Open-Architecture in Slo-Mo: Investment News

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

By Dan Jamieson June 2, 2008

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

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

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

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

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

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

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

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

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

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