Electronic Structured Note Services Face Regulatory HurdlesKevin Dugan
Structured note issuers face regulatory hurdles to releasing electronic systems in the U.S. that are as powerful as software that has become commonplace in Europe.
The programs, which brokers or advisers use to show investors prices for different structured notes that often can be purchased as well, are employed by at least eight banks in Europe, according to data compiled by Bloomberg. UBS AG, Barclays Plc and Deutsche Bank AG have platforms in the U.S.
The software allows banks to lower costs by reducing the labor needed to create notes and to bolster sales by offering products that can be easily customized. That approach in the U.S. may come at the price of potentially higher legal costs and expensive filing requirements, stemming from a rule that a prospectus must be sent to a regulator before a security can be offered for sale.
“If you take the position that every quote an investor receives constitutes a new offer, then potentially you have a huge number of filings for deals that never materialize,” said Mathias Strasser, chief executive officer of WallStreetDocs Ltd., a company that automates offering documents for issuers including Bank of America Corp. and Barclays.
A prospectus must be on file with the U.S. Securities and Exchange Commission before any security is sold in the country, except for private placements, said Kevin Callahan, a spokesman for the agency.
A “more flexible” climate in Europe has made it easier for banks to develop electronic services there first, said Linda Simpson, partner at Davis Polk & Wardwell in New York.
Structured notes are also more common in Europe, which helped spur the creation of the systems, Strasser said.
For U.S. issuers, what’s at stake is the ability to “issue in smaller sizes profitably,” said Tim Mortimer, founder of Future Value Consultants Ltd., a structured products analytics firm, in a telephone call from his office in London. “Banks that are either unwilling or unable to issue more deals in smaller volumes are missing out.”
In 2011, UBS started trading securities using its Equity Investor program in the U.S. This year the bank has 2,580 U.S. structured note sales and ranks No. 6 for total issuance. In 2010, UBS was No. 11 and had 242 offerings for the entire year.
Both UBS and Barclays, which last year started allowing U.S. investors to use its Barx Comet service to see prices though not buy, began offering electronic platforms first in Europe.
Deutsche Bank’s Autobahn program lets European investors purchase securities, while their U.S. counterparts are able to see prices for new products without being able to buy them directly.
Other issuers plan to make electronic systems available in the U.S. this year.
BNP Paribas SA intends to start a service similar to its Smart Derivatives, said Serge Troyanovsky, managing director and head of North American structured product sales at the bank in New York.
Royal Bank of Scotland Group Plc is “evaluating” offering its MarketDirect program in the U.S, said Ed Canaday, a spokesman for the bank in Stamford, Connecticut. The service has been available in Europe since 2010. The bank hasn’t issued any structured notes in the U.S. this year, Bloomberg data show.
Credit Suisse Group AG and Morgan Stanley introduced their platforms to some countries outside of the U.S. last year. The Credit Suisse service, my Solutions, can be accessed in Switzerland, and there are plans to make it available more broadly in Europe, as well as in Asia and the U.S., said Valeria Ancarani, a spokeswoman for the bank in Zurich.
Spokespeople Megan Stinson of UBS, Mark Lane of Barclays, Lauren Bellmare of Morgan Stanley and Amanda Williams of Deutsche Bank declined to comment on the programs.
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.