Jan 11, 2016

Part II: PRIIPs Update

In this Part II video blog Tim Mortimer, Managing Director for Future Value Consultants, Keith Styrcula, Chairman and Founder of the Structured Products Association and Jim Jockle, CMO of Numerix discuss the latest regulatory developments surrounding the incoming packaged retail and insurance-based investment products (PRIIPs) regulation.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Video Transcript:
Jim Jockle (Host): Hi welcome to Numerix Video Blog, I’m your host Jim Jockle. Continuing our conversation on 2016 outlook for structured products with Keith Styrcula and Tim Mortimer. Thank you, gentlemen. So, Tim I want to turn to you. As we were talking with Keith before, obviously education, transparency, critical to the growth of structured products in the US, but the last time we spoke a few months ago, we were at a deciding point as it’s related around PRIIPs. Perhaps, because PRIIPs is as important as a regulatory roadmap for so many jurisdictions, perhaps you can give us a little bit of insight and update of where we are right now.  

Tim Mortimer (Guest): Sure, ok. So when we spoke right around June time, one of the earlier consultation papers had come out and on the three key areas on Risk, Costs, and investor outcomes. There were a lot of difficult circumstances presented to the market and for the industry. Four or five different suggestions for each category. There’s been a further consultation paper at came out in the end of October and with that the regulators have pretty much defined what to do. And, some of the choices have been quite surprising and not without criticism in the market. On the risk ratings side, they decided to use historical data with what’s called a boot strapping, or resampling technique, to allow simulations, but simulations directly derived from historical data and it has the effect that most capital protective structured products come out as a one, on a one to seven scale, most capital risk products are generally five or six, and that’s within the framework which also would look at mutual funds spread more evenly across the spectrum. On the costs side they’ve done something which is quite complex and requires a similar approach to the SEC estimated initial value discourse. And then the final piece which probably has a bit of a way to go, is this idea that with the key invested document, which is typically a two page document, that should have everything that’s about products, terms, risk, it’s possible that outcome opportunities. The manufacturers are required to put three different charts to represent a good outcome, a medium outcome, and a bad outcome and that is not on a probabilistic or outcome weighted, it’s simply illustrative and there’s been lots of debates if that’s the right thing; if you show investors three charts and label them good, medium, bad, people would actually think they are somehow increasing the likelihood, where of course that can vary product by product. So I think there’s a bit of room to go there. The timetable is also getting very tight now. The final paper is due out at the end of March or probably early April next year and it’s all going to become law on the first of January 2017, so we’ve got a little over 12 months with the final paper yet to come out sometime in the Spring. All these extra requirements are very onerous for banks, fund managers, and others to actually provide investor information. So the banks and fund managers are all scrambling around trying to work out what they need to do. And because everything is not nailed down yet, it’s going to be extremely tight.

Jockle: Well thank you, Tim. And I mean it’s going to be a fun debate to watch as it plays out. Keith, from your perspective, you know the good housekeeping seal of approval, the chart, the good, the bad, the ugly. The credit rating. The world’s shortest editorial. From the perspective of the US, where does SPA see the potential best practice for education? Is it a thumbs up, thumbs down?

Keith Styrcula (Guest): Well, we have had some conversations, including with Tim, in setting up some sort of risk ratings of different types of products. One thing we’ve been working on for several years, but we’re now kind of in the bottom of the ninth inning I’d like to think, is a so called “nomenclature” project, which is a generic classification of all types of structured investments, that are coded so they can be dropped into a Bloomberg page, or Yahoo! Finance, or a retail investor would be able to go on to the website, see what type of product it has; the standard disclosure. So we’re excited about that. The education project I mentioned previously, as well, and I think we’ll get there in the second quarter. I think it’s also very important, to be out there as an advocate, association being an advocate, to personify about the benefits, the risks and the attributes, of structured investments, both to the regulators and financial community as well. So I would say, probably between 12-15% of advisors may have sold at least one structured note last year, want to get that up to 20-25%. Some firms, have over 50% penetration, in them, in the major warehouses. So, no reason why we can’t grow the industry by being out there and explaining the benefits, attributes, and the risks and rewards or structured products investments.  

Jockle:  And ultimately putting working money into investor’s pockets.

Styrcula: Exactly right. Which I think we’ve done quite successfully, over the last five years. Structured notes have been a good place to get higher yielding returns on rates linked products, to hedge against declines in the commodities markets, and to give kind of the best of both worlds in the equities sides, where you get enhanced exposure to the upside, as well as protects on the downside.

Jockle: So, some final thoughts coming in. I’d like to get your outlooks, not your personal outlooks, but your outlooks as it relates to SPA for 2016.

Styrcula: I think it goes back to the education, education, education mantra. We’re involving all the heads of all the issuers and many of the distributors. We now have executive committees that are responsible for meeting on a quarterly basis, identifying issues that are of interest to the industry, and how we can kind of come together and grow it in the same way that the mutual fund industry has been so successful in growing that investment class.   

Jockle: And Tim, let me turn over to you. What can we expect from FVC?

Mortimer: Right, so interesting question. We’ve got one big service that we’ve brought out the market; it’s our stress testing service, something which came out of the UK regulator and also on the European side. There’s a requirement for structured products issuers to perform what’s called a stress test, which is really a suitability and scenario analysis of different outcomes, good outcomes and bad outcomes, for the investors. That’s something that they’re required to do now, the motivation for that, the regulators point of view is to try and prevent bad products coming out to market, while clearing up the mess that’s occurred. That’s something that we’re very heavily embedded with issuers and distributors in the UK and starting to talk to US clients as well. The US regulation position is somewhat different; as best practice towards it makes a lot of sense. We’re also seeing in conjunction with that increased demand for valuation services all the time, in the structured products area; I’m proud to say that FVC is a part of Numerix, we use Numerix software to go alongside our own data and methodologies and client support. So those two services we expect to do a lot of work next year, all around transparency, and looking after investors.  

Jockle: Well gentlemen, I want to thank you so much, and some key takeaways, buff and enhance notes, got to be protected on the downside, volatility continues to be a concern going into the year. Whether the bulls and the bears, it’s still up in the air. But thank you so much for joining, and of course we want to talk about the things you want to talk about, so follow us on Twitter @nxanalytics or on LinkedIn and please feel free to send us your comments and suggestions. Thank you so much, I’m Jim Jockle.


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