Tlac: “If regulators get it wrong, it will affect us all very, very badly”

Potential Total Loss-Absorbing Capacity (Tlac) legislation from the Financial Supervisory Board (FSB), which dictates the way in which securities are treated in the event of a ‘bail-in’, the mechanism by which assets and liabilities are ring-fenced should a bankruptcy happen, could have a negative impact on issuers of structured products if regulators “get it wrong”, according to panelists (pictured below) speaking at the 4th Annual Americas Structured Products and Derivatives Conference in New York City on June 11.

While Tlac is a terrific acronym in structured products that is catching the attention of many in the industry, the view from the FSB is that if a derivative is used in any way or form, that product cannot be bailed in. At the same time, the European Commission has ruled that structured products will be bailed in.

At the end of the day we are corporate bond salespeople, said Larry Wilson, managing director, head of North America retail distribution, structured investments at JP Morgan. “As different products are deemed ineligible to be bailed-in, the value of funding for that product decreases,” said Wilson. “What we heard originally is that Tlac is going to be the death of structured products, but what you will see is a clear delineation between the value of the funding that you are providing to institutions.”

“If the regulators get it wrong, it will affect us all very, very badly,” said Deland Kamanga, co-head, global structured products at BMO Capital Markets. “Regulators will get it right because the purpose of Tlac is that the regulators can have an orderly bankruptcy, so they do not want to put banks in a situation whereby funding becomes more expensive and it becomes more difficult to fund banks.”

Tlac does not just strike at structured products, said Rick Silva, managing director, co-head of equities and investment solutions at Wells Fargo. All debt that is in the market today technically is bail-in-able, so the recapitalisation of the financial services industry that is going to take place under these new rules is staggering, said Silva. “I do not think it is fully appreciated how much a source of liquidity this type of debt is for issuers of structured notes,” said Silva. “When you talk about a source of liquidity drying up, that is what has got everybody sensitised to what the impact can be.”

Kamanga added, “There is no question; funding is definitely a big part of the business. When we started, the business was focused on funding, but if you look at all the businesses now, there is such a diversity of product; it is not about funding anymore.” There is a strong demand for asset management solutions because, in a low rate environment, the available alternatives have not satisfied customer demand, said Kamanga. “Funding is important, but I really do believe that, in the next five to 10 years, the business is going to be driven by asset management solutions and not funding,” said Kamanga.

The more complex the problem, the more time it is going to take to implement new regulation, and the more time there will be for regulators to decide what needs to be done and what does not, said Franck Bertoneche, managing director, head of cross-asset distribution, North America global market at BNP Paribas. “This is a complex problem, which is actually a good thing,” said Bertoneche. Panic is a normal reaction to regulatory changes in the industry, he added.

“The name of the game is to be creative,” said Bertoneche.