Last week, JPMorgan Chief Executive Officer Jamie Dimon said that the credit crunch was nearing an end.
Credit card and auto securitization deals are seeing spreads begin to tighten and CLOs are continuing to make their way down the pipeline. But issues of transparency remain substantial, especially as the market begins to recover.
Five trade organizations including the European Securitization Forum, the International Capital Market Association, the International Swaps and Derivatives Association, the London Investment Banking Association and the Securities Industry and Financial Markets Association (SIFMA), are working together under the Joint Associations Committee (JAC) to make sure that investors stay informed about the risks and rewards of their investments.
The committee is also zooming in on distributor responsibility, aiming to maintain a focus on providing clear and accurate information to investors, and assessing the appropriateness of certain structured products in the risk profiles of investor portfolios.
While it might appear that the main driver behind this guidance is the current liquidity crisis plaguing both the U.S. and European credit markets, the group had been in talks long before its onset.
After discussions with other interested parties like the Structured Products Association in the U.S., the Treasury Markets Association in Hong Kong and the Japan Securities Dealers Association, these principles were made public as an exposure draft released last week. This was in order to elicit responses from those who have not been previously involved, the JAC said.
"Our collective intention is to build a genuine consensus, as broadly and as deeply as we can around these principles," said Timothy Hailes, managing director and associate general counsel at JPMorgan in London and chair of the JAC.
Significant work and interaction have been done in both the provider and distributor community. "We were going out and speaking to the people who do this and collectively we came up with what we found to be some of the best ideas across the board," said John Maurello, managing director of SIFMA's private client group.
The JAC first came into being as a product of JPMorgan hosted forums, which began in November 2005 and focused on retail structured products. After a series of meetings, the level of interest in maintaining such discussions was high from market participants including investment banks, law firms, index funds advisors and distributors. As a result, the respective trade associations created a group to adopt and formalize these procedures.
A Timely Approach
And the committee's timing has been well suited to market needs. Its first task was aimed at refining the relationship between structured product providers and product distributors. After a series of meetings with a broad range of market participants outside the JAC, the provider-distributor principles were issued last July, at the onset of market troubles. These principles set certain expectations for the parties involved in the creation and distribution of structured finance products.
However, the group's latest principles, which develop the relationship between intermediaries (including those who work directly with the clients, for example financial advisers or private banks) and their customers, comes at a time when certain investors are arguing about issues of suitability.
Indeed, earlier this month UBS agreed to refund $35 million to 20 towns and public agencies in Massachusetts that it sold auction-rate securities to. UBS had been accused of selling securities that were not a "permissible investment," for the municipalities, according to Massachusetts Attorney General Martha Coakley.
In its principles, the committee calls for structured product distributors to develop methodologies and standards for determining whether a new product is suitable for a certain client. Factors that should be taken into account include: liquid net worth, degree of sophistication, risk profile, age and investment experience.
Highlights among the JAC principles also include attention to risk disclosure, specifically that investors should be informed of the risks associated with structured products. A particular focus is placed on risk that is not usually associated with a given product, for example, risk of loss due to any sale of the product before maturity, the JAC said. Attention should also be paid to "meaningful product-specific risk" such as those from the underlying asset, liquidity and market risks, or specific tax considerations.
It should also be stressed, according to the JAC, that credit ratings of various issuers or guarantors, may not dictate the performance of the individual structured product itself.
Not a Mold
However, the principles will not be a one size fits all approach. "There will be nuances and practices in specific local markets that perhaps go further than what the global principles say," Hailes said. "You can't always necessarily establish a market consensus around a particular issue, but to the extent that we can have the proverbial glass three-quarters full, I think that is a very positive thing for the market and industry to do."
And other market pundits are following the JAC's lead.
The JAC first began discussions in summer 2007 and has since seen various regulatory authorities follow suit with a number of initiatives.
The European Commission came out with a call for evidence around substitute products in late November, primarily focused on the interchangeability of payouts and various wrappers; this is among other interest coming from regulatory agencies including the Securities and Exchange Commission. "It is clearly an area that is moving up the regulatory agenda," Hailes said.
The JAC will run the exposure draft until mid-to-late June.
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