Structured Products

Structured products enable investment into various asset classes with predefined risk profiles. They offer for example the ability to limit the downside, enhance yields or get access to, or leverage on, a wide range of asset classes. These asset classes can be equities in the form of single stocks or indices, commodities, foreign exchange, or interest rates. Thus, structured products are applicable to a very broad set of investment objectives and portfolios.

Structured products were originally created to meet specific investor needs that could not be met by standardized financial instruments, such as equities or bonds, available in the markets. Today, structured investment products are deemed to be fully customized investment products that meet specific investor requirements by offering predefined levels of return, exposure, risk and protection. The redemption value of structured products is linked to the performance of one or more underlying assets. The structured product design is driven typically by the investor and its objectives, and involves the selection of the appropriate underlying assets, pay-off structures and issue programme.

SSPA the Swiss Structured Products Association, where Leonteq is a member, provides a categorization of structured product into five types and learning tools here.

Leonteq's focus is on structured investment products and excludes leverage products.

Introduction To Structured Products by SSPA
Capital protection products have a minimum redemption at expiry equivalent to the capital protection and thus protect against losses from falling prices of the underlying asset. The capital protection is defined as a percentage of the nominal (e.g. 100%) and is guaranteed by the issuer or guarantor of the product. In addition, investors participate in the price increase of the underlying above the strike – which can, however, be limited. During the lifetime, the value of the product may fall below its capital protection level.

Capital Protection Certificate with Participation

Market expectation

  • Rising underlying
  • Rising volatility
  • Sharply falling underlying possible

Characteristics

  • Minimum redemption at expiry equivalent to the capital protection
  • Capital protection is defined as a percentage of the nominal (e.g. 100%)
  • Capital protection refers to the nominal only, and not to the purchase price
  • Value of the product may fall below its capital protection during the lifetime
  • Participation in underlying price increase above the strike
  • Any payouts attributable to the underlying are used in favour of the strategy

Product components

  • Client buys a bond
  • Client buys a call option (call long)

Convertible Certificate

Market expectation

  • Sharply rising underlying
  • Rising volatility
  • Sharply falling underlying possible

Characteristics

  • Minimum redemption at expiry equivalent to the capital protection
  • Capital protection is defined as a percentage of the nominal (e.g. 100%)
  • Capital protection refers to the nominal only, and not to the purchase price
  • Value of the product may fall below its capital protection during the lifetime
  • Participation in underlying price increase above the strike (conversion price)
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Coupon payment possible

Barrier Capital Protection Certificate

Market expectation

  • Rising underlying
  • Sharply falling underlying possible

Characteristics

  • Minimum redemption at expiry equivalent to the capital protection
  • Capital protection is defined as a percentage of the nominal (e.g. 100%)
  • Capital protection refers to the nominal only, and not to the purchase price
  • Value of the product may fall below its capital protection during the lifetime
  • Participation in underlying price increase above the strike up to the barrier
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Possibility of rebate payment once barrier is breached
  • Limited profit potential

Capital Protection Certificate with Coupon

Market expectation

  • Rising underlying
  • Sharply falling underlying possible

Characteristics

  • Minimum redemption at expiry equivalent to the capital protection
  • Capital protection is defined as a percentage of the nominal (e.g. 100%)
  • Capital protection refers to the nominal only, and not to the purchase price
  • Value of the product may fall below its capital protection during the lifetime
  • Any payouts attributable to the underlying are used in favour of the strategy
  • The coupon amount is dependent on the development of the underlying
  • Periodic coupon payment is expected
  • Limited profit potential
Investors of yield enhancement products expect sideways or slightly rising underlying prices. Reverse convertibles and barrier reverse convertibles are the most common yield enhancement products. The buyer of a reverse convertible gives up the potential upside exposure to the underlying asset in exchange for an enhanced coupon. The holder of the product generally remains exposed to the downside of the underlying asset.

Discount Certificate

Market expectation

  • Underlying moving sideways or slightly rising
  • Falling volatility

Characteristics

  • Should the underlying close below the strike on expiry, the underlying and/or a cash amount is redeemed
  • Discount Certificates enable investors to acquire the underlying at a lower price
  • Corresponds to a buy-write-strategy
  • Smaller risk of loss than with direct investment in the underlying
  • Higher discounts can be achieved at greater risk if the product is based on multiple underlyings (multi-asset)
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Limited profit potential (Cap)

Product components

  • Client buys a bond
  • Client sells a put option (put short)

Barrier Discount Certificate

Market expectation

  • Underlying moving sideways or slightly rising
  • Rising volatility
  • Underlying will not breach barrier during product lifetime

Characteristics

  • The maximum redemption amount (Cap) is paid out if the barrier is never breached
  • Barrier Discount Certificates enable investors to acquire the underlying at a lower price
  • Since, provided the barrier has not been breached, the nominal is repaid on expiry, the probability of maximum repayment is higher but the discount is smaller
  • If the barrier is breached the product changes into a Discount Certificate
  • Smaller risk of loss than with direct investment in the underlying
  • Larger discounts or a lower barrier can be achieved at greater risk if the product is based on multiple underlyings (multi-asset)
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Limited profit potential (Cap)

Product components

  • Client buys a bond
  • Client sells a Down-and-In put option (Down-and-In Put short)

Reverse Convertible

Market expectation

  • Underlying moving sideways or slightly rising
  • Falling volatility

Characteristics

  • Should the underlying close below the strike on expiry, the underlying and/or a cash amount is redeemed
  • Should the underlying close above the Strike at expiry, the nominal plus the coupon is paid at redemption
  • The coupon is paid regardless of the underlying development
  • Smaller risk of loss than with direct investment in the underlying
  • Larger coupons can be achieved at a greater risk if the product is based on multiple underlyings (multi-asset)
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Limited profit potential (Cap)

Product components

  • Client buys a bond
  • Client buys a call option (put short)

Barrier Reverse Convertible

Market expectation

  • Underlying moving sideways or slightly rising
  • Falling volatility
  • Underlying will not breach barrier during product lifetime

Characteristics

  • Should the barrier never be breached, the nominal plus coupon is paid at redemption
  • Since, provided the barrier has not been breached, the nominal is repaid on expiry, the probability of maximum repayment is higher but the coupon is smaller
  • If the barrier is breached the product changes into a Reverse Convertible
  • The coupon is paid regardless of the underlying development
  • Larger coupon payments or lower barriers can be achieved at a greater risk if the product is based on multiple underlyings (multi-asset)
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Limited profit potential (Cap)

Product components

  • Client buys a bond
  • Client sells a Down-and-In put option (Down-and-In put short)

Express Certificate

Market expectation

  • Underlying moving sideways or slightly rising
  • Falling volatility
  • Underlying will not breach barrier during product lifetime

Characteristics

  • Should the barrier never be breached, the nominal plus coupon is paid at redemption
  • Since, provided the barrier has not been breached, the nominal is repaid on expiry, the probability of maximum repayment is higher but the coupon is smaller
  • If the barrier is breached the product changes into a Reverse Convertible
  • The coupon is paid regardless of the underlying development
  • Larger coupon payments or lower barriers can be achieved at a greater risk if the product is based on multiple underlyings (multi-asset)
  • Any payouts attributable to the underlying are used in favour of the strategy
  • Limited profit potential (Cap)

Product components

  • Client buys a bond
  • Client sells a Down-and-In put option (Down-and-In put short)
In general, the performance of participation products is closely linked to the underlying asset’s price movements, generally with no up or down limitations. Sometimes these products feature conditional capital protection (bonus certificates) or leveraged upside participation (outperformance certificates). The best-known participation products are tracker certificates, which track the performance of the underlying asset 1:1.

Tracker Certificate

Market expectation

  • Tracker Certificate (Bull): Rising underlying
  • Tracker Certificate (Bear): Falling underlying

Characteristics

  • Participation in development of the underlying
  • Reflects underlying price moves 1:1 (adjusted by conversion ratio and any related fees)
  • Risk comparable to direct investment in the underlying
  • Fees generally in the form of management fees or through the retention of payouts attributable to the underlying during the lifetime of the product

Outperformance Certificate

Market expectation

  • Rising underlying
  • Rising volatility

Characteristics

  • Participation in development of the underlying
  • Disproportionate participation (outperformance) in positive performance above the strike
  • Reflects underlying price moves 1:1 when below the Strike
  • Risk comparable to direct investment in the underlying
  • Any payouts attributable to the underlying are used in favour of the strategy

Bonus Certificate

Market expectation

  • Underlying moving sideways or rising
  • Underlying will not breach barrier during product lifetime

Characteristics

  • Participation in development of the underlying
  • Minimum redemption is equal to the nominal provided the barrier has not been breached
  • If the barrier is breached the product changes into a Tracker Certificate
  • Larger Bonus payments or lower barriers can be achieved at a greater risk if the product is based on multiple underlyings (multi-asset)
  • Smaller risk of loss than with direct investment in the underlying
  • Any payouts attributable to the underlying are used in favour of the strategy

Bonus Outperformance Certificate

Market expectation

  • Rising underlying
  • Underlying will not breach barrier during product lifetime

Characteristics

  • Participation in development of the underlying
  • Disproportionate participation (outperformance) in positive performance above the strike
  • Minimum redemption is equal to the nominal provided the barrier has not been breached
  • If the barrier is breached the product changes into a Outperformance Certificate
  • A higher bonus payment or lower barrier can be achieved at greater risk if the product is based on multiple underlyings (multi-asset)
  • Smaller risk of loss than with direct investment in the underlying
  • Any payouts attributable to the underlying are used in favour of the strategy

Twin-Win Certificate

Market expectation

  • Rising or slightly falling underlying
  • Underlying will not breach barrier during product lifetime

Characteristics

  • Participation in development of the underlying
  • Profits possible with rising and falling underlying
  • Falling underlying price converts into profit up to the barrier
  • Minimum redemption is equal to the nominal provided the barrier has not been breached
  • If the barrier is breached the product changes into a Tracker Certificate
  • Smaller risk of loss than with direct investment in the underlying
  • Any payouts attributable to the underlying are used in favour of the strategy

Warrant

Market expectation

  • Warrant (Call): Rising underlying, rising volatility
  • Warrant (Put): Falling underlying, rising volatility

Characteristics

  • Small investment generating a leveraged performance relative to the underlying
  • Increased risk of total loss (limited to initial investment)
  • Suitable for speculation or hedging
  • Daily loss of time value (increases as product expiry approaches)
  • Continuous monitoring required

Spread Warrant

Market expectation

  • Spread Warrant (Bull): Rising underlying
  • Spread Warrant (Bear): Falling underlying

Characteristics

  • Small investment generating a leveraged performance relative to the underlying
  • Increased risk of total loss (limited to initial investment)
  • Daily loss of time value (increases as product expiry approaches)
  • Continuous monitoring required
  • Limited profit potential (Cap)

Knock-Out Warrant

Market expectation

  • Knock-Out (Call): Rising underlying
  • Knock-Out (Put): Falling underlying

Characteristics

  • Small investment generating a leveraged performance relative to the underlying
  • Increased risk of total loss (limited to initial investment)
  • Suitable for speculation or hedging
  • Continuous monitoring required
  • Immediately expires worthless in case the barrier is breached during product lifetime
  • Small influence of volatility and small loss of time-value

Mini Future

Market expectation

  • Mini-Future (Long): Rising underlying
  • Mini-Future (Short): Falling underlying

Characteristics

  • Small investment generating a leveraged performance relative to the underlying
  • Increased risk of total loss (limited to initial investment)
  • Suitable for speculation or hedging
  • Continuous monitoring required
  • A residual value is redeemed following a Stop-Loss Event
  • No influence of volatility

COSI® Collateral Secured Instruments

COSI® - Structured Products With Minimum Issuer Risk

Investors in structured products bear an issuer default risk in addition to the market risk associated with any investment. This counterparty risk is based on the issuer’s creditworthiness.

COSI brochure

COSI® Collateral Secured Instruments

COSI® Collateral Secured Instruments (hereinafter «COSI® products») help to mitigate that risk by backing the structured product’s current value with collateral. The principles of collateralization are summarized in an Information Sheet issued by SIX Swiss Exchange. This Information Sheet is available from the website.

The COSI® products are collateralized in accordance with the terms of the SIX Swiss Exchange «Framework Agreement for Collateral Secured Instruments» («Framework Agreement»). The collateral provider has concluded a Framework Agreement and undertakes to secure the current value of the COSI® product in favour of SIX Swiss Exchange.

The rights of Investors in connection with the collateralization of the COSI® products arise from this Framework Agreement. The issuer shall, upon request, provide the Framework Agreement to the investors free of charge in the German version or in an English translation.

Investor compensation

In the event of liquidation investors can claim a pro rata share of the net liquidation proceeds from SIX Swiss Exchange. These payments will be made exclusively in Swiss francs. Claims asserted in other currencies will be converted accordingly.

COSI (r)

Triparty Collateral Management (TCM)

How it Works

The TCM Collateral Management Setup allows investors to actively reduce issuer risks associated with unlisted investment products. Within the TCM Setup, the issuer of the unlisted investment product posts specific collateral with SIX Securities Services, acting as collateral manager, that is used to cover obligations to investors in the case of insolvency event (e.g. default, restructuring, liquidation etc.) or under-collateralization. Within the TCM Setup, specific collateral is earmarked to each specific investment product and serves as collateral for only this specific investment product.

As the administrator, SIX Securities Services is completely independent from the issuer. It takes collateral from the issuer according to a specific collateral schedule, earmarks the specific collateral to a specific investment product and regularly tracks the value of both, the issued product as well as the associated pledged specific collateral.

TCM Structure
*TCM Structure

Investor compensation

In the event of an under-collateralization where more collateral is necessary to cover the specific obligations, the Collateral Manager transfers additional collateral from the issuer into the segregated TCM account to ensure continued and sufficient collateralization.

Eligible collateral is defined by the eligible collateral schedule. In relation to a specific issued product it consists of liquid collateral and/or securities that possibly underlie the specific issued product as described in the relevant Termsheet.

In the event of an issuer insolvency event (like a default) or the under-collateralization of a specific product where the coverage requirement is not met within 5 business days after SIX SIS Ltd has notified the issuer, the specified collateral will be liquidated based on a notification of the collateral agent.

the TCM factsheet now!