IOSCO warns against structured products
Monday, 3 August 2009 10:35am
A major review into the causes of the sub-prime crisis has been released and its key message is that if fiduciaries don't understand structured products, they should not invest in them.
The International Organisation of Securities Commissions has issued a report called The Investment Manager Due Diligence Practices that were developed in cooperation with industry representatives following the recommendation made in the Report of the Task Force on the Subprime Crisis that was published in May 2008.
The central focus of the review was how collective investment schemes representing retail investors became involved with structured investments that it turned they did not understand, with disastrous results.
The report notes that "Investing in a structured finance instrument (SFI) is different from investing in a more traditional instrument often referred to as a plain vanilla instrument. The risks are different, and [require] a tailored due diligence process."
"If you do not understand a SFI [structured finance investments], do not buy it," the report warns.
It said due diligence is and must remain a value-added process and must never become a plain box-ticking process.
"Due diligence is generally a three step, and iterative process, which is structured around the understanding of the underlying assets of the structured finance investment, of its structure and of how it fits into the collective investment scheme mandate."
IOSCO noted that due diligence must remain dynamic whereby the review commences when the fiduciary first investigates the investment and ceases only when the investment matures.
The inference is that "point-in-time" ratings for structured investments are inappropropriate and the reliance on them by fiduciaries was a major cause of the sub-prime crisis.
Alex Dunnin
