Structural products of banks

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

To attract customers, banks come up with a lot of marketing moves. One of them is investing in structured products. They are positioned as a panacea in the financial market. Are these tools really that profitable or is it just another pyramid scheme?

Essence

Structured products are tools that are supposed to protect the initial investment, and bring profit from the growth of assets. The uniqueness of the product lies in the combination of tools that allow you to limit the risk of investments.

In conditions of financial instability, it is dangerous to invest in foreign currency due to a sharp change in the exchange rate, and it is difficult to invest in the stock market due to high volatility. The situation is further complicated by the fact that it is necessary not only to preserve, but also to increase capital. The solution to the problem can be an investment in structured products that combine a high degree of asset protection and the possibility of making a profit more than on a deposit.

Structural products market includes:

• deposits;
• securities;
• trade on"Forex";
• bank metals;
• options and futures;
• mutual funds;
• real estate investment, etc.

Structural product is formed by combining assets with different levels of risk:

• deposits and promotions;
• CB of highly reliable and new companies;
• bonds and options;
• deposits and endowment insurance, etc.

The ratio is selected so that the income from "safe" assets covers possible losses.

Example

Structural product consists of 90% of the contribution with a yield of 10% per annum and 10% of shares of new companies with a yield of 300%. After purchasing a product, three scenarios are possible.

If the stock fails, the interest on the deposit will compensate for the initial investment. A year later, the client will receive the same amount as he invested, without profit, but without loss. If investments in the Central Bank bring the projected 300%, then the total return on the portfolio will be 40%. If the investment brings 2/3 of the planned profit, then the profitability of the product will be 30%, etc. That is, it is the selected stocks that play the key role, and risk-free investments serve as insurance against losses.

Subjects

Structural products on the financial market are offered by banks, dealing centers and AMCs. Bank products are considered the most reliable. In AMC, you can pick up assets for “every taste”: from conservative to more risky ones. Portfolio investments of dealing centers are formed at the expense of risky and super-risk assets (for example, currencies andoption).

The purchase of an asset is accompanied by the signing of an agreement between the investor and the company. It clearly stipulated the amount, term of investments, list of assets, risk level and other points related to the transfer of funds.

Scheme of work

Wishing to preserve and increase temporarily free funds, individuals turn to a bank or an investment company and purchase a structured product. The intermediary invests part of the invested funds in reliable financial instruments (bills, bonds, deposits), and the second part in an asset tied to the base (shares, currency), but less volatile (Sberbank shares, gold rate, RTS index, etc.). The client himself chooses the underlying asset and the level of risk, that is, the share of investments that will be redirected to the stock market. The client also independently regulates the participation rate (FC), that is, determines what part of future income he will receive.

Investment term ranges from several months to two years. Additionally, you can insure your investments or purchase an investment portfolio with coupon income. In the second case, the client will receive a fixed amount of profit every month, which does not depend on changes in the price of the underlying asset.

Types of structured products

All package offers are divided into two groups:

• Risk free products guarantee 100% return on capital. The biggest risk is that by the time the investment is returned, the investor mayreceive only the initial investment, subject to a small degree of depreciation due to inflation. The client pays only for the opportunity to make a profit if all assets work.
• Products with limited risk. The share of assets is distributed in such a way as to cover a possible loss. The investor can only lose part of the capital. In a good market situation, the level of earnings can reach 50% of the initial investment.

Benefits

• Structural products of Sberbank or any other credit institution is a passive investment. The client does not independently form a portfolio of assets. The financial intermediary does this job for him.
• No need for knowledge and experience with financial instruments.
• It is possible to adjust the level of loss from investments and invest in assets that are not available in their pure form.
• The structural properties of the product are such that buying at least one of them means diversifying investments.
• When the market dynamics is good, the investor receives a large profit with little risk.

Flaws

• Structural financial products are marketed as complex. In fact, this is a paid consultation on the placement of funds in various assets.
• 100% money-back guarantee can not be provided even by banks. All deposits are insured in DIA. The possibility of loss always exists. The only question is the level of risk. This marketing slogan is designedfor advertising only.
• Structural products of banks, on which no profit is received, are unprofitable. This means that interest on deposits was used to cover losses from other types of investment. If the client immediately put the entire amount of funds on a bank deposit, he would have received more profit than from a unique product.
• Structural products are designed for we althy clients. User reviews confirm this. Enter the financial market with the amount of 10 thousand rubles. makes no sense.
• Asset management services are paid. The commission is charged regardless of whether the investment brings income or not.
• Combination products are not covered by government guarantees. If the bank or AMC goes bankrupt, the investor will not be able to return his investment.
• There is practically no choice of unique products on the Russian market.
• The investor does not become the true owner of the assets, so he cannot control the investment.

Hidden risks

Structured products are combinations of assets and derivatives. They are collected and sold by world banks in the form of notes (bonds). They insure themselves by issuing positions opposite to structural products. The bank always receives a commission. Each individual client, although earning, but on other clients who bought a more risky asset. Ultimately, all customers lose money. Therefore, in order to increase the attractiveness of new products, their risks are “encrypted”. What are banks silent about?

Barrier Notes

If allthe selected shares will keep the price above the set limit, the holders of the combined products will get back their investment and the agreed income. Notes start working like bonds. If one of the selected assets decreases in value, the value of the portfolio investment will be equal to the worst of the shares. The probability of a decrease in the price of at least 1 out of 3 stocks is higher than each individually. Accordingly, the potential loss significantly exceeds the possible income.

Autocall

Portfolio investments are often sold with an additional option. What is the meaning of autocall? If all shares rise in price, the client will be able to purchase another note, and the banker will receive additional income. When the market rises, once a quarter the banker receives a bonus, the client receives a new coupon. This happens until one of the Central Banks falls to the set limit.

Another example is a note of credit. The client will receive 100% of the increase in the share price, and in case of its decrease, a refund of 100% of the invested amount. It is good if a not very volatile instrument is used as an asset. It turns out that part of the note, designed to provide capital protection, is invested in the exchange index. Yield - 20%.

Distribution network

The problem is not only the risks. Banks cannot cover the entire market at once. Intermediaries come into play. Each link in the chain "bank - distributor - manager" earns on resale. The structure of unique products is such that the bank can recalculate the conditions for investing money at any time. It all depends on the seller. Someone will sell a coupon with a mandatory investment99.5% of the money, having received only 0.5%, and someone will be able to sell the goods with worse conditions and get 5% immediately. The maximum difference can be up to 35%.

Intermediaries are more likely to sell riskier products. As a result, conservative portfolios are filled with barrier notes, auto-call, and in a year bring an 80% loss. During this time, bankers manage to receive 0.5% and 4 more times 3% commission for the purchase of a new note.

On a note that guarantees a 100% return on investment in the RTS stock index, the banker will earn twice as much. Such a structured product includes a two-year (17%) call option on the index, a portfolio of illiquid bonds that, upon redemption, will yield 100% of the initial capital. The average market yield of the bond is 18%, of the entire portfolio - 62%. From such a transaction, the banker will receive 21%, the remaining 79% - the client.

Conclusion

Structural products are not a pyramid scheme. If you use such tools within reason, you can make a good deal. The same stock index in capital protection is appropriate if the credit risk is low. But most combo products lose in all respects only due to the inclusion of derevatives in them. In addition, no one has canceled the main rule of trading: the portfolio manager makes a profit together with the client, and the seller - on the client.