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UK: Retail structured products attract record sales

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

Story by: Daniel McAllister
FT InvestmentAdviser Magazine

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

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

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

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

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

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

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

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

Click here for the original article in FT InvestmentAdviser magazine.

SPA Letter in Response to Chicago Lawyer Article on Structured Notes

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

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

Dear James,

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

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

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

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

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

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

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

Sincerely,
Keith Styrcula
Chairman
Structured Products Association

UK: Structured products slip in survey ranks

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

by Nick Rice
FT Investment Adviser Magazine
January 12, 2009

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

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

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

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

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

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

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

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

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

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

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

SP Mag: Indexed annuities face structured product regulation in US

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

From Structured Products Magazine

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

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

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

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

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

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

Special report from mtn-i.com.

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

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

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

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

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

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

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

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

Private clients demand diversification

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

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

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

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

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

by Oliver Ralph, Investors Chronicle (UK)

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

YES, says Nick Lee, sales manager, NDFA:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Sophia Morrell
Structured Products Magazine

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

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

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

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

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

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

SPA Recruiting Industry Executive Committee Members

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

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

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

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

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

SPA Industry Poll - 82% Call for Regulatory Focus

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

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

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

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

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

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

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

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

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

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

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

Special report by
Janaya Moscony, CFA

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

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

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

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

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

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

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

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

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

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

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

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

December 4, 2008 at 4:15 PM EST.

Nov-5: WSJ Publishes Special Section on Structured Products

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

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

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

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

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

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

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

MTN-i: Obama's Victory and Structured Notes

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

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

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

To access this report, click here.

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

An excerpt from the report:

Trading tax treatments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Lori Pizzani
StructuredRetailProducts.com

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

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

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

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

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

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

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

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

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

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

by Kenneth Lim
Prospect News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SPA Seeks Confirmation from FDIC on Liquidity Guarantee for SPs

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

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

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

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

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

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

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

Very truly yours,

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

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

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

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

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

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

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

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

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

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

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

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

US Structured Products Move Toward CD Form

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

Investment is FDIC-insured up to $100K

By Jeff Benjamin
Investment News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For the original story in Investment News, click here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Kenneth Lim, Prospect News

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

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

Train went off-track

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

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

Drop in volume

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

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

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

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

Capital protection gains ground

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

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

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

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

An industry-supported ETN?

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

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

Transparency, simplicity key

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

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

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

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

From hedge funds to bank branches

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

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

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

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SPA AutumnExpo: Panelist Presentations

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

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

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

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

Lori Barnes
City Securities
"Growth in Alternative Investments"

Bloomberg: Lehman 100% Protection = Pennies

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

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

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

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

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

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

For the full article from Bloomberg, click here.