JPMorgan’s Largest Note Since 2010 Tied to Own Futures Index

JPMorgan Chase & Co. sold $234.7 million of structured notes tied to a proprietary gauge of seven futures indexes, its largest U.S. offering in at least four years.

The five-year securities, issued Nov. 22, yield the gains and losses of the JPMorgan Enhanced Beta Select Backwardation Alternative Benchmark Total Return Index, according to a prospectus filed with the U.S. Securities and Exchange Commission. The gauge consists of seven other indexes tied to prices of commodities futures from gold to lean hogs.

The index rebalances monthly, based on weightings of its members in the Dow Jones-UBS Commodity Index, the most popular commodity benchmark for structured notes this year, according to data compiled by Bloomberg. Its level rises and falls with market prices and its members can change weekly to favor commodities showing the most “backwardation,” where earlier contracts cost more than later deliveries, according to the prospectus.

“A backwardated market is by no means indicative of prices falling into the future,” said Stephen Schork, president of the Schork Group Inc., a consultant to the energy industry in Villanova, Pennsylvania. “The fact that prices are lower in the future isn’t an indication that demand is going to fall in the future. It’s just an indication that demand in the spot market is very strong.”

The index was established Sept. 30, less than two months before the securities were sold, according to the prospectus. Since then, it fell 0.4 percent to 101.93 yesterday.

Investor Fees

The bank charges 0.85 percent a year in investor fees, so the index would have to rise from its starting level at least 4.25 percent at maturity for the notes to break even.

Backwardation can provide investors with a so-called roll yield from buying the earlier monthly contract and then collecting the difference as they sell and transfer into the next, cheaper month.

Justin Perras, a spokesman for the bank in New York, declined to comment on the offering.

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 with values derived from stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE