A robust ‘to-do’ list of structured product principles for distributers and investors has been jointly released by some of Europe’s largest securitization, derivatives and investor associations. The draft list comprises suggestions on everything from transparency to compliance on structured products – including securitizations – and is centered around the relationship between distributors and individual investors.
“The distributor-individual investor relationship should deliver fair treatment of the individual investor. Individual investors need to take responsibility for their investment goals and to stay informed about the risks and rewards of their investments,” says officials with Joint Associations Committee. The Securities Industry and Financial Markets Association and the European Securitization Forum are two of the JAC members.
The 12 points of the list, known as the Principles for Managing the Distributor-Individual Investor Relationship, include non-binding principles on product transparency, risk disclosure, credit ratings, and fees and costs. Some points elicited more reactions than others among participants of the compilation process.
“Risk disclosure generated a fair amount of discussion. What is important is that consumers must understand the basic risk/reward proposition that they are buying to,” says Timothy Hailes, associate general counsel for JPMorgan and JAC chairman. “So if something is leveraged, people have to understand what that means: for example a one-point movement on the reference asset can translate into a five-point movement either way in the structured product.”
The first point, product transparency asks distributors to use reasonable efforts to ensure product features are clearly articulated. Point seven, liquidity/secondary market asks that investors be informed of the likelihood of their being able to sell a particular product. “The important thing for retail structured products is the liquidity expectation: are these buy-to-hold investments or are these investments where there is an expectation around realizing value during the lifetime of the product on the part of the retail investor?” said Hailes.
JPMorgan kicked off what has become JAC in 2005, when the retail structured product market was undergoing a significant growth period, to encourage discussion amongst market participants. Eventually five trade organizations – the ESF, SIFMA, the International Capital Market Association, the London Investment Banking Association and the International Swaps and Derivatives Association – adopted the forum.
In July 2007, the group released the Principles for Managing the Provider-Distributor Relationship. Although the release of the current draft is timely as the market continues to struggle through tumultuous conditions, Hailes said the list was not hinged on the crisis. “It’s not all about the credit crunch, but, of course, people’s thinking is informed by experiences in the current market climate,” he said. “The next logical step [for JAC] was to look at the next component in the chain, which is the distributor-client relationship.”
There will be a consultation period until June 16, during which time participants from groups including law firms, distributors, intermediaries and product providers can provide feedback. A final draft will follow after suggestions have been considered.