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Structured Products at Retail?

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On the heels of more and more news about the implosion of the mortgage backed securities and junk bond markets come three news items of interest: guiding principles from a consortium of industary groups for using structured products for retail, and word from Moody’s, and Standard & Poor’s, which has put “612 U.S. Subprime RMBS Classes” on their negative watch list, “with negative implications,” while at the same time announcing changes in their methodology for rating and tracking this type of security.

S&P says it expects that “the majority of the ratings on the classes that have been placed on CreditWatch negative will be downgraded.” Approximately $12.78 billion in securities is included, or 2.13% of $565 billion in U.S. mortgage backed securities S&P rated from “the fourth quarter of 2005 and the fourth quarter of 2006.”

Meanwhile, on June 15 Moody’s downgraded 131 subprime securities and put on its own negative review list 136 others. Of the 267 securities, most had been rated A or lower, “but a small portion was Aa or Aaa.”

Advisors who deal in structured products for retail clients may want to take note of a new set of guiding principles for using structured products in retail accounts that was released July 11 by the Securities Industry and Financial Markets Association (SIFMA) and four other industry groups: London Investment Banking Association (LIBA), International Swaps and Derivatives Association (ISDA), International Capital Market Association (ICMA), and European Securitisation Forum (ESF).

While these new principles regarding retail structured products are neither binding nor too detailed, they may help advisors and broker/dealer executives to adjust in-house rules to cope with an increasingly complex group of structured products, some of which in recent weeks have been put on watch lists or downgraded by the major ratings agencies. The entire set of principles is available at //


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