Question: I am wondering what the panel make of the term ‘counterparty risk' when it comes to the security of Structured Products?
Gary Dale - Investec
With regards to Structured Products the term "counterparty risk" relates to the risk associated with the provider of the underlying deposit or security. With Structured Deposits, it relates to the deposit taker and with Structured Investments it relates to the issuer of the underlying security or note. Structured Deposits are protected by the Financial Services Compensation Scheme (FSCS) up to £50,000 per eligible claimant per institution however Structured Investments are not therefore counterparty risk tends to be used more in conjunction with Structured Investment Plans. The FSA have recently issued guidance on counterparty risk following the default of Lehmans and highlighted that advisers should be looking beyond credit ratings and carrying out more robust due diligence including a banks financial statements, share price indicators and the like. Guidance is also provided on portfolio and product concentration risks highlighting the need for sensible counterparty diversification.
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