Structured Products

Products designed to deliver growth, income or both

A structured product is a type of investment that invests your funds for a set period of time and is designed to give you growth, income or both. These products can be designed for all risk appetites, from low risk to high risk. CheckRisk creates bespoke product structures for institutional clients only, and does not deal directly with retail clients. If you are not sure they’re right for you please get professional financial advice, or contact us.

As an independent agent, CheckRisk can tailor a solution to suit your specific needs. We aim to secure the most competitive terms we can in regard to the potential upside, downside protection and the product cost. CheckRisk can also provide you with ongoing after sales service, reporting on product pricing and the provision of a range of our in-house models to keep track of your portfolio. We are remunerated by our clients directly, and are not paid commissions by any investment bank/insurance company. We work for you.

Why Use Structured Products?

Structured products or ‘capital at risk’ products can give you a much greater amount of control over your portfolio investment strategy. One of the main benefits is that they offer a defined pay-off; you know what you are going to get if the conditions of the investment are met. This is in contrast to ‘normal’ types of investments such as equities or bonds whose prices vary. These type of traditional investment may outperform a structured product if market conditions are favourable, but they may also do worse if market conditions are poor.

Structured products are a useful addition to investment managers in an era where asset prices have become distorted by quantitative easing. In the current low or negative interest rate environment (especially in Europe), cash deposits are earning poor returns such that depositors are often not being paid for the credit risk they are assuming with the deposit bank. Structured deposits therefore represent an alternative to achieve potentially higher rates of return without putting your capital at risk.

Bespoke structures can offer you the potential for increased returns on the upside, or improved downside protection without having to hold the physical assets directly. They are also simpler and more transparent than hedge funds or absolute return funds, whose performance and strategies can be very widely dispersed. In short, structured products offer diversification and hedging benefits that can be tailor made to your portfolio. Many investors use these products to help reduce volatility across their traditional portfolio.

What are structured deposits?

Structured deposits are deposited in the ordinary way with a bank and last a set period of time (often five or six years); however, low fixed rates of return are exchanged for a variable, but potentially higher rate of return.  Although the capital ranks as a deposit and has the same safety, it differs from an ordinary bank deposit in that the return is based on the performance of an underlying asset such as an equity index, bond price or other financial instruments.

If the investment does not perform, you may get no interest at all. However, you will receive back all of your capital. Structured deposits are therefore higher risk investments than a standard savings/bank account. If the underlying bank or counterparty fails, you may lose some or all of your capital – this is the same as a standard bank account.

The products can be set up to meet growth or income objectives and liquidity options can be built-in if required. The maturity length can be set, just as with a fixed-term bank account. Generally speaking, the longer the term, the higher the potential returns.

What are structured products?

Structured products are commonly offered by large insurance companies and investment banks. Your money is typically used to buy two underlying investments, one to protect your capital (typically a zero coupon bond issued by the provider) and another (an option) which provides the bonus or coupon. These are higher risk investments than a structured deposit as your capital is at risk. Structured products are normally created as senior unsecured debt, a type of corporate bond.

At the outset, the client decides how much capital they wish to put at risk e.g. 5% at risk, or a 95% capital guarantee. The return you receive depends on how the stock market index, bond index or other measure performs – you can choose from a vast array of underlying investments on which to base the performance. These should be tailored to your attitude to risk.

You may choose to receive growth, income or both from a product. Liquidity options can be built-in to the product to allow early encashment or to create a stop-loss. The potential returns increase the greater the amount of capital is put at risk, and the longer the maturity. However, there are other factors such as volatility and interest rates that affect day to day pricing.

If the investment fails to perform, or the product provider fails you may lose some or all of your capital.

Examples of Structured Products

  • If the Eurostoxx50 is higher at the end of five years than it was at the beginning, you get your original investment back plus an extra 35%.
  • If the Eurostoxx50 is at the same level or lower than it was at the beginning, but is less than 40% lower, you get your original capital back plus 8%.
  • If the Eurostoxx50 has fallen by 40% or more, the amount of your investment is cut by that percentage. For example, if it has fallen 50%, you lose 50%.

Other products may let you take a regular income e.g. 4% per annum, but the capital may depend on the final value of an equity index at the end of the product.

Structured Deposit Key Features

  • Structured deposits (SDs) exchange a fixed return for a variable return with a higher potential
  • The SD can be structured to provide growth or income payments, or both
  • You may receive 0% return if the underlying investment does not perform
  • The investment return is subject to income tax
  • SDs rank as a deposit in a bank’s capital structure
  • Covered by appropriate depositor guarantee scheme (e.g. FSCS)
  • The capital deposit is not at risk. It is 100% guaranteed
  • The guarantee is as good as the bank’s (Deposit Taker) credit rating
  • The product owner will have counterparty risk with the deposit-taking bank(s)
  • Limited liquidity. Options can be embedded in the product to create liquidity at set times. Alternatively, laddered strike dates can bet set to create liquidity according to needs
  • Cancellation risk. Fixed costs are embedded in to the establishment of the structured deposit. These are one-off fees paid to CheckRisk, the investment banks and the costs of the underlying assets themselves. These may be lost along with any potential returns if you redeem prior to maturity
  • The costs of early redemption may be fixed or variable, depending on negotiations with the bank
  • Inflation risk. The real value of your investment may be eroded if the returns are not sufficiently above the rate of inflation
  • You will receive a memorandum from the Deposit Taker(s) that contains the full terms and conditions prior to investment
  • Prior to investment, you will need to fulfill the relevant anti-money laundering requirements

Structured Product Key Features

  • Structured products (SPs) exchange a fixed return for a variable return with a higher potential
  • The SP can be structured to provide growth or income payments, or both
  • You may lose some or all of your capital if the underlying investment does not perform
  • Taxation. Normally subject to capital gains tax (CGT). This can be tailored to needs
  • Normally ranks as senior unsecured debt in a bank’s capital structure. This can vary
  • Covered by appropriate compensation scheme e.g. FSCS and Financial Ombudsman
  • To generate higher returns, some of your capital will be put at risk of loss. A 95% capital guarantee product equates to 5% of your capital being put at risk
  • The guarantee is as good as the bank’s (Deposit Taker/Plan Originator) credit rating
  • You will have counterparty risk with the deposit-taking bank(s)
  • Limited liquidity. Options can be embedded in the product to create liquidity at set times. Alternatively, laddered strike dates can bet set to create liquidity according to needs
  • Cancellation risk. Fixed costs are embedded in to the establishment of the structured investment. These are one-off fees paid to CheckRisk, the investment banks and the costs of the underlying assets themselves. These may be lost along with any potential returns if you redeem prior to maturity. You may get back less than the original value of your investment
  • The costs of early redemption may be fixed or variable, depending on negotiations with the bank
  • Inflation risk. The real value of your investment may be eroded if the returns are not sufficiently above the rate of inflation
  • You will receive a memorandum from the Deposit Taker(s) that contains the full terms and conditions prior to investment
  • Prior to investment, you will need to fulfill the relevant anti-money laundering requirements