SPA Conference: The year so far is good, but regulation is the wildcard

By Emma Trincal

New York, Nov. 8 - The Structured Products Association Autumn/Expo/09 kicked off with a general perspective of the market during a roundtable called "The year so far" - and participants agreed the picture was much improved in recent months, though there remains considerable uncertainty about the possibility of new regulation.

Panelists included sellsiders and distributors sharing their views a year after the shockwave of Lehman Brothers' downfall. As for all panels but one, Keith Styrcula, chairman of the Structured Products Association was the moderator.

Recovery

Panelists all agreed that the market has held up well despite last year's crisis

In fact, the year 2009 saw a recovery marked by a pick up in issuance and investors' renewed confidence in the market.

Buyers showed a willingness to first regain access to equities through structured products; then, as the year progressed, a willingness to take on more risk, showing more appetite for products that offer enhanced returns or leverage.

The only area where uncertainty remained prevalent was the regulatory landscape as several important bills affecting the industry or the derivatives market have yet to be passed.

Equity appetite

The main theme for the year was that investors, immediately in the aftermath of the credit crisis, were drawn to structured products as a way to regain access to equity, in particular through principal-protected structures.

While it started with principal-protected wraps and FDIC-insured products, investors around mid-year regained enough confidence in the market to move away from principal-protected structures.

A distributor explained that the clearest sign of that trend was the remarkable increase in issuance of reverse convertibles over the past three months.

Growing the pie

One positive for the industry, panelists said, was that banks' consolidation paved the way for stronger distribution channels. Instead of fighting for one piece of the retail distribution, sellsiders are looking for" ways to grow the pie," said Styrcula.

The roundtable participants also noted another important trend: the growth of fund-linked products.

Regulatory limbo

Panelists noted that regulators have looked closely at the wording of FWP documents filed with the Securities and Exchange Commission, requesting that structurers disclose credit risk to investors with more emphasis than ever before.

While no one doubted that this was a consequence of the Lehman Brothers' bankruptcy and some believe that clarifying the risk has made the disclosure more efficient, others, including Styrcula who pointed to the U.K's Financial Services Authority, worried that the industry may be misunderstood or even in some cases "demonized" by regulators worldwide.

Panelists agreed that the regulatory crackdown had been much more severe in the United Kingdom in Asia and in the Middle-East than it has been in the United States, at least, so far.

Issuers' and distributors' focus for the year forward will be to develop more long-dated products, work on specific asset classes, in particular commodities, and to use various tools to enhance transparency and liquidity, such as the use of algorithmic indexes.

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