24 April 2024

A boutique approach to structured products

| The European |

Structured products are investment vehicles, which aim at matching the risk-reward appetite of an investor. A structured product is a combination of two components: a bond component, issued by a guarantor and an optional component allowing the bearer, according to its investment needs, to design any parameter such as maturity or capital protection. These instruments are then tailor-made to serve clients who are looking to alternative opportunities to standard financial instruments, which do not meet their investment expectations such as equities, bonds or money market.

They are usually divided into four main categories to assess the risk profile of the products – capital protection, yield enhancement, participation, leveraged products – and can be implemented on underlyings such as equity, bond, commodity, interest rates, currency, indexes or funds. Capital Protected Notes are the most conservative instruments and entitle the holder to benefit a minimum redemption of the nominal and to get a yield or an exposure to an underlying. Hence, they give the opportunity to get a yield or an exposure to an underlying without putting the full capital at risk. Yield enhancement products offer a regular income during the product’s lifetime and are suited for investors expecting a sideway or slightly rising movement of the underlying. The full capital is at risk and the product yield is limited to the coupon or the discount. Although the maximum maturity is fixed for all type of products in this category, Express Certificate can be early redeemed or Reverse Convertible and Barrier Reverse Convertible could have a call feature. Participation products offer an exposure to the increase or decrease in an underlying and a partial capital protection feature could be added. Leverage products are the riskiest instruments and offer the possibility to maximise the exposure with a leverage effect and keep the initial investment to a minimum. Thus, structured products allow the holder to optimise the risk-return profile of his portfolio whatever the term is. Finally, regardless of the category, these investment vehicles are subject to the credit risk of the guarantor.

Creating opportunities

In the current low volatility environment, structured products can be implemented to play the decorrelation between different underlyings to extract value and a protection against a potential market downturn. For instance, in yield enhancement products, the bearers are selling a put to extract yield, selling volatility. To maximise the yield, a ‘worst of feature’ can be integrated by cumulating several underlyings in the note obtaining higher coupons investing in non-correlated stocks. Furthermore, considering the low interest rate and the difficulty to get yield on the bond market, investors are implementing Credit Linked Notes (CLNs). CLNs are credit derivative financial instruments in which the payment of the coupons and the principal is conditional to the credit risk of a second entity (reference entity) or a basket of entities (basket of reference). The idea is to extract value from a market inefficiency between the liquidity of the CDS and the comparable bond on the same underlying name in order to deliver to the bearer an enhanced return compared to a conventional bond investment: this market opportunity is called ‘positive basis’.

Since its introduction, structured products have been criticised for lack of transparency leading to problems in secondary market making and liquidity. These investment vehicles cannot get rid of the negative image that has stuck to them since the triggering of the subprime financial crisis. Far from being usurped, this reputation often blurs savers’ understanding of their promises of performance, their functioning and their risks.

During the first decade of 2000, each issuer has tried to get the more return out of this business benefiting from the opacity of the structured products market. As these issuers are using their own model, it has become difficult for the client to compare the offer in this niche. Against this backdrop, VOLTYLAB, an independent financial boutique, has emerged to play a significant role in this industry by assessing the dispersion in pricing and controlling closely any possible opaque interference in the pricing of the investment instrument. Being an independent and neutral boutique in front of the issuers, enables VOLTYLAB to protect investors from overpriced instruments, undue fees or possible abusive behaviour in the financial markets. A specialised company in structured products has an undeniable added value as clients can count on a state-of-the-art know-how of financial markets, counterparts, structuring methods and pricing models, which deliver the constant achievement of efficient opportunities and the total avoidance of opaque risks. The investor has then one single interlocutor to get access to an unlimited offer of issuers.

VOLTYLAB is an independent financial firm, which provides optimisation and control services in the structured products industry. Regarding the follow-up of these securities, an in-house platform analyses and scrutinises their parameters, which influence their valuation in the secondary market. With its automated notification services, the platform supports the holders in managing their outstanding positions and in taking decisions thanks to a global overview on the invested universe. The platform is integrated with various providers’ streamer in order to obtain the most reliable market data. Then, the clients are able to control and manage all their investments in these investment vehicles from a highly performing, comfortable and handy cockpit: no details about the lifecycle such as barrier hit, call event, coupon notification or redemption can be missed. The investor has then one single interface to monitor and control all positions trading or expired whatever the issuer. It then enables the bearers to constantly manage the embedded risks of their structured products’ portfolio.

Transparency, excellence, independency, service and innovation are the key guiding principles followed by VOLTYLAB bringing an undeniable added value in the niche of structured products.

Further information

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