JPMorgan plans to tighten up its third party distributor due diligence in preparation for its structured equity products being marketed to a wider European retail base in February. The effort, dubbed KYD or 'know your distributor', is designed to prevent the firm becoming embroiled in potential law suits and negative publicity that could arise if its structured products are distributed to inadequately informed or unsuitable retail investors. "When you are dealing with a retail investor, the risk of reputational damage rises substantially," explained Tim Hailes, assistant general counsel in London. "And the fact that you can sell a product to them doesn't necessarily mean you should," he continued.
The initiative is predicated on a new European Union regulation that will make derivatives available to a much wider audience: mutual fund investors. The new law, UCITS III (Undertaking for Collective Investment In Transferable Securities), will be implemented across the whole of the European Union by February (DW, 3/24) and will lead dealers to increase the number of distributors they use.
Hailes added that he has recently approached the International Swaps and Derivatives Association about establishing a securitized derivatives committee, which could help firms to collaborate on this issue. Louise Marshall, policy director at ISDA in New York, confirmed the trade association has been approached and is in the preliminary stages of looking at the idea.
