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I want to understand how investors get access to structured notes.
OVERVIEW
Hello there! Thanks for your question about how investors get access to structured notes.
The short answer is that financial institutions typically design and issue structured notes, and broker-dealers sell them to individual investors. Lower costs, faster execution times and increased price transparency are some of the factors driving a shift to electronic trading for accessing structured notes.
Below is a deep dive of the methodology and findings.
METHODOLOGY
I researched corporate websites, industry reports, and trusted media sites to find the most appropriate answer to the question.
FINDINGS
WHAT IS A STRUCTURED NOTE
According to Investopedia, a structured note is "a debt obligation that also contains an embedded derivative component that adjusts the security's risk/return profile. The return performance of a structured note will track both that of the underlying debt obligation and the derivative embedded within it. This type of note is a hybrid security that attempts to change its profile by including additional modifying structures, therefore increasing the bond's potential returns." In addition, the Wall Street Journal, September 2016, says "structured notes are issued by financial institutions and contain both a bond component and an embedded derivative. Unlike a traditional debt instrument, the notes provide a return based on an equity index or another benchmark, rather than an interest rate. A structured note allows investors to participate in the upside of a particular sector or asset class while limiting downside exposure."
HOW AN INVESTOR GETS ACCESS/PURCHASE STRUCTURED NOTES
Wall Street Journal 2016 is quoted as saying, "Investors should be aware that a note that protects an investor from losses of more than 15%, for example, could very well limit returns over 15% also. Investors must weigh if that protection is worth the sacrifice." According to Investopedia however, "the investment class broadly known as structured products is one innovation that has gained traction as an addition to retail and institutional portfolios." Structured products offer retail investors easy access to derivatives. They are designed to facilitate highly customized risk-return objectives. Well known banks can issue structured products in the form of notes.
US Security Exchange Commission (SEC) informs that "financial institutions typically design and issue structured notes, and broker-dealers sell them to individual investors." Some common types of structured notes sold to individual investors include principal protected notes, reverse convertible notes, enhanced participation or leveraged notes, and hybrid notes that combine multiple characteristics.
Bloomberg has reported that lower costs, faster execution times and increased price transparency are some of the factors driving a shift to electronic trading in the banking industry. The U.S. structured notes business is following this trend, with a number of electronic services available for buying the products.
Interestingly, CAIS, the leading independent product platform for the wealth management industry, implemented a new open-architecture structured notes platform in 2014. The CAIS platform reduces barriers to entry for independent firms looking to access and execute on products.
REGULATORY FRAMEWORK
European issuers face two new regulations in 2018 says Bloomberg: "The Packaged Retail and Insurance based Investment Products (PRIIPs) rule and the Markets in Financial Instruments Directive II (MiFID II)." Bloomberg also states that the requirements of PRIIPs, which has a strong focus on structured products, are dynamic. A lot of the reporting requirements for MiFID II are "more static types of attributes and things that don’t change as frequently."
The CAIS says that the seamless technology it has developed around structured products, allows wealth advisors to access calendar offerings and performance tracking and easily build customized notes, as well as place orders. The CAIS approach to structured notes mirrors the open architecture model of its fund's menu. CAIS gives clients access to a selection of banks and products providing credit diversification and institutional pricing. Multiple product providers on the same platform help wealth managers to find suitable products at a competitive price.
Matt Brown, CAIS Co-Founder and CEO says “As our product menu expands, we continue to advance our mission to deliver advisors a true competitive advantage in a single easy-to-use platform.” He continues, “With the addition of the open architecture structured notes solution, we are improving pricing and execution efficiency as well as overall product education for advisors.”
In addition, Larry Wilson, Head of Structured Investments Distributor Marketing at J.P. Morgan states with confidence that being part of the CAIS platform, efficient access to the offerings to a broad and growing network of advisors will be provided. This will be a network who understands structured products and the benefits to deploying them in their clients’ portfolios.
According to The Wall Street Journal, Goldman Sachs is allowing its competitors including TD Bank and Wells Fargo to sell structured notes on one of its existing web applications. The network called Simon, which is short for Structured Investment Marketplace and Online Network, allows brokers to tweak and buy structured notes directly.
Originally, brokers would have had to go back and forth with their clients, and with the note issuer to tweak a product. For Goldman, opening up Simon to clients and rivals is part of a firm-wide push toward becoming a tech-savvy bank. The play is to make Simon a go-to for banks and dealers when trying to sell structured notes.
CONCLUSION
To wrap it up, the data revealed that financial institutions typically design and issue structured notes, and broker-dealers sell them to individual investors. Lower costs, faster execution times and increased price transparency are some of the factors driving a shift to access structured note via electronic trading.
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