The exact definition varies from country to country and according to different regulators and associations. The SRP definition is that a structured product is an investment that provides a return based on the performance of an asset. This asset can cover equity, index, fund, interest rate, currency, commodity or property markets. The payoff and level of capital at risk can be pre-defined, and the payoff profile can be built to take advantage of rising, falling or range bound markets. The product is delivered in a form that is tailored to the needs of investors.
Each market has its own regulation and definition of structured products, though as an investment product, they are in most cases overseen by the financial regulator. There are also regional and global authorities such as the European Securities and Markets Authority (Esma), whose objective is to strengthen investor protection in the European Union.
Details of regulators in some of the key global markets are available below.
Australia
Australian Securities and Investments Commission
Austria
Finanzmarktaufsichtsbehörde (Financial Market Authority of Austria)
Belgium
Autorité des services et marchés financiers/Authoriteit voor Financiële Diensten en Markten (Financial Services and Markets Authority)
Brazil
Comissão de Valores Mobiliários (Securities and Exchange Commission of Brazil)
Superintendência de Seguros Privados (Superintendence of Private Insurance)
Bulgaria
Financial Supervision Commission
Canada (federal)
Canadian Securities Administrators
Canada (provincial)
British Columbia Securities Commission
Nova Scotia Securities Commission
Autorité des marchés financiers (Québec)
China
China Securities Regulatory Commission
China Banking Regulatory Commission
China Insurance Regulatory Commission
Denmark
Finanstilsynet (Danish Financial Supervisory Authority)
Estonia
Finantsinspektsioon (Financial Supervision Authority)
Eesti Pank (Central Bank of Estonia)
Finland
Finanssivalvonta (Financial Supervisory Authority)
France
Autorité des marchés financiers (French Financial Markets Authority)
Registre unique des Intermédiaires en Assurance, Banque et Finance (Single Register of Insurance, Banking, and Finance Intermediaries)
Germany
Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority, commonly referred to as BaFin)
Greece
Hellenic Capital Market Commission
Hong Kong
Hong Kong Securities and Futures Commission
India
Securities and Exchange Board of India
Insurance Regulatory and Development Authority of India
Italy
Commissione Nazionale per le Società e la Borsa (Italian Companies and Exchange Commission)
Istituto per la vigilanza sulle assicurazioni (Institute for the Supervision of Insurance)
Ireland
Israel
Japan
Securities and Exchange Surveillance Commission
Malaysia
Securities Commission Malaysia
Bank Negara Malaysia (Central Bank of Malaysia)
Mexico
Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission)
Netherlands (The)
Autoriteit Financiële Markten (Netherlands Authority for the Financial Markets)
Norway
Finanstilsynet (Financial Supervisory Authority)
Poland
Komisja Nadzoru Finansowego (Polish Financial Supervisory Authority)
Portugal
Comissão do Mercado de Valores Mobiliários (Portuguese Securities Market Commission)
Singapore
Monetary Authority of Singapore
South Africa
Financial Sector Conduct Authority
South Korea
Spain
Comisión Nacional del Mercado de Valores (Spanish Securities Market Commission)
Dirección General de Seguros y Fondos de Pensiones (Insurance regulator)
Sweden
Finansinspektionen (Financial Supervisory Authority of Sweden)
Switzerland
Eidgenössische Finanzmarktaufsicht/ Autorité fédérale de surveillance des marchés financiers/ Autorità federale di vigilanza sui mercati finanziari (Swiss Financial Market Supervisory Authority)
Taiwan
Financial Supervisory Commission
UK
US (federal)
Securities & Exchange Commission
Commodity Futures Trading Commission
Federal Deposit Insurance Corporation
Financial Industry Regulatory Authority
National Association of Insurance Commissioners
Each structured product carries its own level of risk, which can range from low risk, similar to a traditional deposit, to high risk. Since 2008, most regulators and issuers have been carefully categorising and creating a target market for each product to avoid selling high-risk products to unsuitable investors.
In Europe, since 2018, all potential investors have to be provided with a key information document (Kid) prior to purchasing a packaged investment product. A Kid, which runs to maximum three pages, outlines the key features and functioning of a financial product, describes in detail the associated risks and benefits of the product in various scenarios, and lists costs. The summary risk indicator provides a clear presentation of the risks of the investment using seven risk classes. The Kid is designed to help compare different financial products.
Structured products have received an extraordinary level of attention from regulators since the 2008 crisis, and, as a result, transparency has increased. Nowadays, investors have access to information regarding structured product fees and risks in most countries.
There are six types of transparency investors need to look out for: transparency of the underlying; scenario transparency; risk transparency; cost transparency, liquidity transparency, and; valuation transparency.
In this context, it is particularly important to answer the following questions:
In addition, transparency also requires that information is available concerning the structure and the development of the market in question. In answer to these questions, the following facts demonstrate that structured products have extremely high product and market transparency.
Structured products are complex but so are almost all financial products. For example, there is hardly anything more complex than an endowment life assurance policy and few investors understand the dynamics of credit risk in fixed income investments. However, despite their complexity, these investments can make good financial sense. Investing in structured products is not rocket science; they are much easier to understand than many people think. Nevertheless, investors must take a little time to familiarise themselves with these types of financial products.
According to SRP data, costs vary depending on markets. They are usually higher than fixed income products but lower than equity costs, such as mutual funds or hedge funds. There are many ways for an investor to buy a structured product and each involves different costs.
A retail investor can buy a structured product through an investment adviser in a bank, or as a self-directed investor – without investment advice – from an online broker. In both cases, the investor buys the structured product either by means of direct over-the-counter trading or on a securities exchange. The extent to which the bank earns anything on further services over and above the issuer margin depends on whether it has an internal distribution or branch network.
Sales commission
Investors only need to pay sales commission if they have bought the product through a distribution partner or through the issuer’s internal branch network, if it has one. In this case, investors normally buy the structured product after receiving advice. The sales commission paid by the investor covers this advisory service. The investor must be informed of how much they will be charged in sales commission.
Front-end load fee during the subscription period
A front-end load fee can only be charged for structured products acquired within the subscription period, as with investment funds. This fee varies from issuer to issuer and depends on the type of structured product. The front-end load fee has to be disclosed to the investor.
Many issuers of structured products are traditional retail banks. There are also broker-dealers, insurance companies and many other financial institutions, which offer them (including exchanges). To find out more about issuers, see the Global Leaders page here.
The main reason for the large number of structured products is their great variety of characteristics and features. In particular, these include diverse underlyings, level of risk involved, market orientation and maturities. With the advent of technology, more products are created to satisfy investor needs.
Structured products are securities structured and issued by banks. Issuing a structured product is different from selling one. The bank typically issues the structured product and distributes it, but there are also distribution partners, independent from the banks, that advise investors on structured products and earn money on sales. For this reason, a distinction needs to be made between the issuer and the distributor when looking at profits. It is important for retail investors to know how much they are paying the issuer for the structuring of the structured product. On top of structuring costs, there are the distribution costs and fees incurred in the buying or selling of a structured product.
Issuer margin
Regardless of where and how an investor buys a structured product, the price always exceeds the expected issuer margin. It is important to note that this margin is not the same as the issuer’s net profit. The expected issuer margin includes the expected profit but it also covers all the issuer’s operational costs. These include, for example, personnel costs, exchange listing fees and/or trading system expenses.
Bid-ask spread
Retail investors wishing to buy a structured product after the subscription period or to sell it before maturity, either on an exchange or directly over-the-counter, can find out the value of the structured product at any time during exchange trading hours. The issuers also continuously quote bid and ask prices at which trading is possible in over-the-counter trading. The bid price is always equal to the selling price and the ask price is equivalent to the purchase price of a structured product.
Exchange fees, transaction costs and securities account charges
All investors, whether advised or self-directed, need a securities account with a bank or an online broker for every financial instrument they buy. This means they incur securities account charges in addition to transaction costs for buying and selling any type of security.
When a retail investor buys a structured product, the bank is never their rival. The bank that issues the product actually enables the customer to invest based on a certain market trend. The bank itself adopts a risk-neutral position and hedges its payout obligation by engaging in countertrading on the capital market. It is of no importance to the bank whether the investor is investing based on rising, falling or sideways markets - the issuer only makes money from the structuring of the financial instrument and from trading in that product.
Derivatives appear to be attractive for companies and possess high economic value because they offer security. Companies use derivatives to hedge against market price risks in the form of fluctuations in currencies, commodity prices, or interest rates. Hedging against market price risks is part of risk management, and increases planning security, budget accuracy and crisis stability.
A structured note is a structured product wrapped in a debt obligation (medium-term note), similar to certificates. The return is subject to the underlying performance and to the credit risk of the issuer.
Certificates are derivative securities for private investors and form part of a wider category known as structured products, so called because they are generally made up of several components. Unlike other derivatives, investment certificates are securitised and are often referred to as securitised derivatives.
Market-linked certificate of deposit (MLCDs, or structured deposits) are bank deposit products with returns tied to an underlying asset type. These products are the structured products with the lowest level of risk and are, in most cases, guaranteed by a deposit guarantee scheme that protects deposits in case of bank failure. By comparison, investors in structured notes are subject to credit default.
Most issuers offer liquidity during the life of the investment. In over-the-counter structured products, liquidity is limited to the issuer. In the case of listed structured products, in a few markets, there are plenty of investors buying and selling the products intraday, offering access to a considerable liquid market, where people can sell these products to other investors.