Frequently Asked Questions, Helpful Information & Glossary

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Why Consider Structured Notes?

CashBox structured product solutions are for all seasons

Clients need to invest in all market conditions and there are many views of investment risk. At one end of the spectrum is cash; at the other, more exotic equity markets, commodities or shares. This risk / reward profile may well differ from client to client but they all have the same desire – a good return on their capital and of their capital, no matter what – surely the ideal investment.

In some market conditions, achieving that may be relatively easy, but in others it could be well-nigh impossible. Structured products have a flexibility of design that can make squaring the circle just that bit easier, providing solutions to beat both bulls and bears alike.

A structured product will have a defined objective – it may be for income, growth, capital protection or any combination thereof. As a fixed term investment, there will be a target date for that objective to be met. The returns offered for any structured product will be a reflection of the risk / reward strategy which in itself will be a reflection of the client’s risk profile.

A structured product can be created in a matter of hours so can snap up opportunities one day that may not exist the next. And no matter what the markets are like, investment opportunities will exist.

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There are a number of long established and well proven structures which form the bulk of the structured product market. Straight participation products which can offer maximum capital protection and cash beating returns; Classic Autocalls which can deliver good growth and may return capital before the end of their fixed term; Income products which can provide regular high-level coupons across a fixed term.

Using the component parts of a structured product it is possible to deliver an optimised and bespoke investment solution as and when it is needed.

Innovation is crucial if the industry is to keep up with the ever-changing global market and of course to meet your client’s differing wealth needs. For example, we now have “memory” investments which do not require all underlying links to achieve their predefined levels on the same date to trigger an early maturity. Or, when shares are used as performance links, products which manage the higher risk that shares may have on the final capital return by using the comparatively less volatile performance of an index to determine the risk to capital.

With an extensive secondary market now available, active management of a client’s portfolio can lock-in profits from investments already in the portfolio – or trade in existing risk-aligned notes, where they are attractively priced. Together, the primary and secondary market brings that ideal solution one step closer.

The last few years have seen the wide acceptance of structured products as a choice for many. With a continuing commitment to disclosure, clarity and innovation, the structured product solution is one for all seasons and increasingly forming a key part of an investor’s portfolio.

What are Structured Notes?

  • The investment takes the form of a loan to the issuing Bank or Institution who agrees to pay back the capital and returns being offered, subject to a set of pre-defined conditions.
  • Debt instruments issued by investment grade banks/financial institutions with returns based on the performance of a variety of underlying investment links, typically stock market indices or equities.
  • With the coupon paid out every period, if the underlying investment link is above barrier/income trigger.

Conditional Income

A pay-off where the coupons are dependent upon the performance of the underlying investment link (as well as capital return).

Memory/Catch-up Coupons

An additional feature that allows any previously missed coupons to be paid.

Underlyings

Underlying investment link – normally one or more stock-market indices or equities which are observed by way of options (not invested in directly).

Scrutinise the Risk Level of the Product’s Basket of Investments

  • Indices are the most widely used, with the performance of a diverse selection of stocks seeking to manage overall volatility.
  • Stocks are also used more widely now, and it is important that the criteria for the selection is sound.
  • Questions like: is it a strong and reputable company?; do market analysts feel the outlook is good; do the analysts have major concerns; is the company involved in discussions about mergers etc.?
  • Investors must be clear about the level of risk they are taking on. If an investor has qualms and would be reluctant to invest directly into the shares of a company, perhaps it is not right for them.

Is the Pay-off Suitable?

  • Investors may feel that only 100% capital protection will do.
  • What they need to understand is that the minimum return on such a structure is unlikely to be much more that they could achieve in a deposit account or with a fixed rate bond.
  • With interest rates at historic lows, to obtain better than cash returns something has to give. Higher returns come with either less probability of achieving them, more risk to capital, or both.

How is my Capital Protected – is the Pay-off Suitable?

  • The stability of the underwriting bank to honour the contract is most important.
  • Therefore, CashBox Global only deals with the largest investment grade banks.
  • The underlying Index(es) could fall below the protection barrier of the strike price and may then impact your capital.
  • Our structured income contracts are designed for the highest levels of capital protection whilst delivering the most predictable income streams.
  • Paired with derivatives and utilising Puts and Calls, this hybrid security sacrifices some of the upside of the underlying index funds in exchange for deep levels of protection on the downside. These products are contractually designed to produce returns in a wide range of market trading conditions including sideways markets.
  • Quarterly coupons will be paid out should the market (tracking indexes) rise, move sideways or drop (capped at the protection barrier).
  • In the unlikely event that the underlying index falls more than the protection barrier of the initial strike rate at the end of the contract period, the capital will be reduced in a 1-to-1 ratio. By way of example, if the protection barrier is 50% and the tracking index falls by 52% of the original strike value, a loss of 2% (52% drop - 50% protection barrier) of the capital will be triggered. In the worst crash (the great depression of 1929) the market fell by 42%. Past performance is no guarantee of future performance.

Protection Barrier Level

  • The level of capital protection is set by structuring this protection against market downside. and measures the percentage movement of the underlying across the fixed term, in relation to its initial strike level.
  • The deeper the protection barrier sought, the more the yield is affected.

What are the Risks?

  • The stability of the underwriting bank to honour the contract is most important.
  • Therefore, CashBox Global only deals with the largest investment grade banks.
  • The underlying Index(es) or equities could fall below the protection barrier of the strike price and may then impact your capital.
  • Over the past decade iDad and affiliates have structured 1038 contracts. 94,6% of these delivered returns and capital as expected. The 5,4% that didn’t deliver, mainly due to clients wanting to track exotic stocks, still resulted in 46% of the original capital being returned to those investors driving for exceptional yield rather than protection.

Who Should Consider CashBox Structured Notes?

  • As a result of low cost, higher yielding income & capital protection more and more advisors and investors are looking for more managed risk and returns; and so are now allocating upwards of 20% of their portfolio to structured predictable investments rather than the  unpredictability of direct stock holdings.

Liquidity?

  • Like a mutual fund, the client would be offered the bid price for their investment should they need to redeem.
  • It is best to let the investment run its term as there may well be exit and market timing costs for early exit.

Auto-call

  • Automatic maturity if certain conditions met.
  • An auto-callable (or ‘autocall’) product is a fixed term investment which can automatically mature prior to the scheduled maturity date if certain pre-defined conditions are met. The product is designed to offer a pre-determined coupon over a fixed term, based on the underlying asset being above its initial strike level on any given pre-determined observation date.
  • The criterion for deciding whether the product autocalls is whether the specific underlying is above a predetermined trigger level (the autocall level) This autocall test is usually carried out on a set of pre-defined dates (for example, annually, quarterly, etc.). If a product is autocalled, the investor normally receives a pre-determined coupon along with the capital on that autocall date.
  • Most autocall products incorporate a protection feature so that, if the autocall trigger has not occurred before the scheduled maturity date, the invested capital benefits from a level of protection. The performance of the underlying in relation to the protection barrier level will determine how much capital is protected and so how much will be returned at maturity.

Memory Auto-call

The Memory Autocall is essentially a market-linked, fixed term investment which, in exchange for the acceptance of some risk to capital can provide the opportunity for an early maturity. Based on the classic autocall structure, it includes a Memory feature which is designed to enhance the opportunity of an early return of capital and predefined coupon(s). The pay-out is dependent upon the performance of the underlying during the term, but the methodology involves looking at each underlying in isolation rather than the basket in order to trigger the autocall.

By way of example:

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Index linked fixed term market investment.

Seeking to deliver 6% p.a. in British Pounds.

With 60% Capital Protection Barrier & 60% Income Trigger.

Structured for Quarterly Income Coupon Payments.

Maximum term is 6 years, however, the Note may Memory Autocall / Mature earlier should any of the underlying’s be above 80% (Autocall Trigger) of the initial strike levels, this is measured after 12 months and on a quarterly basis thereafter.

Coupons will be paid out quarterly to your investor platform from the issuing Bank.

Income coupons will be triggered and paid out quarterly should the underlying’s be above 60% of the initial strike value.

Memory/Catch-up Coupons allows any previously missed coupons to be paid out.

Capital Protection Barrier is structured in this case to protect capital should any of the underlying’s drop to as low as 60% of the initial strike value.

Once the CashBox structured note is Hedged with the Issuing Bank an ISIN will be issued together with the term and fact sheets.

Investors can access the Note via their Investor Platform using the ISIN reference.

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