Graham Devile, managing director of Meteor Asset Management, has voiced doubts over the structured product industry’s plans to solve counterparty risk by using the Ucits III regulatory structure.
He says the structure is too expensive to be viable and he does not believe it is a panacea to solve the problem of counterparty risk.
Providers including Morgan Stanley IQ have launched products that comply with Ucits III rules, which include a requirement that no more than 20% is left with any single counterparty.
The industry is battling to rid itself of the reputational damage done by the Keydata collapse and failure of groups with products counterpartied to Lehman Brothers, including Arc, NDF and DRL. (article continues below)
Devile says: “Ucits III makes most products nigh on impossible right now. The expense comes in the trust documentation, all the legals, the reporting requirements and regulatory requirements.”
He says Ucits III funds need to have at least £10m under management to be viable. Structured products are issued over a fixed period and so rarely reach these levels. He says: “It can cost £100,000 a year to run these things.”
Devile adds that having at least five counterparties may increase risk because there is more chance that investors will suffer counterparty failure.