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Leading the way – Structured Products

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By Jason Bingham, Mourant – Many of the most sophisticated structured products in issuance are currently listed on the CISX. Mourant currently administers and acts as listing sponsor to a number of structured product preference share platforms established in the Channel Islands for some of the leading major investment banks and financial institutions.

This article examines a typical structured investment product – the auto-callable, and looks at the reasons why the CISX has become the exchange of choice for issuers of such securities.

Product Focus: Auto-callable structured investment product
An auto-callable (or ‘auto-call’) product is a market-linked security, usually issued in the form of a preference share, which can automatically mature prior to the scheduled maturity date if certain predetermined market conditions have been met.
The criteria for deciding whether the product is automatically matured (‘autocalled’) is whether the underlying reference index is above a predetermined trigger level (‘the auto-call trigger’). The auto-call test is usually carried out on a set of predetermined dates (e.g. annually, quarterly, etc) specific to the particular investment product, so that the product (i.e. the preference shares) can only mature on one of these ‘observation dates’. The underlying reference index will typically be an equity index (e.g. FTSE 100), but it can also be linked to stocks, interest rates, foreign exchange markets, commodities and funds. The cost of achieving exposure to such underlying investments would be far greater if the investor decided to assemble a similar portfolio of stocks.
If a product is auto-called, the investor normally receives a predetermined coupon along with the capital redemption on the auto-call date. That coupon is usually proportional to the length of time from the start date to the auto-call date.
Most auto-call products incorporate a protection feature, so that if the auto-call trigger has not occurred before the scheduled maturity date, capital is fully protected provided the underlying reference index has not fallen below a certain level (‘the protection level’) during the term of the investment. If the underlying index ever trades below the protection level during the term of the investment, then the capital protection no longer applies and the redemption amount of the preference shares will be equal to the index performance over the life of the investment.
Simultaneous protection of capital and income returns
Auto-call structured investment products offer investors the opportunity for a high coupon linked to the performance of the underlying index. The coupon is usually higher than the auto-call trigger, so that investors can achieve attractive returns for small movements in the underlying index.
If a coupon is not paid, because the auto-call trigger has not been achieved by the underlying index on an auto-call date, then the investor gets the opportunity to recoup the missed coupon on the next auto-call date.
In addition, the protection level ensures that the investments are conditionally protected. If the underlying index does not fall below the protection level, investors will receive at least the full principal amount back at maturity.
Why use the CISX?
In order to qualify for inclusion within a UK stocks and shares ISA, the shares of structured product issuers must be listed on an exchange recognised by HM Revenue & Customs. Not surprisingly, the recognition achieved by the CISX has led to a significant growth in structured product listings on the Official List.
UK tax resident shareholders who acquire their investment in preference shares through an ISA and who satisfy the requirements for tax exemption in the ISA Regulations will not be subject to either UK income tax or UK capital gains tax on income and gains realised from their investment and any losses on their investment will be disregarded for the purposes of UK capital gains tax.
What does the future hold for structured products?
In a challenging market environment, investors are seeking greater capital security as well as returns. The financial crisis has certainly changed the landscape for structured products in Europe and elsewhere. Pressure from the regulators on financial institutions to implement comprehensive and efficient processes and systems for the management of such structured products will surely mean changes regarding distribution, product quality and investor education.
From a personal perspective, I think it’s unlikely that the structured products business is going to get smaller. As a market leader in structured product platforms, in terms of listings, administration and legal advice, Mourant is still seeing a healthy volume of transactions and we expect this trend to continue, as well as the addition of new issuers into the market. Our clients have high expectations and we work closely with the CISX to deliver a professional service to them – that’s why they keep returning.
As a founder member of the CISX and having sponsored over 300 listings, Mourant is the premier choice for all your CISX listing requirements. Our dedicated listing team offers expert guidance whilst providing a flexible and personal service throughout the listing process.
For a comprehensive and efficient listing service provider who can combine seamlessly with your organisation, please contact:
Jason Bingham
Associate Director
T +44 (0) 207 469 8180


Article originally publised in Issue 18 (Winter 2009-2010) of the Channel Islands Stock Exchange Bulletin Board magazine



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