Nasdaq to Quote Structured Note Prices as SEC Urges TransparencyKevin Dugan
U.S. investors will be able to shop for structured-note deals for the first time in the $40-billion-a-year market as Nasdaq OMX Group Inc. is set to publish daily values of the securities.
The Mutual Fund Quotation Service, which lists so-called indicative prices of investments from real estate investment trusts to college savings programs known as 529 plans, would make the figures available, Jeff Kimsey, a Nasdaq vice president of U.S. product management in Rockville, Maryland, said in a telephone interview. The note values, which would be estimates and perhaps not guaranteed for trades, will probably be set once a day by banks, he said.
Widespread participation in the program by issuers may help alleviate a chief concern among regulators, that the illiquid investments lack pricing transparency. While banks will still unilaterally determine the quotes on Nasdaq’s system, investors will be able to compare the values of individual securities, day to day.
“I firmly believe that the ability for people to see this information is only going to be a positive in the industry,” Kimsey said. “The dissemination isn’t going to talk about the goodness or badness of structured products. It’s really about bringing light to these instruments.”
Though no issuers have signed up yet, Kimsey said, the Nasdaq service could end up including quotes for products such as “contingent absolute return autocallable optimization” notes alongside those for the $251 billion Vanguard Total Stock Market Index Fund. For each security, Nasdaq will charge banks a one-time fee of $325 and $500 annually, said Wayne Lee, a company spokesman.
Investors are poised to buy about $40 billion of U.S. structured notes this year, according to average monthly sales data compiled by Bloomberg. The securities, which are bonds bundled with derivatives, can be customized and aren’t traded on exchanges like stocks.
This year, the U.S. Securities and Exchange Commission pushed lenders to include initial estimates of their own structured note values, which issuers have added to offering prospectuses. Banks estimate most of the securities at between 96 and 98 cents on the dollar, Bloomberg data show.
Some notes are too complex for buyers to easily understand how they would pay out under different market conditions, said Richard Ketchum, chief executive officer of the Financial Industry Regulatory Authority, at an industry conference in September 2012.
The Mutual Fund Quotation Service, which was started 27 years ago and now includes prices for more than 30,000 funds and other assets, collects and sends data to vendors. Investors can then look up a fund or a security on websites such as Yahoo! Finance or Google.
The performance of U.S. structured notes typically is tied to stocks, commodities, currencies or rates. The products can include buffers against losses, leveraged gains to a cap, protection of principal and a variety of other features.
The largest issuers in the U.S. this year are Bank of America Corp., with $5.34 billion of sales and JPMorgan Chase & Co., with $3.9 billion.
Justin Perras, a spokesman for JPMorgan, declined to comment about the Nasdaq system, and Susan McCabe of Bank of America, didn’t return an e-mail. Keith Styrcula, chairman of the Structured Products Association, didn’t return requests for comment.
While Nasdaq, the second-largest operator of U.S. stock exchanges, first considered adding the securities to its price system about seven years ago, the company first approached the Structured Products Association, an industry organization, earlier this year, Kimsey said.
The timing seemed right, with regulators pushing the industry toward more disclosure, he said.
“I’d certainly like to see transparency with all structured products, but I think it’s going to be up to each of the banks to determine whether this is something that’s going to work for them,” he said.