Structured products - Investors Academy

 

What are structured products?

Structured products are combined products consisting of derivatives with shares, bonds or an index. We distinguish capital protection products, high yield notes and turbos: 

  • A capital protection product offers a certain protection at the maturity date. 
  • High yield notes offer a chance of a predetermined return, sometimes with a certain conditional protection. 
  • A turbo has a leverage and therefore offers a chance of a high return in a short time, but also carries a high risk. A turbo has no maturity date, but a stop-loss.

Read the KID before placing orders

A Key Information Document (KID) is available for each type of structured product. These contain the main features and risks of the product. You will receive a KIID for every order you want to place for a structured product. Before proceeding with your order, make sure that you have read the KID and understand how the structured product works. The KID also makes it easier to compare structured products.

 

Capital protection products

A capital protection product is a form of a structured product and consists of a combination of a bond with an option. A capital protection product offers a certain protection of the principal sum on the maturity date and also offers a chance of return. 

The main features of a capital protection product are:

  • Guarantee level: The guarantee can apply to the entire investment in the capital protection product, then there is a 100% principal sum guarantee. Or for part of it, for example, there is only a 90% principal sum guarantee. The guarantee only applies on the maturity date. If you sell the capital protection product earlier than the maturity date, the price on the stock exchange at that time applies.
  • Participation rate: On the maturity date, you can receive an additional payout on top of the guarantee value if the price of the underlying asset has risen compared to the starting price. The participation rate indicates how much the additional payment is on the maturity date.
  • Starting price: This is the price of the underlying asset on the start date of the capital protection product. 
  • Underlying asset: Usually, a capital protection product has a basket of shares or an index as the underlying asset.
  • Maturity date: In a normal situation, the issuer will pay the guarantee value on the maturity date plus a possible additional payment if the price of the underlying asset is higher than the starting price.

What is a capital protection product?

A capital protection product is a collective name for structured products in which the issuer guarantees that it will repay all or part of its nominal value (principal sum) at the end of the term. The capital protection product is a defensive investment product. It offers you capital protection and allows you to take advantage of a possible price gain from an underlying asset.

  • A capital protection product is a simple way of investing with full or partial protection of your investment (principal sum guarantee).
  • With a capital protection product you have a chance of a higher than expected average return compared to bonds. Bonds are similar to capital protection products for the principal sum risk.
  • The guarantee value only applies on the maturity date of the product. In the case of an interim sale, you run the risk of getting less than the guarantee value. You must therefore be prepared to keep the capital protection product until the maturity date.
 

Turbos

A turbo is a structured product with the features and risks of a derivative. A turbo operates with a leverage. Turbos offer a chance of a high return, but you can also lose a lot of money in a short time. There are turbos on various underlying assets, such as a share, a basket of shares, an index, a currency or a commodity. Depending on your expectations, you can opt for a Long or Short variant. 

The main features of a turbo are:

  • Leverage: The leverage accelerates the price movement of the underlying asset. For example, with a leverage of five, the price of the turbo will move five times faster than the price of the underlying asset. This gives you a chance of a high return but also of a lot of loss. You can lose your entire investment. 
  • Financing level: With a turbo you only pay part of the value of the underlying asset. The rest will be funded by the issuer. We call this part the financing level and it provides the leverage effect. 
  • Stop-loss: A turbo has no maturity date, but a stop-loss. If you have not sold your turbo earlier, the turbo will run until the price of the underlying asset hits or breaks the level of the stop-loss. The turbo will then end automatically. You can then lose your entire investment. Sometimes you will still be paid a small residual value.

AFM product intervention on turbos

As of 1 October 2021, additional rules will apply to providers of turbos. These rules have been imposed by the AFM (Autoriteit Financiële Markten [Dutch Authority for the Financial Markets]). As a result of these rules, the maximum leverage of a turbo has been reduced. The maximum leverage now depends on the underlying value and will in many cases be limited to 5, 10 or 20. More information about the additional rules can be found on the AFM website.

For a complete overview of the available turbos, please refer to the BNP Paribas website.

Risk warning

Turbos are complex instruments and carry a high risk of rapidly accumulating losses due to the leverage effect. 62% of retail investors suffer losses when trading turbos from this supplier. It is important to understand how turbos work and whether you can afford the high risk of losses.

 

High yield notes

A high yield note is a form of a structured product that consists of a combination of a bond with an option. High yield notes often offer conditional protection combined with a chance of a predetermined coupon. Examples of high yield notes are:

  • Autocallable notes
  • Memory coupon notes

Autocallable notes

What is an autocallable note?

An autocallable note is a structured investment product that offers you a chance of a relatively high payment (coupon) during or at the end of the term. However, it is not certain that the issuer will pay out that coupon. This depends on the price development of the underlying asset. However, with a favourable price development, the essence of an autocallable note is that it is redeemed before the end of the term. Then you will receive the principal sum plus the coupon value.

  • You have a chance of a relatively high coupon if you have a moderately positive view of the expected price development of the underlying asset. 
  • An autocallable note has a fixed term, but can pay off much earlier. Namely when the underlying asset is higher than the reference value on a reference date. 
  • You have protection of your investment (principal sum) up to a certain level of price fall. That level is the so-called barrier. 
  • Your positive return is at most the coupon. 
  • When the barrier is broken, you run full price risk on the underlying asset.

Memory coupon notes

A memory coupon note offers a chance of a predetermined coupon. There is no protection and the memory coupon note ends on the maturity date. The main features of a memory coupon note are:

  • Reference date: During the term of the memory coupon, there are several reference dates that determine how much the issuer pays you:
    • First reference date: If the price of the underlying asset is on or above the reference price on the first reference date, the coupon will be paid out. You will receive 1 time the coupon.
    • If the price of the underlying asset is below the reference price on the first reference date, you will not be paid out on that reference date and the memory coupon note will continue until the next reference date. 
    • Second reference date: If the price of the underlying asset is now on or above the reference price on the second reference date, you will be paid the coupon plus the previously missed coupon. You will receive 2 times the coupon.
    • Maturity date: If the price of the underlying asset is not above the reference price on any reference date but only on the maturity date, the issuer will refund the memory coupon note to you and you will receive all missed coupons. You will receive 100% + all missed coupons.
    • If the price of the underlying asset is not above the reference price on any reference date and also not on the maturity date, no coupon will be paid out. It then depends on the price of the underlying asset how much you will still get back from your memory coupon note. This can be much less than what you paid for the memory coupon note. You will less than receive 100% and no coupon.
  • Starting price: The issuer determines the starting price of the underlying asset in advance.
  • Reference price: The reference price is a certain percentage of the starting price and determines how much you will be paid on a reference date.
  • Underlying asset: The underlying asset usually consists of an index. But it can also consist of a share or a basket of different shares.

What is a memory coupon note?

A memory coupon note is a structured product that gives you a chance of a relatively high coupon. There is a chance with constant, rising and even falling market conditions. A memory coupon note has no capital guarantee.

  • You have a chance of a relatively high coupon with a moderately positive vision or a neutral vision of the expected price development of the underlying value.
  • Due to the relatively low reference price, the memory coupon note offers you protection of the investment against a price drop to a certain level.
  • Your positive return is at most the coupon.
  • If the reference price is or is broken at an observation moment, you run a price risk on the underlying asset.

Counterparty risk and bail in: special risks of structured products

Structured products have many different risks, you can read more about this in the KIID of the product. But we will mention two important risks here: the counterparty risk and the “bail in”.

  • For structured products, the issuer of the product is your counterparty. You run the risk of the issuer failing to meet its payment obligations to you. You also run this counterparty risk with capital protection products, you may get back less than the guarantee value or even lose your entire investment. The counterparty risk depends on the development of the issuer’s credit quality. We also refer to counterparty risk as credit risk or debtor risk. 
  • For bonds and structured products, you must also take into account any “bail in” as a result of the European Bank Recovery and Resolution Directive (BRRD). The government can decide to "bail in" if it wants to save a bank that faces bankruptcy. This means that that bank must partly or completely postpone or even cancel the payment of interest and redemption on the bond or structured product. Even if the issuer does not go bankrupt, you can lose some of your rights to repayment of your principal sum as an investor. A “bail in” means that no or less government money is needed to prevent a bank from going bankrupt. Many countries outside of Europe have a similar arrangement.

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