The Securities Litigation Expert Blog

IOSCO Publishes "Regulation of Retail Structured Products" Report

Posted by Jack Duval

Apr 30, 2013 2:51:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

IOSCO has published a consultative piece on the regulation of retail oriented structured products.  (Press Release, Paper)  As you can read, there is much confusion about structured products, even at this level.  For example:

    • There is no clear definition of a "retail client";

    • There is no clear definition of "structured product"

There are some things that are clear though:

    • The products are complex;

    • There is a large amount of issuance;

    • There have been many blowups of structured products in the recent past

Investors and advisors alike should be wary of structured products because of their complexity and high costs.

Our previous coverage of structured products can be found here, here, and here.

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Topics: suitability, investments, Structured Products, Complex Investments, Compliance, IOSCO, Complexity

New Financial Assets Increase Market Risks

Posted by Jack Duval

Apr 23, 2013 4:49:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

A new paper from Alp Simsek of MIT makes an argument that financial innovation always increases market risks.  (See the WSJ article on the paper here, and the paper here.)  Essentially, the argument boils down to this:

    1. New financial products create new disagreements about valuations and outcomes;

    1. These products are new and therefore disagreements are bound to be wide;

    1. New products amplify speculation on existing disagreements;

    1. They also allow traders to purify their bets (and speculate on more narrow outcomes) or in economic terms, the traders opportunity set has increased;

    1. When traders are able to make purer bets, they make larger bets

The traditional argument for financial innovation is that it allows for risk sharing, and that those who don't want to take certain risks can trade them to others who want them.  This paper is interesting because it shows that aggregate risks are increased by the endogenous introduction of new financial products (by amplifying old disagreements and introducing new disagreements).
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Topics: investments, CDS, Structured Products, financial innovation, RMBS, CDO, risk, Complexity

Tableau Files for IPO

Posted by Jack Duval

Apr 10, 2013 5:38:14 AM

VentureBeat has coverage of the Tableau IPO filing.  (VB)  The S-1 can be found on EDGAR here.  Goldman Sachs will be the lead underwriter.

Revenues have ramped 10X in the past five years.  The company is only marginally profitable, but that is often true of young companies focused on growing revenue and market share.

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Topics: Statistics, analytics, Goldman Sachs, IPO, Tableau, Complexity, Predictive Analytics, Analytic Talent

Risks of Structured Products

Posted by Jack Duval

Mar 22, 2013 2:53:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

While structured products are often marketed with one-page fact sheets, they are usually highly complex.  Some of this complexity can be seen in the multitude of risks that can be found in most structured products.  Some of these risks include:

    • Credit (Issuer)

    • Reference Security

    • Liquidity

    • Maturity

    • Interest Rate

    • Leverage/Embedded Option

    • Concentration

Evaluating these risks is beyond most investors and many securities sales personnel, leading to portfolios which can be much more risky then either intended.

Compliance and supervisory staff should be extra vigilant of portfolios with high concentrations of structured products.  Portfolio risk assessment by supervisory staff and subsequent frank discussions with registered representatives and clients is a must to avoid excessive and unknown risk-taking.

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Topics: FINRA, Investment Advisors, investments, supervision, Structured Products, risk, Complex Investments, Compliance, Complexity

Protecting Senior Investors - Finra Product Focus Areas

Posted by Jack Duval

Mar 19, 2013 6:15:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

Finra has delineated a number of products to focus on regarding sales to senior investors.  (NTM 07-43)  Some of these include:

    • Any products with withdrawal penalties, including: Variable Annuities, Variable Life Settlements, Equity Indexed Annuities, REITs, and Limited Partnerships;

    • Complex Structured Products

    • Home Equity Lines of Credit

    • Early Retirement (Rule 72T Withdrawals)

Compliance officers and supervisors should take note of these as the Baby Boom generation moves into the senior investor category.

Our previous coverage of senior investors can be found here, here, and here.

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Topics: FINRA, NTM 07-43, Investment Advisors, Senior Investors, investments, SEC, Structured Products, Compliance, regulation., Complexity

Independent Valuations of Structured Products from EDI

Posted by Jack Duval

Mar 6, 2013 1:36:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

Here's an overdue idea: independent valuations of structured products.  Exchange Data International and Derivative Partners are teaming up to do just that.  (EDI) Here's the press release:

Exchange Data International (EDI), a well-established provider of Security Reference and Corporate Actions data, today announced its partnership with Derivative Partners, a leading provider of independent risk management and valuation services of structured products, to provide valuations for a wide range of structured products and complex derivative instruments.

The current service covers result sets combining various asset classes including equity, indices, FX and commodities, payoffs and pricing models.

Derivative Partners operates a scalable architecture for providing daily independent valuations, currently calculating over 200,000 instruments using an independent database and proprietary state-of-the-art valuation models. In combination with a flexible approach for integrating new payoffs and pricing models this allows to meet the intensified regulatory demands for transparency that clients are faced with.

Jonathan Bloch, CEO at EDI says: "We have noticed an increased demand from our clients for independent portfolio valuations and more especially for complex financial derivatives and structured products over the last years. We are very pleased to have partnered with Derivative Partners and provide our clients with a reliable and impartial valuation solution that will help them meet the transparency standards."

Andreas Kropf, Managing Director of Derivative Partners Research, adds: "We have been continuously developing and enhancing our coverage of complex derivative instruments. The partnership with EDI allows us to bring our valuation capabilities to a larger audience."  (Emphasis added.)

 See our previous coverage of structured products here, here, and here.
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Topics: Exchange Data International, valuation, complex products, investments, Structured Products, fixed income, Derivative Partners, regulation., Complexity

New Swiss Rules on Structured Product Distribution

Posted by Jack Duval

Mar 4, 2013 3:27:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

Structured Product issuance and distribution rules have recently been changed in Switzerland under the CISA and CISO.  Most interesting is the requirement that a "simplified prospectus" be delivered to non-qualified purchasers.

Here's a quote from the Froriep Renggli briefing (FR):

 Subject to certain exceptions, under the existing and new legal regime, a simplified prospectus has to be made available to the investor at the time of issuance of the structured products. The revised CISA additionally provides that also a preliminary simplified  prospectus has to be made available to the investor prior to the subscription of the structured products.

The new rules took effect March 1, 2013.  I look forward to reviewing the "simplified prospectuses".
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Topics: investments, Froriep Renggli, Switzerland, Structured Products, Compliance, CISO, CISA, regulation., Complexity

St. Louis Fed on Bank Complexity (It's Worst Than You Thought)

Posted by Jack Duval

Feb 28, 2013 3:15:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

William R. Emmons, of the St. Louis Fed, delivered a presentation on October 1, 2012 entitled: "Are the Biggest Banks Too Complex?".  (STLF)  Although the title is rhetorical, the answer is obvious.  The most telling data in the presentation were the number of subsidiaries for each of the largest banks:

    • JP Morgan Chase & Co. - 3,391

    • Bank of America - 2,019

    • Citigroup - 1,645

    • Wells Fargo - 1,366

    • Goldman Sachs - 3,115

    • Morgan Stanley - 2,884

Good luck to the regulators.
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Topics: St. Louis Fed, investments, SEC, Compliance, Dodd-Frank Act, regulation., Complexity, banks

Ernst & Young CEO says Investments are Too Complex

Posted by Jack Duval

Feb 26, 2013 3:53:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

The Times-Picayune reports that E&Y CEO James Turley, speaking at Tulane University, decried the complex nature of modern investments. (TTP)

... Some of those instruments were created for good reasons, he said, to better reflect complex and abstract financial forces, but the finance industry has yet to succeed at explaining their meaning.  "It actually becomes less and less transparent because it's less understandable," Turley said during the 20th installment of Tulane's Burkenroad Institute Symposium onBusiness and Society. "There is a real disconnect going on."

See our previous coverage of complex investments here, here, and here.
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Topics: Ernst & Young, James Turley, investments, Complex Investments, Complexity, education

Big Data for Big Cities

Posted by Jack Duval

Feb 25, 2013 4:37:43 AM

The internet of things is coming to a city near you.  The New York Times had an interesting article on how real-time data of a cities traffic, water, and energy use can be used to reduce its resource consumption by up to 50 percent. (NYT)

NYU has started a program called the Center for Urban Science and Progress to study the "science of cities".  This is just one more example of how New York is becoming of of the dominate technology hubs on the planet.

The initiative at N.Y.U. is part of a broader trend: the global drive to apply modern sensor, computing and data-sifting technologies to urban environments, in what has become known as “smart city” technology. The goals are big gains in efficiency and quality of life by using digital technology to better manage traffic and curb the consumption of water and electricity, for example. By some estimates, water and electricity use can be cut by 30 to 50 percent over the course of a decade.

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Topics: big data, Statistics, NYU, Complexity, Predictive Analytics, NYT, education

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