Structured Note Value Disclosures to Start in Germany Next Year

The largest issuers of structured notes in Germany will start disclosing the fees they’re charging investors for the products next year, as regulators press for greater transparency in the market.

Barclays Plc, Goldman Sachs Group Inc. and UBS AG are among the 17 member banks of the German Derivatives Association that have agreed to publish the estimates, according to Christian Vollmuth, managing director at the association in Berlin. Note values are generally lower than the issue price because of underwriting fees, hedging costs and other expenses to create and market the securities.

Banks in Europe are expecting more disclosure requirements for structured notes after the U.S. Securities and Exchange Commission asked issuers to divulge the initial value of their securities, and European authorities said they are considering similar measures. The notes offer customized bets to investors and have been scrutinized for being opaque and complex by regulators from the U.K. to Mexico.

“The financial crisis has left our industry with some undeserved stains on its reputation and that has driven us to self-regulate,” said Vollmuth.

The disclosure requirement takes effect on May 1, according to a statement the association released yesterday. Members must publish estimates of note values at the time of pricing as either a percentage or an outright amount in the issuance currency, according to Vollmuth. Banks should also recommend that brokers or third parties selling the notes to individual investors disclose the figures in their product information sheets, he said.

Reverse convertibles

More than 95 percent of Germany’s structured products market, Europe’s second largest, will be affected, Vollmuth estimated, including capital-protected and credit-linked notes as well as reverse convertibles.

“We are committed to showing our industry is making every effort to have transparent products and structures,” said Dirk Hess, co-head of sales and distribution of warrants and certificates in Europe, the Middle East and Africa at Citigroup Inc. in Frankfurt.

The European Securities and Markets Authority is discussing whether note sellers should be forced to publish their intrinsic value calculations. Paris-based ESMA said in July some investors don’t have sufficient knowledge to understand what a note is worth and how much they are paying in fees.

Banks in the U.S., including Goldman Sachs and Bank of America Corp., now disclose values for most of the SEC-registered structured notes they sell, after the agency requested in April 2012 that they begin doing so.

Buyers of structured notes, which include institutional investors as well as high-net-worth individuals, bear the risk both of the bank selling the securities and of the underlying assets. Fees that issuers may disclose in marketing materials typically form only part of that total expense to investors as other costs and profits are embedded.

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