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

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

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

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

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

December 4, 2008 at 4:15 PM EST.

Nov-5: WSJ Publishes Special Section on Structured Products

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

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

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

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

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

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

[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

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

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

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

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

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

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

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

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

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

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)

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)

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)

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)

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)

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)

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

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?

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

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

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)

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

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.

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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.