By Robert Hunter

Some of the most inspired pieces of mathematical alchemy have languished for years in dusty academic journals and corporate marketing departments, waiting for the rest of the world to catch on. Peter Broms, president of Americus Stock Process Corp., believes his work of the past 11 years will one day spark the next financial revolution, and has taken on an increasingly evangelical tone in spreading the word.

Nearly all of Broms’ efforts these days are dedicated to extolling the virtues of RISKS, OWLS and DIVS—long-term, exchange-traded option products that combine to replicate a single share of common stock. “These are simply the finest and fairest option products ever created,” he enthuses, “and they will shake up the options market. I defy people to find a way to improve on them.” First, however, he must form an option-clearing entity to guarantee the products, a task that has so far proved arduous.

Broms, a long-time equity salesman who has worked for such firms as Merrill Lynch, Kidder Peabody and Paine Webber, has been pitching cutting-edge options since the Reagan administration. In the 1980s, Americus’ sister company, Americus Shareowner Service Corp., created trust products called Primes and Scores, which split common stock shares into two components—the Prime, which allowed investors to reap dividends but limited capital gains up to the “termination claim,” and the Score, which gave holders the ability to profit from capital gains above the termination claim level. The products traded fairly successfully on the American Stock Exchange, until the Internal Revenue Service removed the tax advantages of setting up the trust products, thus killing them off. By 1992, all the Americus trusts had expired; no additional ones have since been created.

In the last half-dozen years, Broms has been busy developing new versions of Primes and Scores, but has met adversity at every turn. In the early 1990s, he began working with the Philadelphia Stock Exchange on a suite of products called SPECS, DIVS and ZIPS. The Options Clearing Corp., which clears all exchange-traded options in the United States, banished the product to the financial world’s version of Hollywood’s “development hell.” For more than three years, the products lay dormant while Americus fought through OCC red tape. “We jumped over every hurdle the OCC created,” says Broms. “But they were more interested in keeping the status quo than in bringing new products to market.”

The Procter & Gamble/Bankers Trust case sealed the products’ fate. “One line in the whole decision said that not all options may be securities, and the OCC seized on it, claiming these new derivatives might be subject to state gaming laws,” says Broms. Americus then got an unprecedented letter from the Commodity Trading Futures Commission saying that the products were not futures, satisfying one of the OCC’s main stipulations. Americus also enlisted the Securities and Exchange Commission to argue that the products were in fact securities to rebuff the P&G/BT argument—all to no avail. After spending millions in legal fees, Americus and the PHLX severed their relationship in 1997.

But Broms hasn’t given up hope. Americus is working on an agreement with Ashton Technology Group, which is currently developing a new electronic options exchange, to create a derivatives clearing corporation to guarantee the Americus products.

The new products—all with five-year maturities—are called DIVS, OWLS and RISKS. Like their predecessors, the new products combine to mirror a single equity share. The DIVS (dividend value of stock) component is essentially a call option on the stock’s five-year dividends. The OWLS (option with limited stock) component is the core of the stock, and its holder receives, at termination, stock in the underlying company equaling either the “termination claim” (that is, the strike price) or the stock’s current price, whichever is less. A long OWLS position, in other words, is akin to a buy-write on the underlying stock, in which the investor has sold a long call on the stock’s appreciation and a long call on its dividends. The RISKS (residual interest in stock) component is similar to a standard five-year call option or warrant but with a different settlement mechanism—holders of RISKS receive stock worth the amount that the underlying stock is selling above the termination claim of the OWLS on the termination date. Broms believes that DIVS will appeal to income-oriented investors, OWLS will be attractive to conservative players looking for better rates of return than they could find in the money markets, and RISKS will attract high-risk, high-reward players. Meanwhile, he says, arbitrageurs will be combing all three for plays.

The products don’t differ substantially from certain over-the-counter products, leading some to question whether they’ll catch on. “There are already so many ways you can replicate this product—LEAPS [Long-Term Equity Anticipation Securities], covered writes, various structured notes—that people don’t necessarily have to be intrigued by these,” says Michael Schwartz, chief options strategist at CIBC Oppenheimer. “And the dividend aspect escapes me entirely, because dividend yields are so low these days. These new products will be also-rans.”

Broms is undaunted by such criticism. “The OTC world trades things like these all the time,” he says, “but because they’re private contracts, the only way you can unwind is to go back to the same dealer. There’s no liquidity, no fair market pricing. And the margining is completely different because of the counterparty risk. We’re trying to bring these products through an exchange with a clearing corporation, which creates a lot less systemic risk to the securities markets in the long run.”

Naturally, Broms is bullish about the products’ future. “It’s a travesty that these products aren’t already trading on an exchange,” he says. “They won’t just save investors tens of millions of dollars—they’ll save investors billions.”

The derivatives world suffered a loss in May when one its true pioneers, William O’Connor, died of a heart attack at age 68.

O’Connor served as chairman of the Chicago Board of Trade from 1990 to 1992, during which time he ushered in the electronic trading era with the introduction of Project A. Before serving as chairman, O’Connor and his brother Edmund managed O’Connor & Co., a futures-trading firm founded in 1959. A 1990 Wall Street Journal article put William O’Connor’s net worth at between $75 million and $300 million, although he described the estimate as “outrageously high.” O’Connor’s legacy includes an instrumental role in the formation of the Chicago Board Options Exchange in the 1970s.

The O’Connor brothers were considered by many to be as archetypal members of the “Irish Mafia,” a group of traders from the South Side of Chicago that dominated the CBOT leadership ranks for decades.

In his personal life, O’Connor took risks akin to the highly leveraged futures bets he made as a trader. His eulogizers spoke of his history of terrifying motorcycle crashes, snowmobile jaunts and piloting adventures. Ironically, O’Connor died of a malady he nearly inflicted on several of his closest friends.

• Ameren Corp. has selected James Whitesides president. He had been vice president of energy trading at AmerenEnergy.
• Nicolas Galmiche has been hired as head of U.S. government and agencies bond activity at Paribas. He had been a senior member of the proprietary trading group.
• Infinity, a SunGard company, announced the appointment of David Rowe as president of risk management. He had been senior vice president and head of the trading risk management information unit at Bank of America in San Francisco.
• Thomas Wilson, a former partner at McKinsey & Co., has been named a principal and head of internal risk management and risk control at Swiss Re New Markets.
• FNX Ltd. has appointed Stephanie Swanton, a former a vice president and product manager at Infinity, a SunGard company, as product manager for back-office and interest rate products.
• John Shealy, formerly senior vice president in Aquila Energy's commodity transactions group, was promoted to senior vice president and general manager of the recently formed Aquila group, Natural Gas Partners.
• The National Association of Securities Dealers Inc. has announced that Edward Knight, former general counsel of the U.S. Department of Treasury, has been named executive vice president and chief legal officer.
• Lauren Bopf, former vice president of foreign exchange sales at JP Morgan, has been appointed vice president of sales in North America at NatWest Global Financial Markets.
• The International Swaps and Derivatives Association has named Emmanuelle Sebton and Richard Metcalfe to senior staff positions. Sebton, who was appointed head of risk management, previously worked on issues relating to the reform of the Basle Capital Accord and regulatory treatment of credit derivatives at the U.K. Financial Services Authority. Metcalfe, the former editor of Futures & OTC World, has been named assistant director of European policy.
• Michael Mengel has been named sales manager for Germany, Austria and Switzerland at MKIRisk. He had been country manager in Germany and Austria for Cognotec.
• The Chicago Mercantile Exchange has appointed Rahm Emanuel to a two-year term on the CME board of directors. He is currently a managing director at Wasserstein Perella & Co. Inc.
• Benny Mah, a former director with the Credit Suisse Group's Clariden Asset Management Inc., has been appointed managing director for marketing in Asia at Alpha Investment Management Inc.
• United Capital Securities has appointed Heidy Jameel COO. She had been general manager of business development and head of global marketing and media at the Sydney Futures Exchange.
• Steven Renehan, former head of North American credit trading at Merrill Lynch, has joined Deutsche Bank as a managing director and head of investment-grade credit trading.
• NumeriX has announced the appointment of two new employees. Robert Lopez has joined the company as sales manager; he had been a vice president in the firm-wide risk department at Goldman Sachs. Patrick Hagan, former senior global adviser in fixed-income research at Paribas, has been named designer of trading systems.
• Mike Montgomery has been named interim CEO of TransEnergy Management. He was the founder and chairman of TransEnergy.
• Societe Generale has named Claude Piana head of credit derivatives marketing. He had been head of interest rate derivatives trading in SocGen’s Hong Kong office.
• Thorkild Juncker has been appointed head of JP Morgan’s new e-commerce busines unit. He had been global head of foreign exchange and precious metals at the bank.
• Deutsche Bank has appointed Stephen Stonberg, formerly a director in the derivatives and structured products group at Lehman Brothers, as senior associate director for repackaging in London. Kevin Ball, formerly a director in Bear Stearns’ credit derivatives and structured products group, has been named vice president for repackaging at Deutsche Bank.
• Kym Astwood, formerly the chief insurance regulator at the Bermuda Registrar of Companies, has been appointed president of Arrow Re, the Bermudan company set up by Goldman Sachs.
• Rick Holliday-Smith has been promoted from director of the Sydney Futures Exchange and its subsidiary, the New Zealand Futures and Options Exchange, to chairman of the SFE.

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