provide efficient protection against falling prices. As a rule, capital protection ranges from 90% to 100% of the nominal value applicable on product expiry. As with bonds, there can be price fluctuations throughout a structured product’s life, hence the product can also trade under capital protection. Generally, the growth potential of capital protection products is lower than that of other products and may even be limited. The investor has, nevertheless, the chance of significant earning potential without foregoing capital protection.
What are structured products?
Structured products are defined as investment instruments publicly issued by securities issuers whose redemption value is linked to the performance of one or more underlying assets. Investments such as equities, ETFs, funds, interest, foreign currencies or commodities serve, for example, as underlying securities for structured products.
Structured products are composed of a combination of a classic investment (such as a bond) and a derivate financial instrument (for example, a call option). According to the derivative strategy selected, a suitable product can be designed to fit any market expectation (positive, stagnant, negative) and any risk profile (conservative, balanced, aggressive).
Legally, structured products are bonds or debt obligations payable by the issuer. The issuer is liable for their fulfillment to the full extent of his assets. This makes a structured product issuer’s creditworthiness of paramount importance to the investor. Structured products are not collective investments, and investors do not enjoy the special legal protection provided by Switzerland’s Collective Investment Schemes Act (CISA).
Structured products as an asset class are important to both asset management and the Swiss financial center as a whole. As relatively new products, their considerable growth over recent years has made them a significant part of Switzerland’s economy. Today, they are directly or indirectly responsible for more than 3,000 highly skilled jobs. According to information from the Swiss National Bank, approx. CHF 200 billion in Swiss custodial accounts is currently invested in structured products (assets under management). This corresponds to 4% of all assets under management in Switzerland.
The Swiss Structured Products Association (SSPA) publishes the latest figures on their market volume on its website at: www.sspa-association.ch
SSPA Swiss Derivative Map
The SSPA categorization model consists of three hierarchy levels. At the top level, the model distinguishes investment products from leverage products. These two main categories are made up of five product categories on the second level, ranging from the low-risk capital protection products to the higher risk leverage products with knock-out.
On the third hierarchy level, each of these five product categories comprises a number of specific product types. These product types illustrate how a single structured product functions by means of its respective payoff diagram.
The descriptions also provide further information on the investor’s market expectations as well as product-specific characteristics.
are suitable for sideways-tending markets, with the investor foregoing full participation in the underlying security’s price increases. The threshold of participation is called the cap, from there any possibly yield is capped. In return for surrendering the full upward growth potential, the investor is given a coupon, called a reverse convertible, or a discount on the underlying security (discount certificate). If the underlying security declines sharply and falls below the cap or the barrier (barrier reverse convertible), the investor shares fully in the loss as he would have with a direct investment in the underlying security. The coupon is redeemed in any case.
share fully in the underlying security’s price movements, with no up or down limitations. Depending on the product structure, some products share in parallel with such price movements (tracker certificates), others come with additional mechanisms. For instance, the participation rate of outperformance certificates goes up beyond a previously specified threshold. Bonus certificates pay a bonus even if the price of the underlying security fails to increase but moves sideways. In both cases, the investor is prepared to forego dividends.
are suitable for short-term speculation or hedging. Best-known among them are put and call warrants with a fixed lifetime, as well as mini-futures and warrants with knock-out, which expire early once a barrier has been reached (stop-loss, knock-out). All leverage products, as the name suggests, follow the price movements of the underlying security with a leverage mechanism. In the worst case, it can lead to total loss limited to the capital invested.