[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-2008
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