Companies

Netdania Logo

NetDania

The best alternative to expensive legacy systems for trading, news and analysis

TTMzero part of United Fintech logo in blue

TTMzero

Fully digitized RegTech and capital markets software solutions

FairXchange-Solo-Default-Dark-200w

FairXchange

State-of-the-art analytical tools for trading firms

Athena logo blue

Athena Systems

Workflow automations for buy-side participants

Products

image of a pie chart

OneChart

The ultimate charting framework for desktop and mobile applications

Icons showcasing a graph on a computer screen

Social Charts

Interactive client engagement tool that engages clients in conversation internally and online

icon of a upside down pyramid

NetStation

User-friendly information and analysis terminal, deployable in multiple roles, including trading

image of a pie chart

Data Feeds & APIs

Multiple APIs designed to ensure low latency and minimum resource usage

weight scales icon

Fair Value Pricing

Independent fair value pricing for added transparency where current prices are not readily available

icon for real-time market data

Evaluated Real-Time Market Data

Independent real-time market data feeds at a fraction of the cost

magnifying glass icon

Key Figures and Risk Indicators

Precise indications of the risk and return probabilities for financial products

icon with arrows and checkmark

Financial Instruments Automation Platform

Reliable and cost-effective digitization process for securities and OTC trades

Horizon logo in purple

Liquidity Management

Unparalleled insight into your trading with data visualization

spark-oms-icon

Spark OMS

Highly flexible Investment Management System

spark risk logo

Spark Risk

Manage your risk needs on a central platform

Did you know you can save 90% on market data?

Take a look at the “Definitive guide to Evaluated Real-Time Prices” to discover how you can save costs today.

magazine_6

Structured products: an investment class that continues to offer value for issuers and investors

Illustration showcasing united Fintech client module worldwide

Structured products: value for issuers and investors in a post-pandemic world

Since they emerged in the 80s and 90s, structured products have provided an effective source of funding for investment banks and companies as well as attractive tailored investments for asset managers, financial advisers, and retail investors. 

With new regulatory requirements under Packaged Retail Investment and Insurance Products (PRIIPs) soon coming into force, and in a post-pandemic world where economies are struggling with rising costs and dropping standards of living, what value do structured products offer to both those writing them and those investing in them? 

Read on for a breakdown of all things structured products, or use these links to jump to the info you need.

  1. A brief timeline of structured products
  2. Structured products: an overview 
  3. What are the benefits?
  4. What are the risks?
  5. Types of structured products 
  6. Investing in structured products
  7. Regulations overview
  8. Discover our structured product solutions

Breakdown

Most structured products have similar characteristics:

A brief timeline of structured products

1980-2000

Popular across Europe and Asia Pacific, but less so in the USA, where consumer protections inhibit retail investors from trading riskier products, structured products emerged in Europe in the 1980s when they were sold in the UK and France. Over the course of the 90s, they gained popularity in Asia.

2000s

Structured products were a popular alternative investment class throughout the 2000s, before the collapse of Lehman Brothers in 2008. In the aftermath of the financial crisis, structured products fell in popularity. 

2010s

New regulations were introduced in the decade following the 2008 financial crisis, and in 2013 the Markets in Financial Instruments Directive (MiFID) and Packaged Retail Investment Products (PRIPs) regulations were introduced, and in 2018 MiFID II came into force and the Packaged Retail Investment and Insurance Products (PRIIPs) and Key Information Document (KID) regulations were introduced. 

2020s

The major shocks of the pandemic and Russia’s war against Ukraine have accelerated digitization and led to highly volatile markets, meaning investments offering a degree of predictability can play an important role. 

Structured products: an overview

What are structured products?

Structured products combine different financial instruments to create fixed-term hybrid investments offering bespoke risk, return, and payout profiles that are distinct from those available from standard equity or fixed income securities. Returns are based on the performance of the underlying assets of the instruments making up the product.  

They can play a useful part in a diversified investment portfolio, and help asset managers target specific investment objectives. They are primarily of interest to retail investors, as they enable them to gain tailored risk exposure to asset classes such as derivatives. 

How do structured products work?

With structured products, investors are effectively buying a ‘bundle’ of securities. Instead of identifying complementary investments and buying them separately, investors can simply select prepackaged products that give them the exact risk-return and protection levels they’re looking for. 

Most structured products have similar characteristics:

  • Fixed term

Investors usually have to commit their money for a fixed term. They only get to capitalize on any potential upsides at the expiry date.

  • Risk-tailoring

These products are assembled to satisfy a wide range of risk profiles, depending on investors’ needs.

  • Principal protection

Investors can usually guarantee the return of all or some of the nominal value of their initial investment, but there are also products for investors who are happy to risk all their capital.

Typically, structured products combine an asset class offering a predictable yield with more speculative instruments. A classic example is a low-risk bond combined with a stock call option, allowing investors to secure either the principal protection or coupon payments of a bond and also the potential for higher returns if the underlying asset increases in value by the end of the fixed term.    

What are the benefits?

For issuers

These products allow issuers to:

  • Issue debt and raise funding 

Investment banks wanting to raise capital and issue debt for themselves or other companies traditionally issue bonds or convertible bonds. With structured products, they can issue debt at submarket interest rates by offering investors something in return (an option) for a bond that offers a lower coupon – and charge a premium for the product.  

  • Charge a premium price for a bespoke product

Investment banks that design and issue structured products apply a markup to the prices of the component securities, making them profitable. The products command a higher price because the payoff profiles can be highly attractive and meet investors’ objectives exactly, and also because retail investors will struggle to access the asset classes otherwise.

For investors

These tailored products can add value for different kinds of investors, but especially retail investors. They offer:

  1. Ease of participation

If you’re a trading professional, you’ll certainly be able to combine assets on your own to achieve the desired balance of risk and returns, although you may choose these prepackaged products for scalability. But for retail investors, structured products offer a simple way to do the same without much effort or prior market knowledge – plus they usually offer the only way to gain exposure to certain asset classes. 

  1. Downside protection

With many structured products, you’re guaranteed to get your initial capital back, unless you’re investing in the more speculative types of products. This compares favorably to buying stocks directly, as that makes you subject to the whims of the market without any true downside protection. For this reason, structured products can be ideal for anyone looking to capitalize on potential market upsides without risking all their money.

  1. Flexibility

Because they can be assembled in so many ways using any combination of asset types, structured products are extremely flexible. They can be adjusted to fit your specific risk profile, include specific asset classes, or align with your predictions about future market trends.

  1. Control over overall portfolio

Pre-packaged products are a way for investors to plug in holes in their investment portfolio or activate their money using the exact risk-return ratio they seek. Those with existing portfolios can hedge against unpredictable market movements. Others can capitalize on their market insights and predictions, for example by securing positive returns in bear markets.

What are the risks?

While the idea of capital protection can be appealing to investors, it’s important to remember there are risks involved with structured products, including:

  1. Liquidity limitations

Your capital is tied up until the end date of the contract. This affects the liquidity of your assets and limits your ability to continuously reinvest money based on new information.

  1. Market risk

Depending on the level of principal protection, investors will be exposed to market risk. This means it’s possible to lose some or all of your invested capital if the market takes an unfavorable turn.

  1. Counterparty risk

Structured products are typically offered by investment or retail banks. They’re not backed by government bodies and are therefore subject to counterparty risk. What this means is that even if the product itself performs favorably, there’s always a risk that the issuing bank becomes insolvent and defaults, meaning you won’t get your money back. 

  1. Premiums

The main way issuers earn money on prepackaged products is by charging a premium for the service of putting them together. While this isn’t a risk per se, it means investors have a higher cost and may lose money on products that otherwise break even.

  1. Opportunity cost 

Investors are attracted to the certainty and feeling that they have a possible upside with no chance of a downside. However, while they won’t suffer any nominal losses, they will suffer the effects of inflation and the opportunity cost of missed returns and market interest rates. 

  1. Lack of price transparency

There’s no widely accepted standard for pricing structured products. As such, investors may have a hard time comparing alternative packages from competing issuers or with different combinations of assets. Issuers may also incorporate their own fees into the price of the product itself, which makes it even trickier for investors to fully understand its implicit cost.

Types of structured products

While there are dozens of different variations, they commonly fall into these three broad categories:

1. Capital-protected products

These types of products offer rather limited potential for any return on investment. Instead, as the name implies, they are used to protect capital during unfavorable market conditions (e.g. negative interest rates). Investors can secure returns comparable to deposit rates, with a minor upside.

The bond + option example above may well fall into this category of capital-protected products.

2. Yield-enhancement products

With this type of products, investors can choose to forego some principal guarantees to receive a higher return. Yield-enhancement products are more risky, but they allow investors to “bet” against the market. This way, investors can end up making profit while the stock market as a whole stagnates or goes down.

3. Leverage products

These products push both the risks and profit potential even further. Using leverage products, investors can achieve a rate of positive return that actually exceeds the increase in the value of the underlying asset itself. On the flip side, investors must also accept the possibility of losing the entirety of their invested capital.

How are structured products priced?

In a nutshell, the price of a structured product is the sum of what it costs to buy its individual components plus the premium charged by the issuer. Depending on the issuer, they’ll either charge their premium fee separately or “bake it into” the price structure of the product itself.

What are the benefits?

For the casual investor, these tailored products may make sense for a number of reasons.

1. Ease of participation

If you’re a trading professional, you’ll certainly be able to combine assets on your own to achieve the desired balance of risk and returns. But for the uninitiated, structured products offer a simple way to do the same without much effort or prior market knowledge.

Additionally, buying pre-packaged products may often grant an investor access to an asset class that they can’t purchase directly.

2. Downside protection

In general, you’re guaranteed to get your initial capital back,  unless you’re investing in the more speculative types of products. This compares favorably to buying stocks directly, as that makes you subject to the whims of the market without any true downside protection.

For this reason, structured products can be ideal for anyone looking to capitalize on potential market upsides without risking all of their money.

3. Flexibility

Because they can be assembled in so many ways using any combination of asset types, structured products are extremely flexible. They can be adjusted to fit your specific risk profile, include specific asset classes, or align with your predictions about future market trends.

4. Control over overall portfolio

Pre-packaged products are a way for investors to plug in holes in their investment portfolio or activate their money using the exact risk-return ratio they seek. Those with existing portfolios can hedge against unpredictable market movements. Others can capitalize on their market insights and predictions by e.g. securing positive returns in bear markets.

yellow_purple

What are the risks?

Few investments come without risks, and structured products are no exception. Here are the main risks and downsides people should take into account.

1. Liquidity limitations

With such products, your capital is tied up until the end date of the contract. This affects the liquidity of your assets and limits your ability to continuously reinvest money based on new information.

2. Market risk

Depending on the level of principal protection, investors will be exposed to market risk. This means it’s possible to lose some or all of your invested capital if the market takes an unfavorable turn.

3. Counterparty risk

Structured products are typically offered by investment or retail banks. They’re not backed by government bodies and are therefore subject to counterparty risk. What this means is that even if the product itself performs favorably, there’s always a risk that you won’t get your money. (Such as if the bank in question becomes insolvent or goes bankrupt altogether.)

4. Premiums

The main way issuers earn money on pre-packaged products is by charging a premium for the service of putting them together. While this isn’t a risk per se, it means investors have a higher cost and may lose money on products that otherwise break even.

5. Lack of price transparency

There’s no widely accepted standard for pricing structured products. As such, investors may have a hard time comparing alternative packages from competing issuers or with different combinations of assets. Issuers may also incorporate their own fees into the price of the product itself, which makes it even trickier for investors to fully understand its implicit cost.

yellow_purple

TTMzero: Automated solutions for capital markets

United Fintech's structured products tools

One of United Fintech's portfolio companies, TTMzero, provides high-quality real-time data and fully digitized regulatory and capital markets tech solutions that take clients into a new digital era.

To learn more about TTMzero's solutions, click on the products below:

Picture illustrates various TTMzero products

Products

Key Figures and Risk Indicators

TTMzero calculates about 100 key figures for structured products, including the Greeks and risk indicators, which provide precise risk and return probabilities.

Explore product

Financial Instruments Automation Platform

Digitize your issuance processes with TTMzero’s Financial Instruments Automation Platform (FIAP) to allow for a fast market launch of new products and ensure straight-through workflows. Also includes PRIIPs for KIDs.

Explore product

Evaluated Real-Time Market Data

Get a competitive edge - not just during volatile times - with highly accurate real-time prices across a wide range of instruments and asset classes.

Explore product

Fair Value Pricing

Meet your regulatory requirements with Fair Value Prices also for illiquid and hard-to-value financial instruments.

Explore product