Crisis, lack of expertise, scale pose hurdles for structured CD issuers, structurer says

By Kenneth Lim

Boston, June 3 - The lack of new issuing banks continues to be a limiting factor for structured certificates of deposit despite strong growth in the space over the last year, said CD Funding Group, LLC managing director Timothy J. Bonacci.

CD Funding began in 2005 by helping mid-tier banks to create and understand structured CDs. It has since also added a distribution arm to help the banks push their products to external broker-dealers and investment advisers.

The company considered expanding into structured notes, but put that move on hold after the financial crisis struck and demand for structured notes plummeted, Bonacci said. But he estimates that structured CD volume has almost doubled year-on-year, and he is not concerned about missing out on the other part of the structured products market.

"I think in at least the near and medium term, I think structured CDs are going to be the predominant vehicle in the space," Bonacci said.

The growth came after the financial crisis hit in 2008, as investors became more risk averse and sought out principal protection and the CD's guarantee from the Federal Deposit Insurance Corp. But the FDIC guarantee comes with limits - the investment amounts are currently only protected up to $250,000 per depositor per bank.

"At the very large banks out there that offer these products, we're starting to see clients get 'filled up' with those bank names," he said. "Those clients are looking for additional bank names, and that's where we're getting a lot of enquiries and requests from the buyside."

Distracting hurdles

More banks are beginning to offer structured CDs, but the increase in issuers remains slow, a point that Bonacci and other distributors have acknowledged.

One of the hurdles is that the financial crisis has distracted banks in the past several months.

"In the last couple of months a lot of banks in the marketplace have been preoccupied with other things, TARP and so on," Bonacci said.

But more fundamentally, the medium- to small-size banks lack the in-house expertise to handle structured CDs, said Bonacci, who co-founded CD Funding to address that issue.

"Unless you are the biggest banks you don't have the internal expertise to understand how to work them and get the best price for hedging and so on," he said. "The largest obstacle is not knowing how to do it."

CD Funding also hopes to address the problem of scale by essentially aggregating the products that its various bank clients offer. Hedging costs can be kept low that way, which will translate into more attractive pricing, Bonacci said.

"Without significant volume it's difficult for them to get good prices," he said. "Because we work with multiple banks, we're getting aggregated pricing that helps them get better prices."

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