New Structured Product Risk Classification Launched

Osmond Plummer

4 June 2009

The Swiss Structured Products Association is about to launch a new risk classification for Swiss structured products in association with Risk Metrics Group, the association has announced in a statement.

The classification will be based on Value at Risk and will cover structured products traded in Switzerland. The new risk classification will be available to market participants as of the beginning of July on the association website. Data vendors will be able to obtain the information from SIX Exfeed.

VaR is one of the most widely used statistical measures of the potential of economic losses due to market risk based on actuarial calculations.

In addition to a pure VaR risk classification, it will be possible to employ this risk information within an SSPA Risk Rating. This will enable investors to better understand and manage the risks of specific structured products.

The association aims to establish its SSPA Risk Rating as the standard risk measurement for structured products in Switzerland. “The availability of Value At Risk numbers and the SSPA Risk Rating are going to further increase the transparency of structured products for investors”, Roger Studer, SSPA’s president said in the statement.

Industry commentators point out, though, that VaR, like other risk measurements, is based on bell curve statistics and ignores outlying events. So, while it is helpful and useful 99 per cent or even maybe 99.8 per cent of the time, the damage done by the events not under the bell curve is of disproportionate size and can be cataclysmic. They argue that it is unlikely that investments in AIG or structured products protected by Lehmans would have been highlighted by such a process.