JPMorgan adds reset to reverse convertibles; Morgan Stanley launches currency-tied exchange traded notes

By Kenneth Lim

Boston, March 17 - A number of new structure and products were introduced to the market on Monday by JPMorgan Chase & Co. and Morgan Stanley.

JPMorgan offered a twist to the ubiquitous reverse convertible by throwing in a reset feature that one distributor familiar with the structure described as "an insurance policy."

Meanwhile, Morgan Stanley announced a couple of exchange-traded notes linked to the Chinese renminbi and the Indian rupee that will be marketed through Van Eck Global.

JPMorgan revisits reverse convertibles

JPMorgan gave a new look to its reverse convertible offerings with plans for notes that incorporate a reset feature.

The bank announced a series of 14% annualized reverse exchangeable notes due June 30, 2008 linked to the common stock of Research in Motion Ltd.

Like most reverse convertibles, the notes will pay par unless Research in Motion stock falls below the barrier level of 70% of the initial share price during the life of the notes and finishes below the initial share price, in which case the payout will be a number of Research in Motion shares equal to par of $1,000 divided by the initial share price.

But the notes also have a reset feature. If Research in Motion stock falls below the barrier level of 70% of its initial level during the first 30 calendar days - up to April 25, 2008 - the initial price will be reduced by at least 30%.

JPMorgan also announced 12% annualized reverse exchangeable notes due June 30, 2008 linked to the common stock of Apple Inc. that work the same way.

The barrier level on the Apple-linked notes is 80% of the initial share price, while the reset window is also 30 calendar days.

Both series are expected to price March 26 and settle March 31.

A second chance for investors

"I haven't seen anything like this elsewhere," the distributor said. "Maybe something like this has been seen in Europe or Latin America, but I haven't seen it here in the U.S. It took about a week to get it ready because there wasn't a previous product supplement or anything to base it on."

The distributor said the reset feature works like an "insurance policy" that essentially gives the investor a second chance if an unexpected stock event takes place at the start of the note's term.

The lower risk does not take away much from the potential upside, the distributor said.

"It's better for the investor because the cost associated with it in coupon terms is minimal," the distributor said. "It could be 25 basis points to 50 bps to 100 bps in coupon terms to get this insurance feature, depending on what the underlying stock is. That's not much especially considering how the market has been running lately. Stocks have dropped 40% in one week."

The distributor did not think the new structure will become the new standard for reverse convertibles immediately.

"Is it going to replace the reverse convertible?" the distributor said. "Probably not. It's probably going to be one of those one-off transactions for customers who have decent size and want to add this piece."

But the structure offers attraction for investors who like an underlying stock but are concerned about broader volatility.

"If you're like, I like the stock, but I'm not sure if it's going up or down, I'm neutral on it, this would be good for you," the distributor said.

Morgan Stanley launches ETNs

Morgan Stanley on Monday announced two currency-linked exchange traded notes that will be marketed through Van Eck Global.

The Market Vectors-Chinese Renminbi/USD note seeks to track the performance of the S&P Chinese Renminbi Total Return Index, less an annual investor fee of 0.55%. The note will be listed under the symbol CNY on the NYSE Archipelago Exchange.

The Market Vectors-Indian Rupee/USD note seeks to track the performance of the S&P Indian Rupee Total Return Index, less an annual investor fee of 0.55%. The note will be listed under the symbol INR on the same exchange.

The products will be the first exchange-traded notes in the United States to provide exposure to the Chinese and Indian currencies, Morgan Stanley said in a statement.

The underlying indexes track the performance of rolling investments in short-term forward contracts of their respective currencies plus a short-term deposit rate.

"The new Chinese renminbi and Indian rupee ETNs represent an exciting and groundbreaking opportunity for investors to obtain exposure to these currencies," Morgan Stanley structured product origination managing director Jeffrey Barany said in a statement.

"Morgan Stanley's considerable global reach and structured products expertise well positions us to deliver innovative products from a single multiple asset-class ETN platform. We are pleased to be working with Van Eck Global to bring the renminbi and rupee ETNs to investors under the Market Vectors umbrella."

Van Eck Global principal Jan van Eck said in the statement: "Our goal is to assist investors who are seeking investment access to the renminbi and rupee. To date, accessing these currencies has been cumbersome and costly. These new products offer convenience when compared to over-the-counter currency forward trading."

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