Structured products
Structured products is the term for a variety of different types of securities. What they have in common is that they are tailorable and can have different exposures, returns and risks. The members of the Swedish Securities Markets Association include market players who are active in the market for structured investments. The Swedish Securities Markets Association works to increase the clarity, comparability and understanding of structured products in Sweden and, as part of this work, the association has produced a recommendation on structured products. The recommendation aims to provide guidelines and a common minimum standard for what should be regarded as good industry practice with regard to the provision of information in marketing material for structured
The association’s work with structured products
Through its work in the area of structured products, the Swedish Securities Markets Association wants to work to increase the clarity, comparability and understanding of structured products and for investors, authorities and other stakeholders in society to have confidence in them.
Within the framework of the Swedish Securities Markets Association, a number of participants in the market for structured products have developed self-regulation in the form of a recommendation on structured products. The work on self-regulation was initiated by the Swedish Securities Markets Association in 2008 under its former name, the Swedish Securities Dealers Association, and in September 2009 the first version was published in the form of an industry code. The work was initially carried out through the subsidiary company Structured Products in Sweden (SPIS) but has since been included in the Swedish Securities Markets Associations other activities. In connection with this, the self-regulation has been revised from an industry code to a recommendation.
Recommendation on structured products
The Swedish Securities Markets Associations recommendation on structured products aims to provide guidelines and a common minimum standard for what is to be considered good industry practice with regard to the provision of information in marketing material for structured products. The recommendation aims to promote a well-informed and well-founded approach to investing in structured products. Clear information about structured products and understanding by those selling and investing in the products is needed to ensure that these investments are used wisely and in the best interests of the client at all times.
In order to make the terms used in marketing material for structured products more uniform, the Swedish Securities Markets Association has, in addition to the recommendation, also produced a glossary as an aid for investors so that they can more easily compare the information between marketing material for different structured products. For the same reason, the Swedish Securities Markets Association has also produced a product description for different types of structured products so that these are referred to in a uniform manner in marketing material. Both the glossary and the product names are appendices to the recommendation.
The recommendation is not formally binding, but the intention is that it will become an industry practice through widespread use. The guidelines in the recommendation obviously apply in addition to the requirements set out in laws, ordinances and regulations.
Recommendation on structured products – Swedish
About structured products
Structured products is the term for a variety of different types of securities. What they have in common is that they can be tailored to offer investors investments that meet their own preferences in terms of the balance between risk, return and exposure. This allows structured products to contribute to investors’ portfolios with characteristics that differ from many other investments. Structured products are usually created by combining different financial instruments such as bonds and options. Examples of structured products include equity index bonds, autocalls and credit certificates.
Different types of structured products
There are several different types of structured products, but for the sake of simplicity, they can be broadly divided into two main categories based on risk: capital protected investments, which ensure that the investor gets back all or part of the invested capital upon maturity, and market investments, where all or part of the invested capital can be lost but the possibility of return is also different. The most common example of capital-protected investments is equity index bonds and the most common examples of market investments are autocalls and various types of certificates such as credit certificates.
An alternative to dividing the investments according to risk is to divide them according to different underlying asset classes, i.e. the market to which the investments provide exposure. The most common asset classes for structured products in Sweden are shares and credits. But there are also investments that give the investor exposure to currencies, commodities and interest rates.
All types of structured products sold to consumers must have an up-to-date KID. The KID should contain basic facts about the product. Investors should have access to the KID well in advance of any purchase of the product.
Primary and secondary markets
The market for structured products, like other financial markets, can be divided into a primary or first-hand market and a secondary or second-hand market. In the primary market, investments are issued and it is usually here that investors buy the investment. For example, if you meet an advisor and decide to invest in a structured investment, this investment is usually made in the primary market.
If an investor wants to sell an investment during its term, this can be done on the secondary market. This assumes that the structured product is listed for trading on a stock exchange. A large proportion of the outstanding products on the Swedish market are listed on a stock exchange. In order to be able to sell an investment on the secondary market, it is assumed that there is someone who wants to buy it. Hoewver, liquidity before maturity may be limited and it is not certain that investors can sell their holdings at all. As an investor, you should therefore assume that the product will be retained for the entire term. If you choose to sell an investment before the repayment date, this is done at the current market price, which can be both lower and higher than the invested amount.
Checklist for buying structured products
Structured products is a term for a number of different types of securities. What they have in common is that they are tailorable and can vary in terms of exposure, return and risk. This also means that there are a number of things an investor should check before buying a structured investment. Below is a checklist, which does not claim to be exhaustive but can serve as a starting point, of what an investor should check before buying a structured investment.
Who is the issuer of the investment?
A buyer of a structured investment takes a counterparty or credit risk on the issuer. If an issuer becomes insolvent, the investor may risk losing all or part of the investment, regardless of the performance of the underlying market. It is therefore important for investors to be informed about who the issuer is and to assess its creditworthiness.
Is the investment capital protected and, if so, to what extent?
Investments in capital protected products can be offered at different risk levels. Depending on the degree of capital protection of the product and whether the investment is made at a premium, investors risk not recovering all or part of the amount invested. Investors must therefore ensure that they know and understand when they risk not getting back all or part of the amount invested in a capital protected investment.
How big are the fees?
It is important for investors to understand the fees for structured products, as the size of the fees determines how much the investment must increase in value to provide a positive return. An investor who is unsure should ask the adviser or distributor of the investment to explain the size of the fee, both as a percentage and in dollars and cents. How and in what form this information should be provided is subject to regulation.
What are the conditions attached to the return and how is the return calculated?
The potential return is usually the main reason why an investor decides to make an investment in the first place. Sometimes it is not obvious at first glance what determines the return and how it is calculated. However, it is important that the investor is aware of what the return is linked to and how it is calculated. Investors who are unsure about this should ask the adviser to go through the terms and conditions so that the investor understands, as this is important for both the investor and the adviser.
What are the preliminary terms and conditions in terms of participation rate, coupons and barriers?
The terms and conditions of structured products, including participation rates, coupons and barriers, can have a significant impact on the size of the return. An investor who does not know the terms and conditions does not have full control over his or her investment. Normally, the terms and conditions should be clearly mentioned and described in the marketing material so that investors can familiarise themselves with the terms and conditions prior to a potential investment.
Will the investment be listed on an established marketplace to which the investor has access?
An investor wishing to sell a structured product before maturity can do so on the secondary market provided that the product is listed for trading on a marketplace and provided that there is a buyer. A large proportion of the outstanding structured products on the Swedish market are listed in this way. However, investors must be aware that the market value of a structured product, if sold before maturity, may be less than the amount invested at the time of investment, in which case the investor will make a loss.
Decide how much you are willing to invest based on your specific situation!
When giving advice, advisers should consider the client’s financial situation and preferences in terms of risk, potential return, desired market exposure and duration of the investment. Advisors must also take into account the investor’s other investments. Although the adviser has a major responsibility for ensuring that this is done, it is ultimately the investor who has to make a decision and it is important that the investor always starts from his or her own situation, both financially and otherwise.
A good piece of advice is to diversify risks by buying investments with different maturities and with returns linked to different markets. Buying investments with different maturities and with returns linked to different markets helps spread the risks. By investing in, for example, investments that provide exposure to different asset classes, the risk of a negative price development in an individual market having a major negative impact on the value of a specific portfolio is reduced.
In conclusion
It is important to always read the risk information in an issuer’s base prospectus and final terms and conditions before making an investment. Structured products are not necessarily a suitable investment for all investors. Whether or not a specific investment is suitable for an individual investor depends on the investor’s preferences, understanding of the investment and the overall structure of their savings and investment portfolio.
An investor who is unsure or does not understand how an investment works should ask their adviser to explain it to them – a basic rule is not to invest in an investment that you are unsure of or do not understand how it works.