Ready-Made U.S. Structured Notes Cut Costs, Shrink Deal Sizes

Banks in the U.S. are increasingly using programs that automate structured-note documents, cutting costs and making smaller offerings more profitable.

At least seven banks, including Bank of America Corp., the largest U.S. issuer of the securities, are automating offering prospectuses either through their own lawyers or by contracting outside firms.

Using software that can create a document in a few hours, rather than a legal team that might take a few days, can make smaller structured note offerings less costly. Even as overall volume dropped, banks sold $1.07 billion of notes in 2012 in the U.S. that were less than $1 million in size, 6 percent more sales than the year before in 30 percent more deals, according to data compiled by Bloomberg.

Automation makes it possible to offer notes that otherwise wouldn’t break even, said Guy Dempsey, a partner at New York-based law firm Katten Muchin Rosenman LLP and former general counsel for the Americas at Barclays Plc. “Notes under a million dollars pretty much describe that point where the breakeven doesn’t occur.”

With a computer program, a user can enter certain fields for a particular type of note, such as the linked asset and the amount of protection from losses, and a template is filled out automatically.

That saves on the $2,000 to $7,000 that a bank would pay an external law firm to write and issue a prospectus, said Mathias Strasser, chief executive officer of Wall Street Docs Ltd. in London. His company began offering automated documentation for structured notes in April 2011. Clients include Bank of America, HSBC Holdings Plc, Citigroup Inc., Bank of Montreal, JPMorgan Chase & Co. and Barclays.

EQI Program

Banks have developed their own programs as well. In 2011, UBS AG started trading notes using its Equity Investor program, or EQI, in the U.S. The software lets financial advisers choose a security’s structure and pick underlying stocks or indexes from a predetermined list.

In Europe, financial advisers can download an application that allows them to create UBS notes on their iPhone.

The bank led in the number of U.S. offerings of less than $1 million last year, with 2,238 notes, or 87 percent, Bloomberg data show. These smaller notes made up 13 percent of the Swiss bank’s U.S. sales last year.

Royal Bank of Scotland Group Plc is in the “early stages” of developing an auto-documentation program for structured notes in the U.S., said Ed Canaday, a company spokesman. The bank has been automating documents in London for several years, he said.

2012 Sales

Mark Lane, spokesman for Barclays, Elizabeth Seymour, spokeswoman for JPMorgan Chase, Juanita Gutierrez, spokeswoman for HSBC, Megan Stinson, spokeswoman for UBS, Matt Card, spokesman for Bank of America, and Scott Helfman, spokesman for Citigroup, declined to comment on document automation. Martha McInnis, spokeswoman for Bank of Montreal, didn’t return requests for comment.

Last year, banks sold $39.2 billion of structured notes in the U.S., 14 percent less than 2011, Bloomberg data show.

Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money. Derivatives are contracts whose value is derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

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