The Public Securities Association yesterday released a list of features that underwriters selling three popular types of derivatives should disclose about the products to market participants.
The PSA's task force on derivatives information standardization, which includes officials from prominent derivatives dealers and information service providers, developed the lists, which apply to auction and swap-based inverse floaters and embedded cap bonds.
"This should help buyers and sellers and improve liquidity," said Donald C. Carey, co-chairman of the task force and a director at CS First Boston. "Early on, there was some reluctance [from dealers]. They felt the products were proprietary. But we have overcome that reluctance over the last few months."
The task force was established in September, after David C. Johnson, a portfolio manager at Van Kampen Merritt Investment Advisory Corp. and a major buyer of derivatives, said he would stop buying the products, in part because of poor disclosure, Johnson was out of his office yesterday and not available for comment.
The recommended terms of derivatives, which include such features as the number of days used to calculate interest on the security and the exact coupon formula, will be disseminated over pricing wires on new deals. On existing derivatives, underwriters should submit the same details to information service providers by Jan. 1, the PSA task force said.
Because the PSA is an industry trade group, not a regulatory organization, the group cannot force compliance with the task force's recommendations. But the task force included officials from the most active derivatives firms.
The recommendations apply only to derivatives sold in the primary market. Carey said the task force's next project would be to address disclosure issues for derivatives created in the secondary market.
While disseminating information for primary market products is "relatively straightforward," creating standards for secondary market disclosure is more difficult because of the complex legal structures needed for products created in that market, Carey said.
Investors have complained that they have had difficulty trading derivative products except with the firms that structured them. To make a bid on a derivative, another buyer needs to know many of the product's specific features.