The industry’s proposal seeks a consistent internal standard to evaluate how much extra cost the structured product charges for additional features versus a simple zero-coupon bond.
The European Structured Investment Products Association (Eusipa) position paper on Value for Money published by the trade association earlier this month to set out its position on the negotiations on the EU Retail Investment Strategy (RIS) has identified diverging funding costs between issuers as one the main hurdles to make structured products from different issuers comparable.
In a nutshell, the ambition is to determine which products are unlikely to have value for money when compared against comparable other assets - Thomas Wulf, Eusipa
According to the Eusipa paper, structured products are always issued under certain market condition that set the framework for the pricing with the main reference to but not only the issuers funding costs which cannot be compared against a product even one having identical pay-off features, issued at a later point it time.
“For structured products specifically, the proposal is to draw such a comparison against a zero-coupon bond issued by the same issuer and on whose performance scenario is added on, if need be, an equity premium in case of an equity underlying, with further specific adjustments also being worked out right now for fixed rate underlyings and others,” Thomas Wulf (pictured), secretary general, Eusipa, told SRP.
“Our approach would thus be a solution to the dilemma that you cannot directly compare structured products from different issuers due to their different funding costs, which directly impacts fees charged and yields offered," said Wulf.
The European industry believes a forward-looking approach is necessary for structured products, as neither past performance, nor cost of previously issued products are representative of market conditions and value at the point of subscription by investors.
“This is the core of the paper's methodology,” said Wulf. “For that reason, we call our key proposal in terms of its reference to the zero-coupon bond, the ‘next best alternative’ when assessing value for money.”
The next best alternative comparison proposed by the trading body would focus on comparing the forward-looking return expectation of products against a zero-coupon-bond or equivalent, ‘rendering the exercise primarily benchmark-like, as it evaluates the cost of the structured product relative to the cost of capital protection alone’.
In addition, a risk premium such as the equity risk premium for products with an equity underlying will be added, with the aim of ‘making the comparison closer to a peer group-like tool’.
The Equity Risk Premium (ERP) will assess whether the market exposure of the product delivers sufficient risk-adjusted returns, which would be similar to comparisons made across products issued by other peer institutions, ‘due to the use of industry-wide guidelines on economic assumptions relating to such risk premiums’.
Wulf added that the core aim of the VFM paper is to take a "methodologically sound approach to focus on the key challenge in the value for money discussion”, which Eusipa believes is the outlier identification.
“The paper captures this ambition relating to what both the benchmarking and peer group comparison regulatory mechanisms are at their very core pursuing,” he said. “In a nutshell, the ambition is to determine which products are unlikely to have value for money when compared against comparable other assets.”
In addition to this central proposal, the paper also includes suggestions on other legislative proposals made under the Retail Investment Strategy and outlines specific suggestions relating to the wording of amendments put forward by Council and Parliament, while a separate chapter explains each position taken by the industry with further technical background.
Given that the new commission will not be fully established until the end of November, there is no movement likely in the on the important Retail Investment Strategy (RIS) file which the value for money topic is tied to, according to Wulf.
“This delay gives the entire financial sector a bit of breathing space to work out more granular advocacy positions and prepare our outreach,” said Wulf.
Do you have a confidential story, tip or comment you’d like to share? Contact Us | SRP (structuredretailproducts.com)