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Structured Products

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Structured Products

A Structured Product is a combination of two or more financial instruments with a specific maturity date and a defined return objective. It comprises a single structure where the performance is linked to an underlying asset with a derivative element. The underlying piece tends to be a bond or equity or even a commodity with a derivative component such as an option layered on top. For example, a principal protected structured product will have a bond that would take up most of the investment to protect the principal portion. The rest of the investment that is not allocated to the bond will be used to purchase a derivative product which provides upside potential to investors including exposure to a specific asset class.

Asset classes within structured products can include equities, funds, interest rates, currencies, market indices, commodities, individually or as a basket of assets. The performance of the underlying assets will determine the profitability of the structured product, together with the return of the principal invested at maturity.

There are two types of option:
Call Option The option holder (investor) has the right to sell the asset at a certain price on a certain date
Put Option The option holder (investor) has the right to sell the asset at a certain price on a certain date

The product will usually aim to pay back the capital along with the returns on maturity, these returns will depend on the performance of the underlying asset. Notes with 100% capital protection will typically offer lower returns. An investor can increase returns by decreasing the level of capital protection.

Structured products are complex investments and not suitable for all investors. Here are some of the key risks and considerations you need to be aware of when investing in structured products:

Issuer Credit Risk

As corporate debt, all terms, including return of principal, is subject to the credit risk of the issuer of the note

Market Risk
  • If the underlying asset depreciates over the term of a note, the issuer may repay investors less than the principal amount, depending on the terms of the note.
  • Investors may lose up to 100% of their initial investment if the note is not principal protected
Secondary Market Risk
  • Issuers generally make a secondary market but are under no legal obligation to do so.
  • Prior to maturity the value of a structured note may depend on various factors, including:
  • Change in value of the underlying
  • Change in volatility of the underlying
  • Change in interest rates
  • Change in credit quality of issuer
  • Costs and fees paid
Fixed and Capped Investment Returns

Structured notes which have defined coupon payments, or upside potential limited by a step-up return or a maximum gain, may underperform relative to a direct investment in the underlying asset

Early Redemption Risk
  • Some notes may be called prior to maturity. You are not eligible to receive any further coupon payments after such an early redemption has occurred.
  • There is no guarantee that you will be able to reinvest into a new investment with comparable return and/or with a comparable interest rate for a similar level of risk.
Uncertain Tax Treatment

The characterization of structured notes for tax purposes is not fixed. Investors should consult the tax section of the prospectus for any prospective structured note investment and should consult their own tax advisor as to the specific tax impact of investing in Structured Notes.

  • A Structured Product is an Investment Product that provides risk management solutions and alternative risk/return profiles for clients and counterparties
  • Products may include traditional securities such as an investment-grade bonds and derivatives allowing the replacement of usual payment features with non-traditional payoffs.
  • Structured products can be principal-guaranteed if held to maturity.
  • The risks associated with structured products can be complex and they may also lack liquidity therefore it is imperative that clients understand these products and the risks associated with them.
  • Interest rate-linked notes and deposits
  • Equity-linked notes and deposits
  • FX and commodity-linked notes and deposits
  • Hybrid notes and deposits
  • Credit-linked notes and deposits
  • Constant proportion portfolio insurance (CPPI) Market-linked notes and deposits
  • Total Return Swaps
  • Others

Structured products are an alternative to direct financial assets as they can be customized to match various market expectations, risk profiles, investment classes or pay-offs. They are tailored to your specific requirements based on a broad array of underlying assets, including equities, funds, interest rates, currencies, market indices, commodities, both individually or a basket of assets.

  • Potential yield enhancement
  • Principal protection where applicable
  • Tailored to meet the investors financial circumstances and requirements
  • Customized payouts and exposures
  • Upside potential with downside protection (low volatility)

However, structured products are not without their risks, including but not limited to:

  • Loss of capital
  • Lack of liquidity
  • Issuer risk, where the product issuer goes into default there is a risk the principal may be lost