The International Securities Exchange said it intends to provide venture capital to the exchange-traded product industry.

The operator of an all-electronic options exchange and licenser of financial indexes said it was beginning to fund the creation of exchange-traded funds by other parties.

The operator of an all-electronic options exchange in the United States said it had concluded one agreement to provide capital to an “established issuer” that will help it create a new exchange-traded product.

Kris Monaco, head of new product development at the exchange firm, declined to name the company that it has agreed to provide startup capital. He said ISE had three similar deals close to being concluded.

The first product will be “in the commodity space,’’ he said. Monaco said he believed the deal that has been reached is the first of its kind, where an exchange operator provides startup capital to the issuer of an exchange-traded product.

In a press briefing at ISE headquarters on Broad Street, Monaco said ISE expected to make money on such funding arrangements by charging fees for services rendered that would be calculated against the amount of assets under management by the issuer, in the fund. The charges could be for services such as listing fees, index calculation costs and portfolio management distribution.

ISE would not invest in the issuer directly, only in the costs needed to launch a specific product. ISE would provide startup capital and take on so-called “shortfall” expenses, in return for asset-based fees.

In the initial case, the capital will help the issuer expand the number of products it offers, which otherwise would be limited by its current budget for new products, Monaco said.

Participation in the asset-based fees will be “much higher” than in a traditional index licensing deal, the firm said.

The “venture-like function” will allow ISE to package its capital, ability to design indices and strategic partnerships with brokers and market makers to help get the exchange-traded product off the ground.

The move will help ISE diversify its revenue streams. The company envisions creating an index, then working with an issuer to create an exchange-traded product based on the index, earn transaction fees on options traded on the index and asset-based fees on the exchange-traded product based on the index.

Without putting up its own capital, exchange-traded products already exist that are based on ISE indices, including, for instance, the ISE Global Wind Energy fund and the ISE Copper fund.

-- This article first appeared on Securities Technology Monitor.