeitung.

The US hedge fund said true losses would swell if banks were forced to adopt "mark-to-market" methods of valuing structured credit instead of the "mark-to-model" currently being used.

“We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse," Bridgewater was quoted as saying the report.

UK: Wealth advisers and private banks turn to structured products

2008-07-10T13:57:00.000-07:00

Wealth advisers are increasingly turning to structured products in an effort to protect clients from stormy markets while offering the potential for capital growth, according to the chief executive of Blue Sky Asset Management, a UK-based structured products specialist set up last year.

Blue Sky is launching a third issue of its Asset Allocation Accelerated Growth Plan, which enables investors to construct their own portfolio split between UK, US, European and Japanese equity markets, while receiving capital protection and leveraged returns.

Chris Taylor, chief executive, said: "We are laying down the gauntlet to the traditional mutual fund and index tracker world. We think the features of the plan question the rationale for investing in those products."

He pointed out that traditional mutual funds had haemorraged assets in the first quarter in the both the UK and US, while demand for cautiously managed and structured products had been robust. "Investors are voting with their feet, and walking out of traditional mutual funds into structured investments that can alter the risk and return profile of their portfolio."
While the firm is focussing its efforts on high-end intermediaries, which are increasingly targeting high net worth investors, it is also seeing interest from private banks.

Taylor said it recently structured a sophisticated product based on a distressed debt hedge fund which was being sold by a Swiss private bank. "We are seeing interest from the more open-minded private banks which are prepared to talk to an independent provider," he added.

Blue Sky is increasingly building inflation protection into its structures. "While a lot of people are talking about how to structure portfolios to hedge against rising inflation, we think there is no better protection that a direct link to the retail price index. It doesn't get much cleaner than that," said Taylor.

For the original article in Wealth Bulletin, click here.

Financial Times: Downside protection gains popularity

2008-07-07T19:53:00.000-07:00

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

2008-07-07T19:41:00.000-07:00

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

2008-07-07T18:39:00.000-07:00

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.

Derivatives Week: Global Principles for SPs Go Final Next Week

2008-07-03T10:28:00.000-07:00

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

2008-07-03T10:04:00.000-07:00

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

2008-07-03T09:56:00.000-07:00

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.

HNWI's Alternative Investments "Ease" in 2008 (Merrill CapGemini World Weath Wealth Report)

2008-06-25T05:05:00.000-07:00

The economic downturn, and the heightened levels of uncertainty it created for investors in the second half of the year, deterred HNWIs from increasing their allocations to alternative investment vehicles -- which included structured products.

HNWI allocations to alternative investments were shaped by the balance between the uncertainty spurred by the economic turmoil and the strong performances of select products within that asset class. Ultimately, HNWIs trimmed their allocations to alternative
investments by a single percentage point, from 10% of their financial assets in 2006 to 9% in 2007.

Counterbalancing HNWI concerns, growth opportunities developed as a result of shifting economic strengths. For instance, gold, among other commodities, gained popularity as a hedge against inflation and the sliding U.S. dollar, boosting gold futures by 31.4% in 2007.

Additionally, various hedge funds froze client withdrawals starting in late 2007, which helped minimize reductions in allocations to alternative investments.

Globally, hedge funds represented the largest portion—over 30%—of alternative investments.

During the course ofthe year, HNWIs seemed to grow more distrustful of hedge funds as subprime mortgage-related turmoil intensified.

The collapse of two Bear Stearns hedge funds, resulting from losses stemming from highly leveraged mortgage-backed security positions, deepened investors’ concerns over participation in hedge funds, limited pricing transparency and the investment vehicles they were likely to impact.

Ultimately, however, hedge funds’ average gains of 12.6% in 2007 were enough to outweigh HNWIs’ worries. Consequently, HNWIs made only slight adjustments to their overall allocations
to alternative investments.

The full report can be accessed on the CapGemini website by clicking here and registering.

Bloomberg: Winning Converts (November 2007)

2008-06-25T04:54:00.000-07:00

Reverse convertibles and other structured investments promise to boost returns and limit risks.

By Michael Iver and Jon Asmundsson

(Bloomberg Magazine, November 2007) -- In the years after the dot-com bubble burst in 2000, U.S. investors were hungry for anything that could give their portfolios a boost—or at least stanch the bleeding. Stocks plunged. The Standard & Poor’s 500 Index lost half of its value from its 2000 peak to its low in 2002. Bonds or money markets didn’t look much better. Yields on Treasuries fell to the lowest in four decades.

There was nowhere to hide . . . and a new class of securities gained a foothold on Wall Street. Managers of assets for high-net worth investors led the trend, offering debt instruments designed to mimic derivatives- based strategies. These securities promised a way to limit losses and enhance returns, and they became known as “structured” investments.

“Around 2000–2003, structured products became very prominent in portfolios of private banks such as JPMorgan and Merrill Lynch and Morgan Stanley,” the Structured Products Association said in a report on the subject. The new approach “was so useful that they started mass marketing it for retail investors at minimums of $1,000,” it says.

Protecting against further drops in the stock market was key, says Rhian Horgan, global head of equity derivatives at JPMorgan Chase & Co.’s private banking arm, which oversees $430 billion for its clients, who include more than 180 billionaires. Investors hurt by the S&P 500 Index’s slide from 1,553 to 769 wanted protection before they would even consider buying stocks again. “So we started putting together strategies that gave clients some protection on the next 10 percent downside in the equity market, and they financed that by selling away the upside above 14–15 percent annualized returns,” Horgan says.

For the full feature in Bloomberg Magazine, click here.

Australia: Capital Protected Products on the Rise (Investor Daily)

2008-06-24T15:59:00.000-07:00

Greater competition between issuers

By Victoria Papandrea

SYDNEY, Australia -- The take-up of capital protected structured products in Australia has increased over the past few years along with the competition between issuers.

There was around $4 billion dollars worth of 100 per cent capital guaranteed products sold to Australian investors in 2007.

This represented a 50 per cent growth in issuance of the products compared to 2006 figures, according to JPMorgan vice president equity derivatives and structured products David Jones-Prichard.

"One of the reasons for that was an increase in the quality of the products we've seen over the last two to three years in Australia," he said.

"We've really started to see more flexibility, versatility and just a much more expansive and innovative range of structured products throughout the market as well as a lot of competition between issuers."

There is currently around a dozen issuers in the Australian market that are providing a variety of different structured products to Australian investors, Jones-Prichard said.

"There's also greater technology that's gone into the products so not only is there greater competition between the issuers but there's also greater call on our resources from our global desks," he said.

For the original article from Australia's Investor Daily, click here.

India: Wealthy Investors Exit Stocks, Seek Protected Exposure to Nifty-50

2008-06-22T14:03:00.000-07:00

From The Economic Times (India).

As the tides have turned, many well-heeled investors are moving out of stocks to park some of their money in structured products which are linked to leading market benchmarks.

Structured products, offered by banks and brokerages, have taken off in the last two years. But now with the Sensex having lost over 5,000 points from its peak, securities houses are sensing a greater demand for such products in the last few months.

A foreign bank recently offered a 15-month tenor product with a Nifty participation of 160-170%, with a knockout barrier of 20%. Standard Chartered was the first to introduce a “cliquet” structure, wherein investors “lock-in” profits earned in each year. Given the way that markets are behaving, bankers are tweaking products.

Earlier products which participated on the upside found favour with investors, but today products which participate the market upside as well as the downside find appeal. Hence, popular structures today have a 20-30% participation on both the upside and downside, with tenures of 18-24 months.

Today banks like Citi, HSBC, Standard Chartered and private sector players such as ICICI, HDFC and brokerages such as Emkay, Motilal Oswal, Edelweiss sell these products to their high net worth clients.

The minimum ticket size for these products is Rs 10-20 lakh. “A lot of HNI clients who do not want to risk their capital and want a slice of capital market returns opt for capital-guaranteed products,” says Abhay Aima, group head, Private Banking and Third Party Products, HDFC Bank.

For full article from The Economic Times (India), click here.

MSNBC: Energy Speculation Lead to Obama's Call to Close "Enron Loophole"

2008-06-22T13:50:00.000-07:00

Obama campaign's said today that he plans to ease the impact of rising gas prices by cracking down on excessive energy speculation through closing the so-called “Enron Loophole.”

Aides argued the changes to the regulatory structures could have at least some medium-term impact on gas prices. The “Enron Loophole” -- so named because it was added at Enron’s behest -- has kept the Commodity Futures Trading Commission from fully overseeing the oil futures market and investigating cases where excessive speculation may be driving up oil prices, the campaign explained in a policy paper.

Obama would close the loophole by requiring that US energy futures trade on regulated exchanges. His plan also calls for legislation that would direct the CFTC to investigate whether further regulation is needed to end excessive speculation in US commodities markets, including higher margin requirements and position limits for institutional investors.

Obama would aim to ensure that US energy futures cannot be traded on unregulated offshore exchanges and would seek to work with our other countries to establish regulations to avoid excessive speculation in commodities futures markets. He would also call on the Federal Trade Commission to investigate market manipulation, including in the oil futures markets and ask the Justice Department to investigate whether energy traders have been engaged in illegal activities that have helped drive up oil and food prices.

Corzine said high oil prices were partly a result of increased demand from countries like China and India, but that most experts believed speculation was also a contributing factor and that the volatility in the price of oil on a daily basis was a clear indication of speculation in the marketplace.

“I think everyone believes there’s too much speculation in the oil markets and a lot it flows directly from that particular loophole,” he said. “"It might as well be called the Phil Gramm loophole, because it was snuck in at the 11th hour, 59th minute to the 2000 energy policy bill, and it just is, it really needs to be addressed. And it would have a lot of impact I think certainly in the intermediate term, if not in the short term with greater oversight here.”

Corzine said the "Enron loophole” Gramm had added to the bill took exchanges and derivative oil contracts out of supervisory oversight and had been a problem in electricity markets in California a few years ago. He said it was unlikely Gramm would push back against his own amendment.

For the full report, click here.

UK Guardian: Protected Plans "Don't Set My Pulse Racing"

2008-06-22T09:20:00.000-07:00

Structured investment plans
"These each-way bets don't set my pulse racing," says the Guardian's Paul Farrow

They don't have the sexiest name, but that is not stopping investors from lapping them up.

Structured investment plans, which are linked to stock market indices or a basket of shares and guarantee either full or partial capital protection, often prosper during times of uncertainty. And with the all the gloom and doom, they are enjoying a boom. They are on course for a record year in terms of sales.

This comes as no surprise. Providers will always try to cash in on the prevailing mood of investors. And, boy, are they cashing in.

Whether they are linked to agriculture, Africa, China or even bombed-out banking shares, new structured plans are coming thick and fast.

I'm sure that many investors will be tempted by the latest offering from James Hay, which is a five-year plan linked to four banking shares with full capital protection - although HBOS is not one of the four. But investing in structured products is a little like betting on a horse race with an each-way wager and ending up with a second or third placed win, rather than a victory. And the trouble with an each-way bet is that, with a tinge of regret, you are often left thinking of what might have been – and whether the smaller win was worth the effort in the first place.

For the full article, click here.

Business Week: A Note Tailor-Made to Fit Your Goal

2008-06-21T07:51:00.000-07:00

By Ben Levisohn
BW Magazine

They're the bespoke suits of the investment world—financial products that can be designed to meet almost any investing goal. They don't look so fancy at first glance. They're bonds, basically, backed by a bank. It's the financial accoutrements layered on that basic frame that distinguish these products and lead to their name: structured notes.

Most of these products share a common foundation in pairing a Treasury or corporate bond with an options contract; the option bets on the direction of a stock or stock index over time. The above-average income some products offer is part of their appeal in a low-rate environment. But it's the options contracts that give a "have your cake and eat it too" aspect to the deal. While enjoying steady income, investors can maintain exposure to the stock market and cap potential losses—and, in a trade-off some notes require, gains.

The use of structured products has grown rapidly, with their total value more than quadrupling, from $28 billion in 2003 to $114 billion in 2007. About half of that $114 billion was sold to individuals by brokers or financial advisers. The number of notes is growing as well. In May, 2007, there were 437 structured products aimed at individual investors, valued at $2.4 billion; in May, 2008, there were 634, with a total value of $4.2 billion, according to data from StructuredRetailProducts.com.

While it's smart to be wary when pitched complex products, it's easy to see why more investors are intrigued. The notes can be designed for almost any goal, from protecting retirement dollars to aiming aggressively at high returns. "There's a seemingly endless amount of them out there," says adviser Brent McQuiston of Scottsdale-based Wealth Trust-Arizona.

Principal protection notes, geared to insure against market losses, are popular now. They let you participate in some of the upside of a stock index, and if the index drops, you don't take a loss. "Investors don't want to lose money, even if it means giving up some gains," says Neel Tiku, a financial planner at Peak Financial Management in Waltham, Mass.

Notes that offer double-digit yields, but come with far higher risks than typical fixed-income products, are also strong sellers.

For the full article in Business Week, click here.

Cerulli: SPs, Alternatives Draining Mutual Fund AUMs

2008-06-21T07:40:00.000-07:00

Tide Shifts for Open-End Mutual Fund Market

Rebecca Moore, PlanAdviser.com

For the first time since their creation, open-end mutual fund launches were eclipsed by the combined introductions of ETFs, closed-end funds, and variable annuities in 2007.

A report from Cerulli Associates said the cumulative impact of these and other alternative vehicles, including structured products, funds of funds, and collective and commingled trusts, poses a significant threat to the open-end mutual fund market. Cerulli contends that fresh thinking about Modern Portfolio Theory (MPT) is influencing product development and spawning an array of new alternative investment strategies and asset classes structured as both 1940-Act and non-mutual fund products.

The increased availability of alternative strategies is challenging product marketers as they seek to position their funds amid evolving portfolio construction. Nearly two-thirds of asset managers report that the evolution of portfolio construction and Modern Portfolio Theory is having a large impact on their retail third-party product development strategy. This evolution in thinking—coupled with Baby Boomers’ changing needs as they shift into retirement mode—is influencing the portfolio construction of both new and established products, Cerulli notes.

The changes are also influencing which products and strategies distributors use to meet their clients' needs, and ultimately which products gather and retain assets, Cerulli said. The report says changes to the underlying construction of products is shaping how advisers and platforms construct client portfolios, as well as the demand for certain products and strategies.

For the full story from PlanAdviser.com, click here.

For a copy of the Cerulli report: "Product Development in an Evolving Portfolio Construction Environment," call 617.437.0084 or email CAmarketing@cerulli.com.

Press Release: LaSalle Team Sets Up Shop at ICAP

2008-06-19T12:02:00.000-07:00

From left to right: John Tessar, Chris White, John Korody, Eric Moskoff, Alex Ciccotelli, Krista Martin, Ed Coach ICAP's new structured product services division, SPX, is headed by John Tessar and Ed Coach, and is based in Boca Raton, FL. John and Ed are joined by former LaSalle colleagues Krista Martin, John Korody and Eric Moskoff and look to build on the success they experienced while at LaSalle. In addition, Chris White from Countrywide Securities Corp. and Alex Ciccotelli from HSBC Bank USA, join the division this month.

====

BOCA RATON, FL (From the ICAP Press Release) -- It has been widely reported that Structured Product distribution has experienced explosive growth over the past several years in the U.S. This growth has led to great change, evolution and opportunity within our industry.

In that light, we are proud to announce that the former structured products team from LaSalle Bank has joined ICAP, the world's premier voice and electronic interdealer broker. ICAP delivers specialist intermediary broking services to trading professionals in the wholesale financial markets. The group covers a very broad range of OTC (over-the-counter) financial products and services in commodities, foreign exchange, interest rates, credit and equity markets, as well as data, commentary and indices.

Through the SPX platform, our team plans to offer issuers and the broker dealer community enhanced structured products education, information and trading services. Focusing solely on the distribution of structured products to the dealer and advisor community, our team hopes to capitalize on the growing demand for structured products by U.S. investors.

SPX Co-heads John Tessar & Ed Coach said in a joint statement, "Our success will most certainly be gauged by how well we can address the needs of both issuers and dealers. As we grow, we hope to help the entire investment community to learn, find and buy a variety of structured products from a vast array of issuers. We very much look forward to working with you in the near future."

SPX - Structured Product Services
2255 Glades Road, Suite 200E
Boca Raton, FL 33431
888-308-2024
spx@icap.com

Skandia UK: With 152% Increase, Protection Proves Popular

2008-06-13T17:14:00.000-07:00

13 June 2008

Structured products are proving a popular solution for those who are nervous about equity investments following stock market volatility.

Structured products are an alternative investment solution for investors who are concerned about losing their capital.

Figures from Skandia show a 152 per cent increase in inflows into its Protected Portfolio Investment (PPI) during the first quarter of 2008 compared to the same period in 2007.

Investors can build a portfolio of funds based on a long-term strategic asset allocation that is in line with their individual risk profile, investment objective and time frame.

Another option is a structured product that enables them to benefit from some of the investment growth but with the added reassurance that their capital is protected against any downturn.

Skandia’s protected portfolio investments are structured to maximise the opportunities for growth alongside security of capital. Unlike the majority of structured products available in the market, actively managed funds are used to determine growth rather than passive indices. So when market conditions start to improve, investors will still have the potential to benefit from stock market growth.

Graham Bentley, head of investment marketing at Skandia, says, ‘The key principle of any investment strategy is understanding attitudes to risk, and for some investors an investment that allows them to enjoy growth should markets rise, with a safety net of up to 100 per cent capital protection at the end of the investment term should markets fall, suits their risk needs.

‘The recent market volatility is clearly making the idea of protecting their initial investment even more appealing to many investors and, as a result, over the last quarter we have seen significant interest in our structured products.’

Investopedia: Structured Retail Products Too Good To Be True?

2008-06-11T16:36:00.000-07:00

by George D. Lambert
(Contact Author Biography)

Structured retail products promise a return tied to a portfolio's earnings and guarantee you'll get your original investment back - regardless of what happens to the market! And some even offer to pay double or triple an index's return. You might wonder whether there's a catch. Can there really be reward without risk? It would seem so - that is, until you look beneath the surface.

The financial institutions issuing structured retail products might invest in one or more stock indexes. For instance, these could include the DJIA, the S&P MidCap 400 Index, the S&P SmallCap 600 Index, the Dow Jones EURO STOXX 50 Index, or the Nikkei 225 Index. Some even offer products that are tied to a handful of stocks in one industry, such as the energy sector.

Who sells them? Several banks and brokerage firms offer structured retail products, each with a unique acronym, but the concepts are basically the same: If the underlying index or stock in the portfolio does well, you'll get a piece of the return. On the other hand, if the market tanks, you're assured to get all of your money back. Plus, they might throw in a little interest.

How They Work

One bank, for example, has a $1,000 five-year note that pays at maturity the greater of two amounts:

Your principal plus a 5% total return (0.98% annual), which comes out to: $1,050

A piece of the underlying portfolio's or index's return. The payout includes dividends, but it's credited quarterly and your account is charged for any losses in the index. At the end of each quarter, you'll get credit by calculating the:

Ending Level - Starting Level
______________________
Starting Level

Then, the level is reset for the following quarter. Your total return is the compounded value of the 20 (five years x four quarters) quarterly returns. The most you can make with this particular bank's product is 7% per quarter.

Compounded, that comes out to 31% a year - not too shabby. But what if the market doesn't go up every quarter during the year?

[Theoretically assume] the market had a 6.59% gain for the year. However, because of the way the earnings were credited with this bank's structured retail product, you would have actually lost 7.55%! You wouldn't have this problem, though, if the market stayed on a steady, upward course throughout the year.

How does the issuer protect your capital?

Since the financial institution promises to return your principal, it has to hedge against a drop in the underlying index. As a hypothetical example, imagine you invest $1,000 in a three-year structured retail product that is linked to the DJIA. The institution might put $865 of your money into a three-year zero-coupon bond that is set to grow to $1,000 at maturity. Therefore, if the index drops in value, the institution has the money to meet its obligation to you. Next, the institution uses the remaining $135 to buy call options on the DJIA. That way if the index rises, it'll get both the initial principal ($1,000) and profits related to the index's growth to share with you. But if the index falls, the call options will not be exercised and the investor will still have his initial $1,000.

Other Versions

There are products out there that have different payout caps, such as 90% of the S&P 500's return. You might also run across structured retail products that offer to pay a return at maturity that is a multiple of their underlying market index's return. However, the gains might be subject to limits, such as no more than a 30% total gain over two years, so don't expect to make a killing.

Furthermore, you might have to share in a portion of any decline in the index; therefore, you could get back less than your initial investment. (To read more about capital gains, see Capital Gains Tax Cuts For Middle Income Investors and A Long-Term Mindset Meets Dreaded Capital-Gains Tax.)

How They're Taxed

The tax rules for structured retail products are similar to those of zero-coupon bonds. Therefore, even though you don't actually receive the guaranteed interest each year, you'll pay annual tax on it at your ordinary tax rate (up to 35% federal). At maturity, if the account is up, you'll get another tax bill on the additional earnings.The RisksStructured retail products carry a few risks. Among them:

Neither the FDIC, nor any other government agency, guarantees the products, regardless of whether you bought them from your bank. They are unsecured obligations of the issuing financial institution. As a result, if the issuer goes down the tubes, your investment could, too.

Structured retail products are not redeemable prior to the maturity date. You can try to sell on the open market, but the price you get may be influenced by many factors, such as interest rates, volatility and the current level of the index. As a result, you might end up with a loss.

You won't receive any interest while you own the account.

Conclusion

Structured retail products are a little like certificates of deposit tied to stocks - you get some upside potential with a safety net in case the market takes a dive. Plus, whenever interest rates rise, the minimum promised returns might be an attractive alternative to traditional fixed-income investments, such as bonds. Nevertheless, there are restrictions, so make sure you understand the prospectus before you invest. Otherwise, you could be horrified to suddenly discover that you own an investment that goes down in an up market, and that you may not be able to sell it without taking a loss.

by George D. Lambert, (Contact Author Biography)

George D. Lambert is a freelance financial writer with more than 20 years of experience in the financial services industry. He has worked as a Certified Financial Planner, a Certified Divorce Financial Analyst and an arbitrator for the NASD, NYSE and AAA. George is approved by the Florida Licensing Education Section to instruct life, health and variable annuity courses. To read more about George and his services, visit www.e-financialWriter.com. Also be sure to check out his latest book, "A Boomer's Guide To Long-Term Care".

NASDAQ-SPA June 11 Meet-the-Press Event at NYC MarketSite

2008-06-11T11:40:00.001-07:00

Panel members from the Second Annual NASDAQ-SPA Media Event on June 11, 2008 (left to right): Matt Ginsburg, Wells Fargo; Keith Styrcula, Structured Products Association; Karen Fang, Goldman Sachs; Philippe el-Asmar, Barclays Capital; Scott Mitchell, JPMorgan; John Radtke, InCapital; and Richard Keary, NASDAQ-OMX.

Special thanks to NASDAQ's Wayne Lee for the press availability. Photo by Rob Tannenbaum.

Structured Products Confused with CDOs - Investment News

2008-06-11T11:00:00.000-07:00

By Dan Jamieson, June 11, 2008

NEW YORK - Sales of structured products continue to grow despite the fact that they are often confused with subprime-tainted collateralized debt obligations, said Keith Styrcula, chairman of the Structured Products Association at a media briefing today in New York.

“Half of all news alerts talk about CDOs as structured products,” he said. “They're not CDOs; they're not subprime.”

Ratings agencies have added to the confusion by calling some of their CDO-ratings groups “structured-products groups,” Mr. Styrcula said.

The confusion has also caused some compliance officers at brokerage firms to wonder whether investors are being sold mortgage-backed bonds, he said in an interview.

Sales of structured products are expected to reach $120 billion this year, surpassing the record $114 billion in sales in 2007, according to the Structured Products Association.

In 2006, sales were just $64 billion.

Retail buyers have been increasingly interested in products with downside protection and strong credit ratings, according to industry participants on a panel at the briefing.

About 16% of sales this year have been in commodity-linked products, up from 8% last year, said Philippe El-Asmar, managing director and head of structured-product sales at Barclays Capital, the New York-based investment-banking division of London-based Barclays Bank PLC.

To see the original version of the article, click here.

The Fever for Structured Products -- Registered Rep.

2008-06-11T10:08:00.000-07:00

By BRIAN WARGO, Registered Rep. Magazine
(Originally published March 1, 2008)

Long a Favorite of Investors in Europe, structured products are rapidly gaining popularity in the United States. Last year, $114 billion in structured products were issued in the U.S., according to the Structured Products Association.

That's a 78 percent jump over 2006 — and dwarfs the $32 billion in structured products issued in 2004. Previously the sole purview of sophisticated high-net-worth investors in the U.S., they have begun filtering into the mainstream. The retail market bought some $58 billion — or about half — of the structured products issued in 2007.

Structured products combine financial instruments, typically bonds and derivatives, into a package that allows investors to bet on the direction of stocks, bonds and other investments. They are used to both hedge and to speculate, and typically pay an interest or coupon rate substantially above the prevailing market rate. Many of them also cap or limit upside returns, particularly if principal protection is offered.

One reason demand has picked up so much over the last three years is that a number of new financial institutions have entered the market, says Kumar Doraiswami, managing director and head of sales for Natixis Capital Markets. There are 30 active issuers today, up from 10 five years ago.

That has improved liquidity and helped to cut transaction costs — two issues that have long concerned investors and advisors, he says. The increased number of offerings, and the accompanying press coverage, has also helped generate greater awareness of the benefits and risks of the (relatively new) instruments, says Philippe El-Asmar, managing director and head of investor solutions for the Americas region for Barclays Capital.

El-Asmar believes structured products will continue to win greater appeal, particularly those that give investors exposure to attractive but risky markets, such as emerging equities or commodities, but protect them on the downside. Those frustrated with a 3.5-percent return on bonds, for example, may appreciate a product that protects their principal while giving them 80 percent of the upside in the market, he says.

Current market conditions could also enhance their appeal. Randy Pegg, executive vice president of Colorado-based Fixed Income Securities (FIS), says the U.S. structured-product industry witnessed tremendous growth during the market correction of 2000 to 2001 as more investors realized they could protect their downside, yet remain invested for some upside.

The same reasoning may now be at play, according to Pegg. “We have experienced increased demand with the recent market sell-off,” he says. “Investors have learned that to make money in the market, you must be in for the up days. When they know they have principal protection, investors can stay invested longer and still sleep at night — especially during turbulent times.”

For the full article, please click here.

State Street Survey: 60% of Pros Know ETNs

2008-06-10T15:12:00.000-07:00

Advisors name ETFs as most innovative investment vehicle of the last two decades -- Products have become an increasingly vital investment vehicle
Tuesday, June 10, 2008
By James Langton, Investment Executive Magazine

Exchange-traded funds (ETFs) are changing the financial advisory business, according to new research from State Street Global Advisors and Knowledge@Wharton, the online business journal of The Wharton School at the University of Pennsylvania. The survey of 840 investment professionals found that 67% identified ETFs as the most innovative investment vehicle of the last two decades, and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios.

Also, 76% of advisors believe the use of ETFs encourages fee-based models; 76% identified themselves as light-to-moderate users of ETFs, indicating that less than 50% of their portfolios utilize ETFs, just 4% report they do not use the instruments at all; 60% of respondents said they knew what exchange traded notes are, and 29% indicated that they plan on increasing their use of ETFs in the future; only 31% of advisors are currently using inverse ETFs, which allow investors to bet against a market index. However, nearly 40% report that they plan to increase their use of inverse ETFs in the future.

Advisors identified the top five most appealing characteristics of ETFs, as: low cost, liquidity, intra-day trading capability, tax efficiency, and investment style purity. The greatest disadvantages of ETFs were identified as: “unknown/untested indexes and/or portfolio methodologies” or the, “overwhelming number of choices.”

“Exchange traded products have become an increasingly vital investment vehicle for financial intermediaries,” says Anthony Rochte, senior managing director of State Street Global Advisors.

“By incorporating exchange-traded products into sector rotation, core-satellite, tax management, and portfolio completion strategies, advisors are simultaneously managing costs and risk, which helps underscore their value proposition and strengthen relationships with clients.”

“The pace at which new ETFs and indices are entering the market is clearly a concern,” said Rochte. “In light of these findings and the increasing importance of understanding index methodologies, the role of responsible product development and educational support cannot be overstated.”

Robert Spicer: Market-Linked CDs

2008-06-10T15:04:00.000-07:00

"Only thing we have to fear is fear itself". Franklin D. Roosevelt, March 4th, 1933

FDR gave this famous quote during his inaugural speech. Many people today erroneously believe he was talking about the threat of WWII. Not true. He was talking about the economy of the United States of America and the financial crisis it was facing at the time. Banks were particularly hard hit. Confidence was so shaken that a rumor could create a run on a banks assets and it could be closed overnight. However, by innovative and somewhat dramatic actions he regained the confidence of the American people in the U.S. banking system. One such step was the Nationwide Bank Holiday, closing every bank in America for an entire week. Every U.S. bank, while closed, was inspected by government examiners who would only open the bank if it was given a sound fiscal bill of health by the US Government.

This type of American ingenuity and will power changed the fabric of our financial system and allowed the United States to become the financial powerhouse it has become. Yet, today, our current stock market volatility and credit crunch has again created overblown fear. A fear that may be self defeating in the long run.

The world’s largest banks have devised a way for most investors to participate in the appreciation of the equity markets while protecting the principal invested with FDIC insurance.

Even the most conservative of investors now have the ability to participate in most, if not all, of the upside potential of a variety of markets (such as the S&P 500, DJIA or a basket of stocks or commodities) without the risk of losing any principal provided the investment is held to maturity. Typical maturities range from one year to seven years. Participation rates on the upside vary with each issue and can reach 100%.

These investments are called structured Certificates of Deposit or Market Linked CD’s. They are issued by some of the largest banks in the world and linked to indices or investments. The investor’s principal is protected (insured) up to $100,000 per depositor or up to $250,000 for certain qualified retirement plans such as an IRA account, per depositor per insured bank. FDIC insurance is backed by the full faith and credit of the United States Government. For more information on FDIC Insurance go to www.FDIC.gov. Unlike ordinary CD’s, these do not pay current income and the investor has to hold the investment to maturity for the strategy to be successful. If the investor liquidates before the stated maturity they may receive back less than their original principal.

Most individual investment portfolios are limited to a combination of cash, bonds, equities, real estate and perhaps some managed futures. In today’s markets too many investors are reducing their equity exposure due to a fear of losing principal. Fear drives overweighed allocations to cash and bonds. While past performance is not indicative of future performance, it is a well known axiom that equities have outperformed cash and bonds in the past, especially over the last 60 years. In my opinion, most investors today, after a careful review of their portfolio and risk tolerance, need equity exposure to achieve their long-term investment goals. Market Linked CD’s offer conservative investors a new vehicle to participate in the markets while reducing principal risk.

In the past only institutions and very high net worth individuals have been able to access these complex, performance-linked investments in a variety of asset classes that offer in tandem 100% principal protection on the downside combined with the upside potential of the linked asset class. According to the trade group Structured Product Association new issuance of all structured products in the U.S. has risen from $28 billion in 2003 to $114 billion in 2007.

FDR proclaimed in his first fireside chat “Let us unite in banishing fear” March 12th, 1933. We are fortunate to have new financial tools to help accomplish financial security in today’s market environment.

It is important you talk to your financial advisor before you invest. Some topics to discuss are your tolerance for risk, time horizon, your market outlook, and interest in particular asset classes, expenses, taxes, computation variations and participation rate, maximum and minimum interest rates, prepayment penalties, current income requirements and secondary market activity if any.

Open architecture is also a concern. When an investor is only offered the in-house brand he or she may be at a disadvantage. It is generally better when banks compete. Typically, independent broker dealers can secure CD’s, bias free, from many different issuing banks.

This is not intended to be an offer or solicitation for the purchase or sale of any investment.

Robert Spicer is an Executive Vice President at First Financial Equity Corporation in Greenwood Village, CO. He can be reached at 303-643-5959 or rspicer@ffec.com. Member FINRA/SIPC

Open-Architecture in Slo-Mo: Investment News

2008-06-03T10:41:00.001-07:00

Structured market leery of open systems
Yet brokerage firms' proprietary-only policy sparks risk concerns amid credit crisis

By Dan Jamieson June 2, 2008

Open architecture has been slow to come to the structured products market.

Structured products are unsecured debt obligations of the issuing brokerage firms, and despite growing concerns about Wall Street's financial strength, only one wirehouse sells outside products.

UBS Financial Services Inc. of New York has given its brokers a choice of issuers since 2006, said UBS spokeswoman Karina Byrne.

In addition to its own products, UBS offers products from Lehman Brothers Holdings Inc. of New York, Deutsche Bank AG of Frankfurt, Germany, HSBC Holdings PLC of London, and Barclays Capital, the New York-based investment-banking division of London-based Barclays Bank PLC.

Other than UBS, there's been no movement to open the doors.

Flows into structured products have almost doubled from $64 billion in 2006 to $114 billion in assets in 2007. Five years ago, in 2003, it was $28 billion.

The risk from a proprietary-only policy is that clients may not get the diversification they need, and they may pay too much when issuers don't have to compete.

Other than UBS, the only other traditional firms offering outside products are the private banking units at JPMorgan Chase & Co. of New York and Credit Suisse Group of Zurich, Switzerland, Mr. Styrcula said.

"If they did [use outside issuers], I would probably consider [structured products] a lot more seriously," said a Smith Barney rep who asked not to be identified.

For the full article, click here.

NASDAQ to Host SPA Press Event on June 11

2008-06-03T10:35:00.000-07:00

On June 11, 2008, the NASDAQ and the Structured Products Association (SPA) will co-host a media briefing to discuss why "structured products" represent the fastest growing investment vehicle for American investors.

With nearly 7,000 structured products sold in the United States in the last year, this investment class has been resilient in turbulent markets and nimble in monetizing current market opportunities.

The Structured Product investment class outsold closed-end funds and convertible securities last year and was third behind hedge funds and exchange traded funds in new assets. Structured Products are rapidly becoming a mainstream investment instrument for millions of American investors, taking its place along side mutual funds, exchange traded funds, closed-end funds and stocks and bonds in well-diversified portfolios. This presentation is intended to provide the press with an overview of the structured products investment class and this rapidly developing industry.

WHO:
John Radtke, Executive Director, Incapital LLC
Karen Fang, Managing Director, Goldman Sachs
Matt Ginsburg, Executive Vice President, Wells Fargo
Nikki Tippins, Managing Director, J.P. Morgan
Philippe El-Asmar, Managing Director, Barclays Capital

IHT: U.S. to toughen regulation of commodities markets

2008-06-03T10:28:00.000-07:00

by Diana B. Henriques
International Herald Tribune

Regulators of the nation's commodity markets will demand more information about investors to determine whether they are evading market limits on speculation and artificially driving up world food prices.

The regulatory agency, the Commodity Futures Trading Commission, also plans to initiate talks with bank regulators to ensure that adequate credit is available for the farm economy.

Finally, in an unusual departure from the secrecy that usually cloaks its enforcement actions, the commission will confirm that it is investigating the price spike that hit the cotton futures market in late February, a step demanded by cotton industry executives at a commission hearing on April 22.

The commodity futures markets play a key role in establishing worldwide prices for wheat, corn, soybeans and other foodstuffs, as well as energy products like crude oil and natural gas.

But in recent years, these markets have also become an attractive haven for investors seeking both profits from rising prices and protection against inflation and a withering dollar. As a result, billions of dollars have poured into the commodity futures market — from pension funds, endowments and a host of other institutional investors — through the new conduit of commodity index funds.

Billions more have come in from investment banks that are hedging the risk of complex bets, called swaps, that these same investors have made in the unregulated international swaps market, which dwarfs the regulated markets supervised by the CFTC

The commission has come under fire, most recently at a hearing on May 20 before the Senate Committee on Homeland Security and Governmental Affairs, for not doing enough to monitor the impact of these investors on markets that have such influence on family budgets nationwide.

Specifically, the commission will start requiring more information about index funds and, more significantly, about the clients on the other side of the unregulated swaps deals that are being hedged on the regulated futures exchanges.

The swaps market has traditionally be seen as off limits for U.S. commodity regulators, but the commission clearly is responding to congressional concern that investors may be using swaps dealers to evade rules that limit the size of their speculative role in regulated markets.

The commission is also putting the brakes on granting waivers that have exempted some commodity index funds from speculative limits, and is formally dropping proposed rule changes that would have extended a blanket exemption to all index funds.

In recent years, more than a dozen commodity index fund companies have been granted individual waivers, after successfully arguing that they were using the futures markets exclusively to hedge their obligations to the people who have invested in their index funds. But the commission now intends to "be cautious and guarded before granting additional exemptions in the area," according to the draft proposal.

The full article can be accessed by clicking here.

Structured Products All The Rage (Hartford Courant)

2008-05-24T21:30:00.000-07:00

But Consider Cost, Liquidity, Complexity

It seems like the perfect pitch for retirees: a financial product that protects principal and offers some growth potential to help fight inflation.

Or, still a decade or so from retirement but needing to boost returns to hit your number? Another product won't protect your downside but promises twice the market's positive return.

These are just two examples of the booming structured-products industry, which last year saw new U.S. issuances jump 44 percent from 2006, to $114 billion, according to the Structured Products Association, a New York-based trade group.

Behind the appeal of enhanced returns or insuring investors' principal, however, are concerns about the products' cost, liquidity and complexity for retail investors.

Financial institutions sell the notes under a variety of names in increments as low as $1,000, offering returns linked to particular market results over a period of time, say, three to eight years. One type of note might offer twice the return of the Standard & Poor's 500 index if it goes up (subject to a cap), but would have full exposure to any decline.

Another type might cap positive returns at a slightly lower figure but offer some downside protection — say, covering the first 10 percentage points of loss.

In the case of principal-protected notes, the contracts might be a hybrid of an FDIC-insured certificate of deposit issued by a bank and an option on the S&P 500 index issued by a brokerage firm. The investor essentially would receive the return on whichever performed better.

Many mutual fund companies and brokerages offer structured products on their trading desks, though often it involves a phone call to a representative to get to a full menu of all the notes being provided. Big players include JPMorgan Chase, HSBC, Morgan Stanley and Merrill Lynch.

Fees typically are embedded into the products, so consumers may find it difficult to comprehend total costs. There are underwriting fees to the banking firm that creates the product and brokerage commissions that combined could exceed 3 percent of an initial investment. Tack on ongoing management fees and the implied costs of caps on earnings.Some buyers have taken to the secondary market — financial exchanges — to escape the issue costs, but the flip side is that sellers trying to unload the products before the term expires have at times been stung by that illiquidity.

One concern is issuer risk. Given the problems in mortgage-related and other derivatives, consumer advocates worry that retail investors could get swallowed up in a round of defaults.

The derivative products also don't pay dividends like you'd receive if you made a direct investment in a stock-index mutual fund.

DJI's PRESTBO: SPs are "Ingenious, Fascinating Vehicles"

2008-05-22T07:37:00.000-07:00

NEW YORK (MarketWatch) -- One unique type of indexed investment is rapidly gaining popularity: "Structured products" are short-term to intermediate-term notes, which normally would pay interest. These don't. Instead, their payoff usually depends on the performance of an index, or maybe a commodity price such as oil or gold.

The required performance is specified in the offering documents for these products. For instance, one product may pay off if the Dow Jones Industrial Average exceeds a particular level by the maturity date, while another pays if the Dow falls below a certain level. It's all in how an investment bank structures the product -- which is another way of saying what the bankers think will sell.

Actually, the Dow examples are of the plain-vanilla variety. Many structured products nowadays are increasingly sophisticated, not to say complex, and are incorporating strategies as well as securities.
Consider, for example, a $2.2 million issue of "Buffered Return Enhanced Notes" that J.P. Morgan Chase & Co.issued last month.

This product essentially is a bet that the commercial and residential real estate markets will recover by April 10, 2010, when the notes mature. The index-linked assets in this product consist of a basket of three ETFs: iShares Dow Jones U.S. Real Estate Index Fund, Financial Select Sector SPDR Fund,

This basket -- in which the iShares real-estate fund accounts for 60% and the other two ETFs are 20% each -- was priced on April 2. J.P. Morgan Chase set this level (a total of $51.24 for the basket) at 100. If the basket price level is higher in two years, investors get their principal back plus two times the percentage gain of the basket.

This is the "enhanced" part of the structure. If the basket ends up at 112, the note would pay out $1,240 for each $1,000 invested, or a 24% total return. The upside potential return is capped at 42%, which means anything more than a 21% increase in the basket does nothing for the investor.

But what if the bottom falls out and the basket ends 30% lower at 70? The investor receives $850 for each $1,000 invested. That's only half of the basket's drop because the note offers protection against a decline of 15% -- the "buffered" part of the structure. If the basket fell to zero, the investor would still get $150 for each $1,000 face amount.

Structured products appeal to investors for a variety of reasons, not least of which is the usually relatively short wait to find out if they've won or lost. According to the Structured Products Association, $114 billion of these instruments were issued last year, up from $64 billion in 2006. So far, this year is on track to reach $120 billion, a 5% increase.

That's impressive growth during a time of turbulence in many markets and asset classes. Keith A. Styrcula, chairman and founder of the association, says one of the driving factors is a "profound shift in investor thinking -- that active management isn't worth the extra cost."

Individual investors take about 45% of structured products and 55% go to institutions, Mr. Styrcula says. "Only 5% to 10% of the investment advisers and brokers are familiar with structured products now. As more of them become so, we'll see growth in the number of individuals participating either directly or through certain mutual funds," he adds.

Rules and caveats

If you're considering a structured product, what should you be aware of?

1. Structured products are sold, not bought. The broker, adviser or somebody similar is going to pitch these investments, and until that happens you probably wouldn't even know they exist. These people want a piece of your investment capital, and most likely haven't given your goals or risk appetite much thought. It's up to you to decide whether the product being offered fits your portfolio and investment strategy. If you can't decide, just say "no."

Indeed, Norway's regulators recently banned structured products from being offered to most individual investors because their "risks are not well understood." This move came after some Norwegian municipalities were burned in the subprime mortgage debacle.

2. Only about 10% of structured products are listed on exchanges. The rest exist in a dimly lit over-the-counter realm. That means you will not necessarily be able to follow the interim pricing of these products, although you could track the publicly traded components such as ETFs.

And there isn't a liquid aftermarket in case you want to -- or need to -- bail before the products mature. Some investment banks say they will buy back the products they created from investors, but you may have noticed that some of these banks run out of money occasionally. In our example above, J.P. Morgan Chase declares it "intends to offer to purchase the notes in the secondary market but is not required to do so."

One notable exception is the growing number of exchange-traded notes. These ETNs were introduced to establish access to markets that are not readily available to many investors, such as commodities and currencies. They are notes structured with distant maturities that allow for exchange trading, and some of them have built up a decent daily volume.

3. Structured notes introduce credit risk into investments that otherwise wouldn't have any. The vast majority of these products are notes that are backed by the issuing banks. If the bank goes belly-up, structured-note investors are left holding the bag. Ideally, you'd perform due diligence on the bank's credit rating before you put money into one of its structured notes.

4. Many structured products offer "principal protection." That is, the investor is guaranteed to get capital back with possibly some extra kicker if the linked index performs favorably. The J.P Morgan Chase example above isn't one of these, but many investors insist on this protection. It changes the risk factor from one of potential loss to one of tying up your money for a period without any recompense.

This kind of structured product plays into what many behavioral finance professors have been telling us: Some people hate to lose money more than they hate to not make money.

Structured products are ingenious, fascinating vehicles. They require careful thought on your end about whether you should take them for a spin, or kick the tires and walk away.

John Prestbo is editor and executive director of Dow Jones Indexes.

Alice Yurke: Leveling the SP Playing Field

2008-05-20T16:03:00.000-07:00

As growth in the European markets in particular continues, Alice Yurke on behalf of the Structured Products Association maps out the road ahead for Structured Products…

The last two years have seen unprecedented growth in the development and distribution of structured products in the United Kingdom, the United States and Europe.

Once exclusively the province of banks and securities firms marketing to institutional and ultra-high net worth individuals, the retail market for these products is developing globally at breakneck speed. A key to this rapid growth is continued marketplace innovation and positioning of structured products in both the retail and institutional arenas. However, the rewards of innovation and positioning are not without their legal and credit risks.

The most critical legal concerns in the development and distribution of structured products in the United States will continue to revolve around disclosure and suitability, particularly in the retail arena. These concerns heighten the need for diligence on the part of broker-dealers, in terms of both fully understanding their customers and highlighting the risks involved on a product-by-product basis. In-depth analysis and understanding of the products, followed by balanced explanation of the risks and rewards, will become increasingly more important as issuers offer complex products whose features may elusively appear to be only slightly different from those offered by a competitor.

For the full article, click here.

Structured Products Association Announces Winners of the 2008 First Annual LeadingEdge Awards for Investment Professionals

2008-05-20T12:00:00.000-07:00

Five top investments advisors are experts in using structured products for asset allocation; consider the use of the investment class as a "competitive advantage"

NEW YORK, May 20 -- The Structured Products Association (SPA) today announced the five winners of the First Annual LeadingEdge Advisor Awards. The winners were chosen at the SPA-2008 Fifth Annual Conference at the Grand Hyatt Hotel in New York. Societe Generale Corporate & Investment Banking sponsored the awards presentation.

The LeadingEdge awards are given to the top investment advisors, brokers and professionals in the Americas who have demonstrated superior results for clients in using investments known as "structured products" in managed portfolios.

"After 50 years, 'modern portfolio theory' can no longer be characterized as the cutting-edge," says Keith A. Styrcula, Chairman and Founder of the SPA. "Simple asset allocation is no longer the optimal solution. The LeadingEdge Awards are bestowed to advisors who expertly used structured products to dial out volatility in portfolios, to add 100 to 250 basis points in additional annual returns, to protect assets against losses, and to access alternative asset classes from around the world that are available exclusively through structured investments."

"For the last five years, structured products have been Wall Street's best kept, $120 billion secret," Styrcula added. "But the five winners of the LeadingEdge awards are among the elite 5% of their profession whose expertise in this investment class has given them a clear competitive advantage."

The LeadingEdge winners were rigorously judged on the effectiveness, creativity and sophistication of their use of structured products as a unique investment solution for client portfolios. A committee from the Structured Products Association collected nominations over a three-month period, and assessed each nominee using these criteria.

The five winners of the LeadingEdge awards are:

Thomas Balcom (Foldes Financial Management) is based in Miami, FL. Foldes has nearly half-a-billion in assets under management (AUMs) Tom's approach is to invest 7-10% of AUMs in structured products, using them as a complement to core investment strategies. http://www.foldesfm.com/

Steve Braverman (Harris myCFO Investment Advisory Services) is based in Fort Lee, NJ. Steve heads a group that advises 300 families with seven offices and 165+ employees. With over $20B in assets, his team's focus on structured products has been rapidly growing. http://www.harrismycfo.com/

SPA CHAIRMAN'S AWARD: J. Scott Miller (Blue Bell Private Wealth Management) is based in Blue Bell, PA. Scott and his team at Blue Bell PWM manage portfolios of structured products for their clients and as separately managed accounts (SMAs) for other RIAs. It is Blue Bell's belief that through the use of managed structured products portfolios, they are able to control risk, reduce portfolio volatility, while still providing compelling upside potential. Scott has over 36 years experience in the nvestment business and purchased his first structured product in 1993. http://www.bluebellpwm.com/

Tony Proctor (Proctor Financial) is based in Wellesley, MA. Tony's firm has been using structured products for over 5 years. His firm believes the investment class is an excellent tool for delivering on two distinct goals for his clients' portfolios: 1) to protect against realistic downside losses, while still capturing and usually exceeding possible upside returns; and 2) to give his firm's clients access to asset classes or areas of the world that would otherwise be difficult to capture. On average, Proctor Financial allocates over 20% of client portfolios to structured investments to achieve these dual goals. http://www.proctorfinancial.com/

Frederick S. Wright (Smith and Howard Wealth Management) is based in Atlanta, GA. Fred's team effectively uses structured products as a risk management tool, specifically to reduce equity exposure and excessive volatility in client portfolios. http://www.smithhowardwealth.com/

Raina Mathur of Societe Generale Corporate & Investment Banking, who presented the awards to the winners, stated: "Registered Investment Advisors (RIAs) are the fastest growing distributors in the structured products industry and they represent the thought-leaders who are bringing this investment class to the mainstream. In recognition of this trend, Societe Generale has created a platform dedicated specifically to the RIA community. Accordingly, it's an immense honor for Societe Generale to recognize these top-tier professionals as recipients of the SPA's First Annual LeadingEdge Awards."

The SPA will open up the nomination process for the 2009 Leading Edge Awards in November 2008. To learn more about the SPA and structured products, visit the SPA website at www.structuredproducts.org, and the SPA blogsite at www.structuredproducts.com.

SPA-2008 - Photo Gallery from the Annual Event in NYC

2008-05-17T13:53:00.000-07:00

Barclays: $4bn New SPs in $225bn Commodities Products (Bloomberg News)

2008-05-02T10:05:00.000-07:00

By Saijel Kishan
May 2, 2008

Commodity assets under management expanded by a record in the first quarter to $225 billion as prices for energy, metals and agriculture increased to all-time highs, Barclays Capital said.

Assets climbed by $28 billion, almost three times the gain in the same year-earlier period, the bank said in a report e-mailed late yesterday. Rising prices accounted for about half of the growth, it said. The figures exclude hedge funds' direct holdings in futures markets.

``The investment community as a whole is still underinvested in commodities,'' Kevin Norrish, analyst at Barclays Capital, the securities unit of London-based Barclays Plc, said by telephone.
Pension funds and other money mangers boosted holdings of commodities as the asset class outperformed stocks and bonds, and the dollar fell to a record low against the euro. Prices for oil, wheat and gold climbed to all-time highs this year.

The Astmax Commodity Index, the best-performing commodity index of those tracked by Bloomberg, climbed 14 percent in the first quarter, while the Standard & Poor's 500 Index of stocks declined 9.9 percent. U.S. Treasuries have returned investors 2.6 percent in the period, according to Merrill Lynch & Co. indexes.

Investments in funds tracking commodity indexes rose by $14 billion to $139 billion, while holdings in exchange-traded commodity products grew by almost $7 billion to $45.8 billion, Barclays said. . . . More than $4 billion was invested in so-called structured products linked to commodities, the bank said. Such products are tailor-made securities designed for clients when standardized contracts and indexes won't fulfill their needs, or when investors are restricted from using derivatives to gain access to a particular asset class.

For access to the full story on Bloomberg News, click here.

Barclays' Philippe El-Asmar on ETNs (IndexUniverse.com)

2008-05-01T19:44:00.000-07:00

Straight From The Source:
Written by Heather Bell
Tuesday, 29 April 2008 11:19

Index Universe (IU): Why did Barclays Capital create its family of ETNs?

Philippe El-Asmar (El-Asmar): We created the iPath family to complement the existing iShares ETFs that Barclays Global Investors were offering. They are meant to give access to more difficult-to-reach asset classes.

IU: How does a decision get made as to whether an index will be used to underlie an ETF or an ETN?

El-Asmar: It's a very close collaboration and partnership that we have between BGI and Barclays Capital, and we regularly meet to discuss the plans for the next three-to-six months, or the next year or possibly even longer-term plans. The first priority is to basically give investors choices and respond to the needs of clients. The primary driver for us in launching a product is not our agenda, but more the response to feedback we've collected from clients over time. We're pretty agnostic with regard to the choice between one instrument and the other. Often there is value in each of the instruments depending on what the investor really wants, and in the past, we have offered an ETN and an ETF tracking the same underlying index. Generally speaking, we collaboratively try to fill the gaps using ETNs as a means to access more difficult-to-reach markets and ETFs as the traditional vehicle.

IU: Beyond the collaboration with BGI, what is driving the expansion of the iPath ETN family?

El-Asmar: The primary driver here is providing the clients with what they want and giving them choices. We didn't try to launch hundreds of ETNs and just hope that some will succeed. We've always been very cautious about providing investment products that we think will see long-term demand from investors. Commodities, for example, are in everybody's mind as an established asset class, but four years ago. very few people had exposure to commodities. We're not saying when we launch a commodity ETN that right now is the right time to invest in commodities. What we're saying is if you decided to invest in commodities, this is the best way you can access the data class-a very simple, transparent, cost-efficient way, with the convenience of trading on an exchange.

IU: Barclays Bank was the first in the ETN space. Do you see a lot of new players coming into the field beyond the ones that are currently there now?

El-Asmar: Yes; we know of at least two other banks that are working very seriously on their exchange-traded note platforms. We've had, since we entered the market in 2006, about six or seven separate issuers create ETNs themselves as well.

IU: Are there high barriers to entry to the market? Barclays was kind of out there by itself for a while.

El-Asmar: I think it does take a lot of time and energy and effort to create the architecture around an exchanged-traded note program, and often the first is the most difficult to do. So yes, it does take time for other issuers to catch up, but relatively speaking, we were in the market uncontested for about a year, and that might have been a little bit longer than what we anticipated. Typically speaking, it would have taken maybe six months for the competition to copy us.

For the full interview on IndexUniverse.com, click here.

Morgan Stanley Cuts 34 of 40 SP Pros: Overreaction?

2008-04-27T15:30:00.000-07:00

Last week, US structured products professionals were stunned by the news that Morgan Stanley let go 34 of its 40 structured products personnel on Tuesday (April 22).

While The Street has grown accustomed to news of cuts in profitable structured products groups of the "lower" 5% to 10% of personnel (Lehman, Citigroup for example) given the deep pain most firms are experiencing as a result of proprietary subprime losses. But the Morgan Stanley news has profound reverberations and defies conventional thinking.

At first blush, it appears that the terminations involve mostly "inside" marketers -- those responsible for sales of structured investments to the former Dean Witter and Morgan Stanley private banking distribution channels. The surviving six appear to be third-party marketers, those responsible for developing new lines of business through independent RIA and regional BDs (a highly coveted group, that represents about 40% of structured products sales).

Bottom line: Morgan Stanley appears to be making a strategic decision that, internally, structured products can be still be sold effectively without the intermediation of 34 internal marketers -- but, as is often said, structured products are not bought; they are sold. The Morgan Stanley experiment will be closely watched by others with internal distribution to see if this is an astute cost-cutting move . . . or a misplaced over-reaction occasioned by its ongoing subprime woes.

USA Today: "Gimmicks Not Good Investments"

2008-04-27T15:22:00.001-07:00

Exchange-traded notes: Don't even think about it
by John Waggoner, USA Today
April 27, 2008

Wall Street has many useful maxims, such as "Don't catch a falling knife," "Don't fight the Fed," and "Count the silverware after the CEO visits." Now, it's time to add another: Beware of complex investments with cute names.

Wall Street has created a new generation of investments, called exchange-traded notes, or ETNs, which go by names such as BOXES, LUNARS, MITTS, PERQS and PISTONS. Except for the plainest of plain-vanilla ETNs, you should handle them like XPLOSIVs.

ETNs are a relatively new development. The value of an ETN depends on the movements of a stock index or, sometimes, even an individual stock. And, as you might have guessed from their name, ETNs trade on the stock exchange — typically, the American Stock Exchange.

In those respects, ETNs are fairly similar to their cousins, exchange-traded funds. But ETNs have a big difference: They are debt securities, not equity securities. When you buy an exchange-traded fund, you're buying a slice of a diversified portfolio of stocks. When you buy an ETN, you're buying a promise — specifically, the promise that the issuer will pay the note according to the terms laid out in the ETN's prospectus.

Those terms can be simple or complex. Let's start with a simple one: The iPath Dow Jones-AIG Commodity Index Total Return ETN, which trades under the ticker DJP. The note pays no interest, but the issuer, Barclays, will pay a cash payment at maturity equal to the gain on the Dow Jones-AIG Commodity Index total return. The maturity date is June 12, 2036.

You can sell the note before it matures, at which point you'll get whatever other investors feel it's worth. As of Thursday, its value was up 9.2% in 2008.

Jeffrey Ptak, Morningstar's director of ETF research, likes DJP because it does a better job tracking the index than an ETF can. A fund has to use futures and other investments to track the commodity index. Because a note isn't a fund, it doesn't have to line up investments that mirror the index. All it needs is the promise to pay according to the index's movements.

As a way to get broad exposure to commodities, Ptak says, DJP isn't bad. The index the note uses is well-diversified, and the overall cost to investors is decent. "I think it could be cheaper, but it's hardly expensive," he says.

The more complex ETNs can be complex indeed. Consider the Capital Protected Notes based on the Morgan Stanley Capital International Europe, Australasia and Far East stock index. The notes trade under the ticker EEC.

Here's the deal: Like DJP, EEC pays no interest over its term, which began May 23, 2005. Each note was issued at $10. When the note matures on Dec. 30, 2008, the underwriters will pay note holders $10 per note. This is where the "capital protected" part comes in: If you hang onto the note, you'll get your money back.

The trade-off is that you give up some of the potential gains from the EAFE index in return for the capital protection. In this case, you give up quite a bit. The note takes the index level at four different dates and averages them together. The percentage difference between the average of the four dates and the starting date is your return.

In a rising market, your gains from this ETN will be considerably lower than if you had simply bought an ETF that tracked the index. (The average will be smaller than the difference between the start and end point.) Given this snakebit market, you might think that the smaller returns are a good trade for preserving your principal. Should the market soar, however, you'll probably feel considerable buyer's remorse.

ETNs have a few other considerations:

• Counterparty risk. As we mentioned earlier, an ETN is backed by a promise. Although the issuers of these notes are large, financially strong firms, you should be aware that, at least until recently, everyone thought that investment bank Bear Stearns was financially strong, too.

• Tax risk. The IRS is reviewing the tax treatment of ETNs and may consider taxing ETN profits as interest, rather than at lower capital gains rates. Already, the IRS has ruled that single-currency ETNs will be taxed at ordinary income rates.

• Commissions and expenses. ETNs are generally cheaper than mutual funds, but you'll have to pay a commission. Your broker may tell you that you can buy an ETN on its initial offering with no commission, but that's not entirely true: The commission is part of the initial offering price.

Generally speaking, the more complex the deal, the more you should avoid it. "The structured notes are getting gimmicky," says Harold Evensky, a financial planner in Coral Gables, Fla. Gimmicks are not good investments.

Although you may well find notes that suit your overall investment outlook, bear in mind that the firms that offer ETNs aren't looking to lose money on the deal. It's a bit like betting against the house at a casino. So stick with simple ETNs, or stick with ETFs. The top-performing ETFs are in the chart.

John Waggoner is a personal finance columnist for USA TODAY. His e-mail is jwaggoner@usatoday.com. The source for this article can be found by clicking here.

Tim Andrews on the Structured Funds' Landscape (Euromoney)

2008-04-22T13:12:00.000-07:00

By Timothy Andrews, Scotia Capital
Special to Euromoney, Published April 2008

The structured fund derivatives landscape has evolved substantially in recent years with an estimated current notional size of over US$700bn globally. An increasing number of treasurers, portfolio managers and other investors are seeking increased returns through exposure to alternative assets via a variety of fund-linked derivatives products. Common fund-linked derivatives products include various options, total return swaps, portable alpha strategies and structured notes. These products can be linked to single hedge funds, fund of funds, fund indices or a basket of the same (each a ‘reference fund asset’).

1. Black-Scholes call options
In the basic form of a ‘plain vanilla’ or ‘black-scholes’ call option referencing a reference fund asset, an investor purchases an over-the-counter call option by paying a premium amount to the financial institution (the ‘bank’) on the trade date. The strike price of the call option is typically fixed either ‘at’ or ‘out of the money’ at inception. The call option is structured to be ‘European style’ which means the investor can exercise the option only at maturity. The cash settlement amount, if any, owed by the bank to the investor at maturity is equal to the amount by which the net asset value of the reference fund asset exceeds the strike price of the call option. In some cases, the call option may also be physically settled where the investor would pay the strike price to the bank and receive physical delivery of the reference fund asset. To the extent that the net asset value of the reference fund asset was less than the strike price, the option would expire worthless and the investor would lose the premium paid at inception.

2. Accreting strike call option structures
The accreting strike call option (‘ASCO’) is among the most widely used fund-linked derivatives today. Take the example of an investment manager looking to launch a leveraged fund (the ‘leveraged fund’) to raise additional capital. Assume the leveraged fund offers investors US$3 of exposure to the underlying reference fund assets for every US$1 invested, or ‘three times’ leverage. Suppose the leveraged fund has US$100m in new subscriptions.

Under an ASCO structure, the leveraged fund would purchase a cash settled over-the-counter call option from the bank for premium amount equal to the US$100m in subscription monies and receive a notional exposure to a basket of reference fund assets equal to US$300m, equating to three times leverage. The bank would most likely hedge its position on a ‘delta one’ basis by purchasing US$300m of the reference fund assets, but could also hedge via another derivative.

For Tim Andrews' full article on the structured fund landscape, click here.

2007: March SPA-2007 Annual Conference at Helmsley New York

2008-04-22T12:28:00.000-07:00

2007: February 13th SPA Event at Bloomberg, NYC

2008-04-22T11:54:00.001-07:00

2006: October 13th SPA-CIBC Event on Open Architecture

2008-04-22T11:50:00.000-07:00

2006: March SPA-2006 Annual Conference at the Harvard Club in NYC

2008-04-22T11:45:00.000-07:00