Structured Products are pre-packaged investments that combine a traditional asset with one or more derivatives (financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark).
When new contracts are issued, all investments in a particular plan initiate simultaneously on the same day, with the idea being that they are held until a triggered maturity, at which point, all investors exit together, achieving a pre-determined outcome on identical terms.
Broadly, Structured Products can be divided into two categories: Structured Deposits, which offer protection for your capital in line with the FSCS limits (often considered more of cautious investment) & Structured Investments which rely on third-party institutions to meet their investment aims and therefore also carry the risk of loss to your capital.
The Risks
Although the returns are typically determined by movements in the underlying index, deposit-based and capital protected structured plans often purport to offer an element of security that capital will be returned in full at maturity.
While you could be fooled into thinking that Structured Products therefore sound relatively risk-free, effectively guaranteeing the return of the original investment, it is important to consider that a return of capital only would equate to a net loss in real terms (known as inflation risk).
Furthermore, if the markets were to experience a significant drop, as happened during the 2008 financial crisis, this could, as with any investment, lead to a loss (market risk).
In connection to the above, depending upon the type of Structured Product, in the event of default or bankruptcy of the provider (known as credit risk), your capital may or may not be protected by the FSCS and you may therefore, receive less than you originally invested.
There is also a relative lack of liquidity associated with Structured Products which is compounded by the fact that the full extent of any returns are not realised until maturity.
As such, if the risks are not fully understood and the investment fails, this could leave an investor financially vulnerable.
The UK Retail Sector – Issuances
In the UK retail sector, between January & March of this year, 204 Structured Products were issued, which represents an increase of around 13% from the same period in 2023. Of the 204 Structured Products that were issued, 63 were deposit-based & capital ‘protected’ plans, according to Max Darer, writing for structuredproductreview.com.
Amongst the providers issuing these plans, Walker Crips, MB & Meteor were the largest issuers by volume over this period.
Q1 of 2024 also welcomed the introduction & re-entry of two counterparties to the UK sector, in the form of Canadian Imperial Bank of Commerce (CIBC) & Santander UK. CIBC was introduced as a new counterparty to the UK retail sector, offering their products via a new provider; hop investing, who are appointed representatives of Meteor Asset Management. After taking a several-year-long hiatus from the market, Santander UK returned offering solely deposit-based contracts via Walker Crips.
Although not classed as a Globally Systemically Important Bank (G-SIB), CIBC is a North American financial institution, and one of the highest rated banks by credit rating agencies participating in the UK retail structured product sector.
The introduction of CIBC & re-introduction of Santander UK not only adds further diversification to the sector, allowing investors to spread counterparty exposure, but also demonstrates continued growth and development for structured products.
The UK Retail Sector – Maturities
When considering the maturity results, the first quarter of 2024 saw the FTSE increase by 2.84% which lead to the maturation of 80 UK retail Structured Products, all but one of which yielded positive results. This is due to the contract not having exposed investors to the risk of loss as it was a deposit-based contract which was linked to the EVEN 30 Index.
Q2 of 2024 brought with it record breaking closing levels of the FTSE, achieved in mid-May, which resulted in 198 maturities and just two contracts returning capital only. Similarly to the singular contract returning capital only in Q1, these plans were deposit-based contracts, linked to the EVEN 30 Index. As such, this result is not totally surprising.
Max Darer comments that, with ‘over 77% of Q2 maturities being solely linked to the FTSE 100 (or FTSE CSDI), these elevated levels have ensured a high volume of early maturities for autocalls and other plans with early calls. Other commonly used indices that are often used in conjunction with the FTSE are also at or near all-time high levels, again warranting ample positive maturities.’
With so many positive results at just over half way through the year then, it appears that the UK retail sector could be in for a bumper year.
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