Risky, expensive, over-complicated: just some of the accusations leveled at structured products. But are these fair conclusions?
In a week that has seen the launch of a structured products provider, some could be forgiven for thinking the industry is set for a resurgence.
Yet many advisers remain unconvinced of the products’ benefits and scared of the risks they pose. Here, we attempt to debunk some of the biggest myths surrounding structured products…
“The collapse of Lehman Brothers showed how risky these products can be”
The collapse of Lehman Brothers brought to the fore the issue of counterparty risk in structured products and frightened a great many number of investors. After all, if Lehmans could go bust, couldn’t any bank? So just how real is this threat?
Ian Lowes, founder of structuredproductsreview.com, said counterparty disclosure rules have changed since Lehmans, meaning the level of risk is easier to assess. “Well known counterparties, such as HSBC and Barclays, are among those backing structured products. If you fear they may go bust, tell me where else you would put your money? If they go bust then we have reached a point of financial meltdown and nothing is safe.”
Lowes said information relating to the creditworthiness of counterparties is now readily available, with projected rates of return linked to counterparties’ credit rating. Additionally, more providers now offer multiple counterparties on a single plan, reducing risk.
“The Keydata scandal was caused by a failure of structured products”
Although Keydata is well known as a structured product provider, most of its business was in US life settlement contracts. It was this side of the business that failed.
Such contracts, which are currently being looked at by the Financial Services Authority (FSA), differ markedly from structured products, which specify possible return outcomes, maturity dates and underlying investments.
Lowes said: “People who don’t understand the market think it was Keydata’s structured products that failed. In fact, they all remain intact and accounted for. People continue to receive income from them.”
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