Structured Product Trends: Growth, Regulation and Yes—Even Innovation

Yesterday, we hosted webinar on the state of the global structured products with Keith Styrcula, Chairman of the Structured Products Association, and Joe Burris, Head of Americas – StructuredRetailProducts.com. The discussion revealed some interesting trends for the future of the industry:

Sales:

• Invested capital in structured products was flat in 2009, totaling roughly $1.6 tn globally, with new money simply replacing maturing assets. (Source: StructuredRetailProducts.com)
• Tranche sales appear to have stabilized in 2H2009, and are expected to grow 9% in 2010.
• The mega-deals from last Fall have scaled down into the $100 mn range, such as the recent issuance of Ford step-up notes.

Product Trends:

• Structured product vehicles are trending toward simplicity, but the underlyings are growing more complex. For example, several structured products houses have introduced complex indices that attempt to replicate the performance of hedge funds.
• Market-Linked Products with 100% capital protection (especially FDIC-insured), leveraged returns, reverse convertibles and auto-callable features are growing in popularity in 2010.
• The big “hidden” development is that mutual funds are substantially increasing their use of SPs to enhance investor returns.
• RIAs are the next significant growth market for structured products, with roughly 10% penetration and an advisor community that actively searches for ways to improve client returns. (Check out StructuredRetailProducts.com’s new website for RIAs: www.SRPadvisor.com, where advisors can review and discuss new products.)
• Insurance companies in the US are largely using structured products as investments inside an insurance wrapper—generally to protect the guaranteed returns of fixed variable annuities. European firms, on the other hand, appear to be more comfortable acting as a direct distributor of structured products.

Regulation and Litigation:

• Regulatory scrutiny has increased globally (EU commission, FINRA, SEC, etc.), even on the most conservative structured products.
• The SEC has formed a Structured Products division run by Kenneth Lench to oversee structured products in the wake of the Lehman default. The FINRA Regulatory Group has also renamed a division Emerging Innovation, highlighting the sensitivity around the “innovation” buzzword.
• In general, structured products have been more resistant to class action litigation than mutual funds or ETFs due to the very clear language included in investment prospectuses, and strict compliance procedures on the part of issuers and dealers of structured products.

Be sure to register for the upcoming Structured Products Association Conference in New York on March 25, 2010. Contact structured.products.events@gmail.com for the updated Agenda.

To learn more about how Numerix can help with the construction, valuation and on-going risk management of all types of structured products, contact the Numerix sales team.