What is a Structured Product and Who Issues Them?
While structured products may be new to you, they have been used for decades by institutional and individual investors. A structured product is a debt security that requires no market growth whatsoever and are issued by Investment Banks. It pays out fixed rate cash income, lasts till set maturity date, and offers a capital protection feature called a Protection Barrier.
The return on a structured product is linked to the performance of either an Underlying Asset, a Group of Assets, or an Index (for example, FTSE 100 Index, S&P 500 Index etc). It should be noted that due to Structured Products direct market correlation and link, investor popularity inevitably and significantly wanes during periods of uncertain market & economic instability and global recessions.
A structured product consists of Three Underlying Pieces: a Bond component, Underlyings and a Derivative component. The bond portion of the product takes up most of the investment and provides principal protection.
The underlying asset adds to the improvement of the returns generated through investment. This asset can be either be a Single Instrument or a Basket of Instruments e.g. FTSE 100 Index, S&P 500 Index and Nikkei 225 Index).
The rest of the investment not allocated to the bond is used to purchase a derivative product and provides upside potential to investors. The derivative portion is used to provide exposure to any asset class (ie Index’s as aforementioned, or equity, ETF’s, currency, debt etc).
As a result of the fusion of underlying assets behind a structured note, there are a variety of different Security Measures that operate to give maximum benefit and protection to investors. Some of them include Autocall, Memory Coupon rate, Protection Barrier etc.
Security; Protection Barrier
At maturity, if all tracked underlying indices (e.g FTSE, Nasdaq, Euro Stoxx) are level or above their starting value, full capital repayment is issued. But what if they have dropped below its starting value? Enter, Protection Barriers.
A 70% protection barrier means that if at maturity, the underlying indices haven’t dropped by more than 30% of their initial start Level (value when you purchased them), you still receive full capital repayment. However, If they dropped by anything below 30%, investors would then be repaid the exact % left e.g. if the markets dropped by 31% by maturity, with a 70% Protection Barrier, investors would no longer receive all their capital back and would instead receive 69% of it back.
Regardless of its features, all payments on a structured product are made by its issuer, and if the issuer is unable to pay its obligations when due, investors may lose some or all of their investment.
Structured notes are also complicated and offer low liquidity- holders should expect to hold their note until maturity.