by Jake Zamansky, Esq.
It’s only a hunch, but experience tells me you can soon expect to be reading a lot about “ELKS” and other structured investments in the business press.
The name evokes images of a hardy, austere and stable animal able to withstand the harsh elements of the forest. But not in this story. For some Citigroup customers, ELKS might conjure images of a broker who duped you into buying risky securities that were inappropriate with your investment goals.
Citi’s ELKS (equity linked security) product is a risky derivative instrument where an investor is offered a specified return on a structured security tied to an individual stock. Providing the stock maintains a minimum value, the guaranteed return is paid. If the stock ever falls below the minimum value (sometimes around 80 percent), the ELKS immediately convert into shares of that stock. Then if the price of the underlying stock declines, the investor could receive a stock worth much less than the initial investment.
Here’s the catch: ELKS offer potentially higher returns, but the downside risk is unlimited if the stock goes south. If the underlying stock happens to dramatically increase in value, the investor only gets the guaranteed return.
For Citigroup, it’s a classic case of “heads I win, tales you lose.” The bank charges investors an upfront commission to buy ELKS and likely earns additional profits through hedging. Not surprisingly, brokerage firms were aggressively peddling structured derivative products like ELKS to unsophisticated retail investors a few years back, prompting FINRA to warn member firms of concerns that customers didn’t understand the inherent risks.
There’s evidence that FINRA’s warnings weren’t heeded. I represent a retired couple over 80 whose Citi broker last year bought $300,000 worth of ELKS on their behalf. The ELKS were highly unsuitable for retirees simply looking to preserve capital. The highly volatile stocks my client’s ELKS were derived from included Yahoo!, Cemex and Sandisk. The couple has lost nearly a third of their principal as the underlying stock’s value plummeted.
Admittedly, I have only encountered one ELKS case so far, but many brokerages firms peddled similar products using monikers such as PACERS, STRIDES, SPARQS, and ELEMENTS. Some commentators were critical of me when I sounded the early alarm about auction rate securities, but that warning proved quite prescient. Recall, that the SEC uncovered wrongdoing in the ARS market in 2006, but the activity persisted. Sadly, I can’t help but suspect that the experience of my elderly clients with ELKS is not an isolated incident.
Stay tuned.
This article is found on the SeekingAlpha.com website. For the original post, click here.
SPA-2008
Tuesday, July 22, 2008
Monday, July 21, 2008
Reg. Rep: Structured Products - Bright Future for Securitization?
By Christina Mucciolo
July 16, 2008
Securitization has gotten a bad reputation lately. But the securitization process—taking debt and pooling it into a derivative whose value is based on the underlying assets—was meant to reduce risk. Take collateralized-debt obligations (CDOs); they are a kind of derivative, a structured product, if you will, that put the lie to that concept. Indeed, given the current dismal state of the CDO market, you’d think that they might taint the entire derivative, structured product marketplace.
Of course, derivatives and structured products refer to a broad category of investments.
Basically, the definition of structured product includes any hybrid financial instrument—typically a registered note, bank deposit or private placement—linked to the performance of a derivative, i.e. an underlying asset, such as a stock, an index, a commodity, currency or other investment. If you don’t know about the vehicles, you may want to learn.
Advisors who use them say they allow an investor to enjoy upside potential on an asset while protecting the on the downside should the underlying asset value drop. Already popular in Europe, structured products have gained popularity at wirehouses and investment banks.
In fact, the retail market bought almost half (worth about $58 billion) of the structured products issued in the U.S. in 2007, according to the Structured Products Association (SPA). About $114 billion in structured products were issued in the U.S. in 2007, a jump of 78 percent over 2006. As of year-end 2007, the American Stock Exchange was trading 400 structured products, with 128 new listings.
While many advisors find them too complex and expensive (loads can reach 6 percent), structured products are being mastered and used by some advisors, such as Scott Miller Jr., managing partner at Blue Bell Private Wealth Management, a fee-only RIA in Blue Bell, Pa. Of the $300 million in assets managed by the firm, Miller estimates 30 percent of it is invested in structured products. Miller says structured products are good for clients who want exposure to equities, but who are willing to give up some upside return potential for some downside protection—they’re buy-and-hold investments. “It is just the nature of anything derivative-based; they may get too complicated for some people,” Miller says.
That’s why advisors specialize in the ones they understand best. Bradley Pace, president of Pace Capital Management, says they are suitable for HNW clients, and he only invests about 10 percent to 15 of any one clients’ portfolio in such products. Pace says he stays away from the risky structured investment vehicles (SIVs), such as reverse convertibles; he sticks to the equity-linked CDs that are more basic. “These are great for clients who are very nervous about the market, but don’t want to lock up all their money in a Treasury note, make 2 percent and lose against inflation for the next two or three years,” says Pace.
Too Good To Be True? The complicated nature of structured products has raised some concern that some advisors and banks understand these products as little as they understood CDOs and other credit swaps that caused the current financial meltdown. “Everyone is wondering about the future of securitization, and I think there is a great deal of concern about credit derivatives generally,” says Anna Pinedo, a securities and derivatives lawyer with Morrison & Foerster and co-chair of the SPA’s Best Practices Committee. “Even though I think structured products are relatively straightforward, there is the possibility that there could be a little bit of a market overreaction against anything that is perceived as being at all structured or complicated, and so that is something that everybody needs to watch out for.”
Still, industry professionals haven’t seen advisors or investors backing away from structured products. In fact, the credit crisis has highlighted the importance of credit quality, says Chris Warren, managing director and head of structured products Americas at DWS Investments, the U.S. retail division of Deutsche Asset Management.
For the full article from Registered Rep., click here.
July 16, 2008
Securitization has gotten a bad reputation lately. But the securitization process—taking debt and pooling it into a derivative whose value is based on the underlying assets—was meant to reduce risk. Take collateralized-debt obligations (CDOs); they are a kind of derivative, a structured product, if you will, that put the lie to that concept. Indeed, given the current dismal state of the CDO market, you’d think that they might taint the entire derivative, structured product marketplace.
Of course, derivatives and structured products refer to a broad category of investments.
Basically, the definition of structured product includes any hybrid financial instrument—typically a registered note, bank deposit or private placement—linked to the performance of a derivative, i.e. an underlying asset, such as a stock, an index, a commodity, currency or other investment. If you don’t know about the vehicles, you may want to learn.
Advisors who use them say they allow an investor to enjoy upside potential on an asset while protecting the on the downside should the underlying asset value drop. Already popular in Europe, structured products have gained popularity at wirehouses and investment banks.
In fact, the retail market bought almost half (worth about $58 billion) of the structured products issued in the U.S. in 2007, according to the Structured Products Association (SPA). About $114 billion in structured products were issued in the U.S. in 2007, a jump of 78 percent over 2006. As of year-end 2007, the American Stock Exchange was trading 400 structured products, with 128 new listings.
While many advisors find them too complex and expensive (loads can reach 6 percent), structured products are being mastered and used by some advisors, such as Scott Miller Jr., managing partner at Blue Bell Private Wealth Management, a fee-only RIA in Blue Bell, Pa. Of the $300 million in assets managed by the firm, Miller estimates 30 percent of it is invested in structured products. Miller says structured products are good for clients who want exposure to equities, but who are willing to give up some upside return potential for some downside protection—they’re buy-and-hold investments. “It is just the nature of anything derivative-based; they may get too complicated for some people,” Miller says.
That’s why advisors specialize in the ones they understand best. Bradley Pace, president of Pace Capital Management, says they are suitable for HNW clients, and he only invests about 10 percent to 15 of any one clients’ portfolio in such products. Pace says he stays away from the risky structured investment vehicles (SIVs), such as reverse convertibles; he sticks to the equity-linked CDs that are more basic. “These are great for clients who are very nervous about the market, but don’t want to lock up all their money in a Treasury note, make 2 percent and lose against inflation for the next two or three years,” says Pace.
Too Good To Be True? The complicated nature of structured products has raised some concern that some advisors and banks understand these products as little as they understood CDOs and other credit swaps that caused the current financial meltdown. “Everyone is wondering about the future of securitization, and I think there is a great deal of concern about credit derivatives generally,” says Anna Pinedo, a securities and derivatives lawyer with Morrison & Foerster and co-chair of the SPA’s Best Practices Committee. “Even though I think structured products are relatively straightforward, there is the possibility that there could be a little bit of a market overreaction against anything that is perceived as being at all structured or complicated, and so that is something that everybody needs to watch out for.”
Still, industry professionals haven’t seen advisors or investors backing away from structured products. In fact, the credit crisis has highlighted the importance of credit quality, says Chris Warren, managing director and head of structured products Americas at DWS Investments, the U.S. retail division of Deutsche Asset Management.
For the full article from Registered Rep., click here.
WSJ: New ETNs Fail To Grab Investor Interest
By IAN SALISBURY
July 17, 2008
This might have been the year of the exchange-traded note, with fund firms and investment banks launching more than 60 new ETNs.
As it turns out, investors have so far turned up their noses at most of these complicated ETF-like securities. While the bulk of new products focus on red-hot assets like oil and other commodities, drawbacks such as credit risk, complicated strategies and uncertainty about the securities' tax status have kept many investors on the sidelines.
"I've talked with a lot of [financial advisors] and they've been staying away," says Ronald DeLegge, a former financial advisor who now offers ETF investing advice to online subscribers. "You've got a lot of risks with these things."
Exchange-traded notes have collected about $7.2 billion in assets since the first ones were launched in 2006, according to fund researcher Morningstar Inc. But the bulk of that, about $6 billion, is in 30 ETNs by Barclays PLC, which invented the product.
Another 59 ETNs created by eight other providers, mostly this year, hold just $1.29 billion, collectively, or about $22 million on average.
In all, 78 of the 89 ETNs on the market have less than $100 million. Barclays couldn't be reached for comment.
Investors, of course, could warm to new ETNs over time. It sometimes takes new funds several years to build a following. Still, ETNs' struggles seem to mirror those of their close cousins exchange-traded funds, where fund companies launched hundreds of products hoping to replicate success of a few early blockbusters and garnered only mixed results.
For the full article from the Wall Street Journal, click here.
July 17, 2008
This might have been the year of the exchange-traded note, with fund firms and investment banks launching more than 60 new ETNs.
As it turns out, investors have so far turned up their noses at most of these complicated ETF-like securities. While the bulk of new products focus on red-hot assets like oil and other commodities, drawbacks such as credit risk, complicated strategies and uncertainty about the securities' tax status have kept many investors on the sidelines.
"I've talked with a lot of [financial advisors] and they've been staying away," says Ronald DeLegge, a former financial advisor who now offers ETF investing advice to online subscribers. "You've got a lot of risks with these things."
Exchange-traded notes have collected about $7.2 billion in assets since the first ones were launched in 2006, according to fund researcher Morningstar Inc. But the bulk of that, about $6 billion, is in 30 ETNs by Barclays PLC, which invented the product.
Another 59 ETNs created by eight other providers, mostly this year, hold just $1.29 billion, collectively, or about $22 million on average.
In all, 78 of the 89 ETNs on the market have less than $100 million. Barclays couldn't be reached for comment.
Investors, of course, could warm to new ETNs over time. It sometimes takes new funds several years to build a following. Still, ETNs' struggles seem to mirror those of their close cousins exchange-traded funds, where fund companies launched hundreds of products hoping to replicate success of a few early blockbusters and garnered only mixed results.
For the full article from the Wall Street Journal, click here.
Thursday, July 10, 2008
Final: SP Principles Released For Individual Investors
Five leading trade associations, co-sponsors of the Joint Associations Committee (JAC), today released “Structured Products: Principles for Managing the Distributor-Individual Investor Relationship.” The global, non-binding Principles address a wide range of issues affecting distribution of retail structured products to individual investors.
The Principles complement the JAC’s “Principles for Managing the Provider-Distributor Relationship,” which were released in July 2007. The Associations issued the Principles for public comment on May 12 and are today publishing them in final form.
"The second set of JAC Principles represents many months of thorough memberdiscussion and wider syndication, and articulates the values that market participants share as they promote the continued development of a healthy market in retail structured products,” said JAC’s Chairman, Timothy Hailes, Managing Director and Associate General Counsel at JP Morgan Chase in London.
“As with the July 2007 Provider-Distributor Principles, the key will be intelligent and proportionate application to local regimes."
The JAC comprises the following trade associations: European Securitisation Forum (ESF), International Capital Market Association (ICMA), London Investment Banking Association (LIBA), the International Swaps and Derivatives Association (ISDA®) and Securities Industry and Financial Markets Association (SIFMA).
The principles were based on extensive work and collaboration with the associations’ member firms, and on consultation with distributor associations.
The Principles can be accessed by clicking here.
The Principles complement the JAC’s “Principles for Managing the Provider-Distributor Relationship,” which were released in July 2007. The Associations issued the Principles for public comment on May 12 and are today publishing them in final form.
"The second set of JAC Principles represents many months of thorough memberdiscussion and wider syndication, and articulates the values that market participants share as they promote the continued development of a healthy market in retail structured products,” said JAC’s Chairman, Timothy Hailes, Managing Director and Associate General Counsel at JP Morgan Chase in London.
“As with the July 2007 Provider-Distributor Principles, the key will be intelligent and proportionate application to local regimes."
The JAC comprises the following trade associations: European Securitisation Forum (ESF), International Capital Market Association (ICMA), London Investment Banking Association (LIBA), the International Swaps and Derivatives Association (ISDA®) and Securities Industry and Financial Markets Association (SIFMA).
The principles were based on extensive work and collaboration with the associations’ member firms, and on consultation with distributor associations.
The Principles can be accessed by clicking here.
Bloomberg: Bridgewater predicts $1.6 trillion in subprime losses
Bridgewater Associates has warned of a massive $1,600bn (€1,020bn) of banking losses from the global credit crunch, four times official projections, according to a report in Swiss newspaper SonntagsZeitung.
The US hedge fund said true losses would swell if banks were forced to adopt "mark-to-market" methods of valuing structured credit instead of the "mark-to-model" currently being used.
“We are facing an avalanche of bad assets. We have big doubts as to whether financial institutions will be able to obtain enough new capital to cover their losses. The credit crisis is going to get worse," Bridgewater was quoted as saying the report.
UK: Wealth advisers and private banks turn to structured products
Wealth advisers are increasingly turning to structured products in an effort to protect clients from stormy markets while offering the potential for capital growth, according to the chief executive of Blue Sky Asset Management, a UK-based structured products specialist set up last year.
Blue Sky is launching a third issue of its Asset Allocation Accelerated Growth Plan, which enables investors to construct their own portfolio split between UK, US, European and Japanese equity markets, while receiving capital protection and leveraged returns.
Chris Taylor, chief executive, said: "We are laying down the gauntlet to the traditional mutual fund and index tracker world. We think the features of the plan question the rationale for investing in those products."
He pointed out that traditional mutual funds had haemorraged assets in the first quarter in the both the UK and US, while demand for cautiously managed and structured products had been robust. "Investors are voting with their feet, and walking out of traditional mutual funds into structured investments that can alter the risk and return profile of their portfolio."
While the firm is focussing its efforts on high-end intermediaries, which are increasingly targeting high net worth investors, it is also seeing interest from private banks.
Taylor said it recently structured a sophisticated product based on a distressed debt hedge fund which was being sold by a Swiss private bank. "We are seeing interest from the more open-minded private banks which are prepared to talk to an independent provider," he added.
Blue Sky is increasingly building inflation protection into its structures. "While a lot of people are talking about how to structure portfolios to hedge against rising inflation, we think there is no better protection that a direct link to the retail price index. It doesn't get much cleaner than that," said Taylor.
For the original article in Wealth Bulletin, click here.
Blue Sky is launching a third issue of its Asset Allocation Accelerated Growth Plan, which enables investors to construct their own portfolio split between UK, US, European and Japanese equity markets, while receiving capital protection and leveraged returns.
Chris Taylor, chief executive, said: "We are laying down the gauntlet to the traditional mutual fund and index tracker world. We think the features of the plan question the rationale for investing in those products."
He pointed out that traditional mutual funds had haemorraged assets in the first quarter in the both the UK and US, while demand for cautiously managed and structured products had been robust. "Investors are voting with their feet, and walking out of traditional mutual funds into structured investments that can alter the risk and return profile of their portfolio."
While the firm is focussing its efforts on high-end intermediaries, which are increasingly targeting high net worth investors, it is also seeing interest from private banks.
Taylor said it recently structured a sophisticated product based on a distressed debt hedge fund which was being sold by a Swiss private bank. "We are seeing interest from the more open-minded private banks which are prepared to talk to an independent provider," he added.
Blue Sky is increasingly building inflation protection into its structures. "While a lot of people are talking about how to structure portfolios to hedge against rising inflation, we think there is no better protection that a direct link to the retail price index. It doesn't get much cleaner than that," said Taylor.
For the original article in Wealth Bulletin, click here.
Monday, July 7, 2008
Financial Times: Downside protection gains popularity
By Steve Johnson
Published: July 7 2008 03:00
One of the key selling points of structured products is that, in many cases, they offer risk-averse investors the chance to shield themselves from falling markets.
The capital guarantees embedded in structured products can be absolute, promising the investor all their money back irrespective of the losses suffered by the underlying assets. However, to stand a stronger chance of delivering meaningful returns, more often than not the downside protection is limited - if asset markets suffer particularly sharp falls, the end investor will suffer as well.
For example, equity-linked products may offer capital protection providing an underlying equity market does not fall by more than 50 per cent during the fixed term life of the product.
If this "soft floor" protection barrier is breached, and the market fails to recover during the product term, the investor may end up shouldering losses on a one-for-one basis, just as they would had they entered the market in a traditional, naked, manner.
Some products, such as many of the precipice bonds sold en masse to UK retail investors in the early years of the millennium, had an even nastier trick in the smallprint.
When these soft barriers were breached, as they were in many cases, investors often lost money on a leveraged two-for-one basis - losing up to 80 per cent of their investment in some cases.
The industry has cleaned up its act since then, and few reputable issuers would market such leveraged downside products to retail investors, certainly not without adequate risk warnings.
But despite this episode, the provision of downside protection is a crucial selling point for the structured products industry, particularly when investors are cautious, as they are at present.
For the full article from Financial Times, click here.
Published: July 7 2008 03:00
One of the key selling points of structured products is that, in many cases, they offer risk-averse investors the chance to shield themselves from falling markets.
The capital guarantees embedded in structured products can be absolute, promising the investor all their money back irrespective of the losses suffered by the underlying assets. However, to stand a stronger chance of delivering meaningful returns, more often than not the downside protection is limited - if asset markets suffer particularly sharp falls, the end investor will suffer as well.
For example, equity-linked products may offer capital protection providing an underlying equity market does not fall by more than 50 per cent during the fixed term life of the product.
If this "soft floor" protection barrier is breached, and the market fails to recover during the product term, the investor may end up shouldering losses on a one-for-one basis, just as they would had they entered the market in a traditional, naked, manner.
Some products, such as many of the precipice bonds sold en masse to UK retail investors in the early years of the millennium, had an even nastier trick in the smallprint.
When these soft barriers were breached, as they were in many cases, investors often lost money on a leveraged two-for-one basis - losing up to 80 per cent of their investment in some cases.
The industry has cleaned up its act since then, and few reputable issuers would market such leveraged downside products to retail investors, certainly not without adequate risk warnings.
But despite this episode, the provision of downside protection is a crucial selling point for the structured products industry, particularly when investors are cautious, as they are at present.
For the full article from Financial Times, click here.
Financial Times: Fledgling SPs flying into a harsher climate
By Hannah Glover
July 7 2008 03:00
Structured products have established a foothold in the US retail markets, but some analysts say even leading issuers such as DWS parent Deutsche Bank, UBS, Barclays and Citigroup may struggle to maintain momentum.
Indeed, the fledgling industry has gained traction in recent years, growing from $64bn (£32bn, €40bn) to $114bn between 2006 and 2007, according to estimates from the Structured Products Association. But tax issues, distribution challenges and investor mindset will make it difficult for banks offering the products to keep that growth going.
Current markets and investor perception of the products pose one challenge. "With all the negative perception of derivatives, they really have fallen out of favour in the US," says Darlene DeRemer, who leads the advisory practice at Boston-based Grail Partners, a merchant bank specialising in the investment management industry.
"Clients don't really understand the products; therefore, financial advisers might not want to sell them," she says.
Adviser advocacy is critical to the sale of structured products in the US, where distribution is dominated by financial advisers and retail brokerage houses. By contrast, in Germany and France, retail investors can buy structured notes from local banks, post offices, or even using their mobile phones.
The US system required the first firms to try to break into the American market - mainly banks with European parents - to pay for shelf-space, sometimes even paying a third-party broker to access their broker-dealer clients. The result was higher costs and compressed profit margins.
Christopher Warren, managing director and head of structured products at DWS Scudder in New York, says: "We weren't talking to the end client, and we didn't know what they wanted."
Financial Times: High SP inflows show US playing catch-up
By Paul O'Dowd
Published: July 7 2008
Structured products, long popular in Europe, are now taking hold in the US as markets spook investors and baby boomers look to protect their wealth. Last year, assets in structured products climbed to $114bn (£57bn, €72bn) in the US, up from $64bn in 2006, according to the Structured Products Association.
Last year, Merrill Lynch was the top issuer with $6.1bn in sales followed by Citigroup with $3.1bn, Morgan Stanley with $3bn, Barclays with $2.6bn and UBS with $2.3bn. These numbers represent the above firms selling only their notes and not competing firms' notes.
Some examples of structured products are: principal-protected notes, index-linked notes, performance-leveraged upside securities and reversed-convertible notes.
This year's inflows are so far keeping pace with last year, says Philippe El-Asmar, head of solution sales for the Americas at Barclays.
Structured products, formerly investments mainly for the wealthy, have since come down-market and are now available in the retail space.
Generally these products are created by combining or snapping-on additional financial products to a traditional security, such as a bond.
These snap-on products can be selected to have low correlation to the underlying investment, which gives the advantage of increasing diversification of the final structured product. If one component of the structure deteriorates, other components will serve to offset or dilute this loss, providing a safety net to investors.
The primary driver behind the high inflows into structured products seems to be that brokers and registered investment advisers (RIAs) are embracing the investment for the first time.
For the full article in Financial Times, click here.
Published: July 7 2008
Structured products, long popular in Europe, are now taking hold in the US as markets spook investors and baby boomers look to protect their wealth. Last year, assets in structured products climbed to $114bn (£57bn, €72bn) in the US, up from $64bn in 2006, according to the Structured Products Association.
Last year, Merrill Lynch was the top issuer with $6.1bn in sales followed by Citigroup with $3.1bn, Morgan Stanley with $3bn, Barclays with $2.6bn and UBS with $2.3bn. These numbers represent the above firms selling only their notes and not competing firms' notes.
Some examples of structured products are: principal-protected notes, index-linked notes, performance-leveraged upside securities and reversed-convertible notes.
This year's inflows are so far keeping pace with last year, says Philippe El-Asmar, head of solution sales for the Americas at Barclays.
Structured products, formerly investments mainly for the wealthy, have since come down-market and are now available in the retail space.
Generally these products are created by combining or snapping-on additional financial products to a traditional security, such as a bond.
These snap-on products can be selected to have low correlation to the underlying investment, which gives the advantage of increasing diversification of the final structured product. If one component of the structure deteriorates, other components will serve to offset or dilute this loss, providing a safety net to investors.
The primary driver behind the high inflows into structured products seems to be that brokers and registered investment advisers (RIAs) are embracing the investment for the first time.
For the full article in Financial Times, click here.
Thursday, July 3, 2008
Derivatives Week: Global Principles for SPs Go Final Next Week
by Sam Mamudi
The final version of a new set of principles for the structured product industry is due to be released early next week.
The Principles for Managing the Distributor-Individual Investor Relationship follows last year’s retail structured products provider-distributor principles. While those principles were focused on the relationships between firms, the latest principles address interactions with clients.
As with the previous principles, the new ones will be jointly released by five trade associations, the European Securitisation Forum, International Capital Market Association, International Swaps and Derivatives Association, London Investment Banking Association and Securities Industry and Financial Markets Association.
Timothy Hailes, managing director and associate general counsel at JPMorgan and Chairman of the Joint Associations Committee on Retail Structured Products who produced the principles, said in producing the latest set he had spoken with various regulators, including the U.S. Securities and Exchange Commission and Hong Kong’s Securities and Futures Commission.
He said the they should be read as a list of desirable outcomes, rather than a document that prescribes how things should be done.
The principles call for measures such as adequate risk disclosure to clients and training for financial advisors. “Although these principles are non-binding…and do not create enforceable obligations or duties, firms…are encouraged to reflect these principles in their policies and procedures,” states the document.
Anna Pinedo, partner at Morrison & Foerster in New York, said the document will not give firms in the U.S. reason to pause or reassess compliance procedures. “These are a nice reminder, nothing more than that,” she said.
However, the principles are “ahead of the curve in a number of [other] jurisdictions,” said Hailes.
The final version of a new set of principles for the structured product industry is due to be released early next week.
The Principles for Managing the Distributor-Individual Investor Relationship follows last year’s retail structured products provider-distributor principles. While those principles were focused on the relationships between firms, the latest principles address interactions with clients.
As with the previous principles, the new ones will be jointly released by five trade associations, the European Securitisation Forum, International Capital Market Association, International Swaps and Derivatives Association, London Investment Banking Association and Securities Industry and Financial Markets Association.
Timothy Hailes, managing director and associate general counsel at JPMorgan and Chairman of the Joint Associations Committee on Retail Structured Products who produced the principles, said in producing the latest set he had spoken with various regulators, including the U.S. Securities and Exchange Commission and Hong Kong’s Securities and Futures Commission.
He said the they should be read as a list of desirable outcomes, rather than a document that prescribes how things should be done.
The principles call for measures such as adequate risk disclosure to clients and training for financial advisors. “Although these principles are non-binding…and do not create enforceable obligations or duties, firms…are encouraged to reflect these principles in their policies and procedures,” states the document.
Anna Pinedo, partner at Morrison & Foerster in New York, said the document will not give firms in the U.S. reason to pause or reassess compliance procedures. “These are a nice reminder, nothing more than that,” she said.
However, the principles are “ahead of the curve in a number of [other] jurisdictions,” said Hailes.
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