Halliday goes the extra mile

Halliday Financial launched its structured products business in October 2009 after consulting every piece of regulatory advice it could find that was relevant to the investment class.
The rationale behind the firm’s exhaustive preparations was that if the regulators ever did take a look at its business, it wanted to be seen as a model for distribution rather than just doing the bare minimum to comply with the regulations. Halliday pulled together advice from the Financial Industry Regulatory Authority (Finra), the US Securities and Exchange Commission (SEC), Massachusetts Securities Regulators and even the UK Financial Services Authority (FSA).

“While understanding that the regulators in the US are enormously helpful, this is still a nascent product area for them, so we looked beyond Finra at what was happening with the FSA and how they approached retail investors,” says Tom Livingston, executive vice-president and director of structured products at Halliday Financial in New York.

“We considered how to deal with customers from a broker-dealer perspective, suitability and product origination standards, and we’ve embraced all of the FSA’s findings and suggestions, including the use of customer questionnaires,” says Livingston.

Halliday’s business counts 40 licensed investment advisers who will sell structured products once fully trained. Finra does not prescribe a specific licence for advisers to sell structured products, but Halliday has devised a proprietary set of educational standards which its advisers must meet before they are allowed to sell products.

“Each of our representatives here at the firm will go through a rigorous process of education before they’re ever allowed to sell products to clients,” says Livingston. “Then we run through model portfolios of where structured products would and wouldn’t fit.”

The firm was established in 1982, and now helps it clients to manage a total of $2 billion in assets. “The approach has always been one of unique asset management and the principle here is that we take a macro view of the industry, and how best to address that,” says Livingston. “Structured products aren’t going to go away – there’s been a sea change in the attitude of retail investors.”

Typical clients for Halliday are high-net-worth and retail investors, and are generally older individuals who are looking at wealth for retirement. People only have a certain amount of time to accumulate assets, and most of the firm’s clients are nearing the end of that time, he says. “To replace those assets is going to be quite a difficult task. So using structured products to mitigate risk is a good approach.”

For now, principal protection is the main focus of the firm’s products, although Livingston does not rule out reverse convertibles when market conditions are more suited to them. ABN Amro, for example, has supplied the firm with various reverse convertible products linked to domestic equities. However, Halliday is interested in products beyond the US stock market theme which has been dominating the US market for the past 18 months, and is considering currency and commodity-based transactions.

Like most independent providers, discussions about where products will be sourced from are rooted in counterparty risk. “We have our own committee in-house. When we look at structures the first thing we do is look at credit risk,” says Livingston. The firm works with a range of banks, including Barclays Capital, ABN Amro, BNP Paribas and JP Morgan.

However, Livingston has found that some institutions with a large internal sales force of their own have been more difficult to deal with – for example putting limits on the amount of protection that can be bought in a reverse convertible.

This might be because, for example, the bank might not want a reverse convertible based on a particular stock available with different levels of protection within their own sales force and another in the wider market, says Livingston, though he says he is unsure of exactly why this might be the case.

One of the most efficient means of mitigating the counterparty risk obstacle is to use a certificate of deposit (CD) structure. This incorporates protection from the Federal Deposit Insurance Corporation for investments up to a limit of $250,000. A six-year investment issued by JP Morgan in February was a digital contingent coupon CD linked to an equally weighted basket of 10 stocks, including Amazon, Boeing and Goldman Sachs. It pays yearly income, which will be the average performance of the basket with each stock’s coupon capped at a maximum of 9%. The maximum negative performance that can be recorded for each stock is 35%, and capital is protected 100% at maturity.

As for Halliday’s plans this year, Livingston says the firm intends to expand and add people to the business, though he stresses it will “try to have a realistic growth pattern”. l

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