This past Friday, Matrix Capital Group of New York City filed an amended preliminary prospectus with the US Securities & Exchange Commission to publicly offer what appears to be the very first US structured unit investment trust (UIT) that will utilize exchange-traded options as opposed to over-the-counter options.

Matrix Capital will serve as the sponsor to the UIT, while Convexcel LLC of McLean, Virginia will be the securities adviser to the trust, according to the prospectus filing.

Executives involved in the creation of this UIT declined to comment for this article, citing the SEC’s pre-approval process and quiet period.

First of its kind
The Convexcel SUIT(SM) Buffered Capped Enhanced Participation Trust, Series I will provide for a leveraged upside performance multiplier of 1.25X (up to a return cap of 15%) and a downside buffer of -10%, all referenced to the performance of the iShares Russell2000 Index Fund. BlackRock Fund advisers is the sponsor of that exchange-traded fund but has no direct role in this UIT offering.

This new UIT is expected to debut in October 2014, if it receives regulatory approval in short order, and will have a two-year term, terminating in October 2016. The “SUIT” service mark stands for “sponsored unit investment trust”, although it could easily be interpreted as “structured unit investment trust.”

This structured investment product is so evolutionary that it will follow an investment strategy for which a patent is being sought and is currently pending. It will feature a portfolio of call options and put options, with the initial portfolio consisting of six types of European style options, according to the registration document. These options are set up so that they would expire just prior to the trust’s mandatory termination date in 2016.

More typical UITs involve investing in a set basket of publicly available securities which are then held throughout the entire term.

Overcoming challenges
The Convexcel UIT takes its cue from many of the features of more mainstream structured notes, including an enhanced participation feature, a maximum performance cap and a buffer against a degree of downside loss should the underlying index it tracks decline. However, this UIT overcomes two of the biggest challenges facing mainstream structured notes: credit risk and secondary market liquidity.

By purposeful design the UIT’s portfolio of options, all to be listed on the Chicago Board of Options Exchange, will be cleared through clearinghouse Options Clearing Corporation of Chicago thereby eliminating specific company credit risk. Issuer credit risk was a huge issue that came to the forefront after Lehman Brothers defaulted on its proprietarily-issued structured notes when it filed for bankruptcy in September 2008. That event scared off many would-be structured note investors who feared another issuer might falter.

In addition, this structured UIT will become a 1940 Act-registered security for which daily net asset value pricing and daily liquidity will be required and offered, despite the intended two-year holding period. That designation overcomes the second challenge to the US structured products industry -- that being no formal secondary market for structured notes and opaque pricing methodologies where redemptions are available.

New UITs planned
Other future similar structured UITs are being planned for offering by the Matrix and Convexcel partnership and may become regular calendar product offerings for broker-dealer reps as well as registered investment advisers to offer to their retail clients.

A second structured UIT, the Convexcel SUIT Periodic Payment Trigger Trust, Series I, was filed with the SEC last year. This is also designed as a two-year investment product, but is intended to be an income-producing UIT. It will be linked to the price performance of the iShares MSCI Emerging Markets Index Fund, along with quarterly payments to investors being derived from the maturing principal from US Treasury obligations.

However, the true downside to any new-fangled security, including the Convexcel SUIT structured UITs, lies in getting it approved for launch by regulators. The capped and buffered UIT was originally conceived and then filed for launch with the SEC in February 2013, whilst the Trigger Trust UIT was originally filed in August 2013 and still exists only as a concept.