Structured Products – Investors' Academy

A capital protection product is a type of structured product, and consists of a combination of a bond and an option. A capital protection product offers a certain amount of protection for your invested capital at maturity and also offers a chance of earning some returns.

The main characteristics of a capital protection product are:

• Guarantee level/Guaranteed value: The guarantee may apply to the entire investment in the capital protection product, which is then a 100% capital guarantee. In some cases, however, there may only be a 90% capital guarantee, for example. The guarantee is only valid at the maturity date. If you sell the capital protection product before the maturity date, the market price on that date will apply.
• Participation rate: At maturity, you can receive an extra payment on top of the guaranteed value if the price of the underlying asset has risen compared to its starting price. The percentage to which you invest in the increase in the value of the underlying asset is called the participation rate.
• Starting price: This is the price of the underlying asset on the start date of the capital protection product.
• Underlying asset: A capital protection product usually has a basket of shares or an index as its underlying asset.
• Maturity date: In a normal situation, the issuing institution pays the guarantee value on the maturity date or the last observation date, plus a potential additional payment if the price of the underlying asset is higher than the starting price. If this is the case, this increase is multiplied by the participation rate. If the underlying asset has fallen instead, you will receive only the agreed guaranteed value.

Capital protection products is the collective term for structured products in which the issuing institution guarantees that they will repay you all or part of the nominal value (your invested capital) at maturity. A capital protection product is a defensive investment product, offering protection for your capital and allowing you to potentially benefit from any increase in the price of an underlying asset.

• A capital protection product is a simple way of investing with full or partial protection of your investment (capital guarantee).
• With a capital protection product, you have a chance of achieving a higher-than-expected average return compared to bonds. The capital risk for bonds is comparable to that for capital protection products.
• The guaranteed value only applies at the maturity date of the product. If you sell before maturity, you run the risk of recovering less than the guaranteed value. You must therefore be willing to keep the capital protection product until its maturity date.

A high-yield note is a type of structured product and consists of a combination of a bond and an optioncomponent. High yield notes often offer conditional protection in combination with the chance of a predetermined coupon. Examples of high yield notes are:

• Autocallable notes
• Memory coupon notes

An autocallable note is a structured investment product that offers you the chance of a relatively high payout (coupon) either during or at the end of the term. However, it is not always certain that the issuing institution will pay the coupon. This depends on how the price of the underlying security has moved. In the event of a favourable price trend, the core feature of an autocallable note is that it is redeemed before the end of the term. You then receive your invested capital, plus the coupon value.

• You have the chance of receiving a relatively high coupon if you have a moderately positive view of the underlying asset's expected price trend.
• An autocallable note has a fixed term, but can be redeemed much earlier. This happens when the price of the underlying value is higher than the reference value on a reference date.
• Your invested capital is protected against a drop in price down to a certain level. This level is called the protection level.
• Your maximum positive return is the coupon.
• If the protection level is breached, you run the full price risk on the underlying asset.

An autocallable note offers the possibility of a predetermined coupon with conditional protection. It has a maturity date, but the autocallable can also end earlier than its maturity. The main characteristics of an autocallable note are:

• Observation date: Throughout the term of the autocallable note, there are a number of observation dates that determine how much the issuing institution will pay you:
  
  > First observation date: If, on the first observation date, the price of the underlying asset is at or above the reference price, the issuing institution will repay you the autocallable note and you will receive the coupon. The autocallable note then ends automatically. You will receive 100% of your invested capital plus one times the agreed coupon.
  
  > If, on the first observation date, the price of the underlying asset is below the reference price, you receive nothing on that observation date and the autocallable note continues until the next observation date.
  
  > Second observation date: If, on the second observation date, the price of the underlying asset is at or above the reference price, the issuing institution will repay you the autocallable note and you will receive the coupon, plus the previously missed coupon (also known as the 'memory effect'). The autocallable note then ends automatically. You will receive 100% of your invested capital plus two times the agreed coupon.
  
  > Maturity date: If the price of the underlying asset is at or above the reference price at the maturity date, but was not on any of the observation dates, the issuing institution will repay you the autocallable note and you will receive all the previously missed coupons. You will receive 100% of your invested capital plus all the agreed coupons.
  
  > If the price of the underlying asset is not at or above the reference price on any observation date nor at maturity, you will not receive any coupons. How much you get back from your autocallable note also depends on the level of protection.
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• Protection level: The protection level is a fixed percentage of the starting price. It offers you limited protection against a drop in the price of the underlying asset at maturity:
  
  > If the price of the underlying asset remains above the protection level for the entire term, you will receive 100% protection and the issuing institution will repay you the full amount of the autocallable note on maturity. You will receive 100% of your invested capital and no coupons.
  
  > If the price of the underlying asset falls to or below the protection level during the term of the note, you will receive the value of the autocallable note as it is on maturity. This value may be much lower than what you paid for the autocallable note. You receive less than 100% of your capital and no coupons.
  
  
• Starting price: The issuing institution determines the starting price of the underlying asset in advance.
• Reference price: The reference price is a fixed percentage of the starting price and determines how much you will receive on each observation date.
• Underlying asset: The underlying asset usually consists of an index, but it may also consist of a share or a basket of different shares.

A memory coupon note is a structured product that gives you the chance of receiving a relatively high coupon. There is a chance of this happening whether market conditions are steady, rising or even falling. A memory coupon note does not involve any capital guarantee.

• You have the chance of receiving a relatively high coupon if you have a moderately positive or neutral view of the underlying asset's expected price trend.
• Due to a relatively low reference price, a memory coupon note offers you protection against a fall in the price down to a certain level of protection.
• Your maximum positive return is the coupon.
• If it falls to or below the reference price on an observation date, you run a price risk on the underlying asset.

A memory coupon note offers the chance of a predefined coupon. There is no protection and the memory coupon note ends at maturity. The most important characteristics of a memory coupon note are:

Observation date: During the term of the memory coupon note, there are various observation dates that determine how much the issuing institution will pay you:

• First observation date: If, on the first observation date, the price of the underlying asset is at or above the reference price, you will receive payment of the coupon. You will receive the coupon once.
  
  > If, on the first observation date, the price of the underlying asset is below the reference price, you will receive nothing on that observation date and the memory coupon note will continue until the next observation date.
  
  > Second observation date: If, on the second observation date, the price of the underlying asset is then at or above the reference price, you will receive the coupon, plus the previously missed coupon. You will therefore be paid the agreed coupon twice.
  
  > Maturity date: If the price of the underlying asset is at or above the reference price at the maturity date, but not on any of the observation dates, the issuing institution will repay you the memory coupon note and you will receive all the previously missed coupons. You will receive 100% of your invested capital plus all the missed coupons.
  
  > If the price of the underlying asset is not at or above the reference price on any observation date nor at maturity, you will not receive any coupons. How much you will receive for your memory coupon note will then depend on the price of the underlying asset. This may be much less than what you paid for the memory coupon note. You will receive less than 100% of your capital and no coupons.
  
  
• Starting price: The issuing institution determines the starting price of the underlying asset in advance.
• Reference price: The reference price is a fixed percentage of the starting price and determines how much you will receive on each observation date.
• Underlying asset: The underlying asset usually consists of an index, but it may also consist of a share or a basket of different shares.

Structured products have many different risks. You can read more about this in the products' KIIDs. However, there are two major risks that we will define straight away: the counterparty risk and the bail-in.

• For structured products, the institution issuing the product is your counterparty. You run the risk that the issuing institution will not be able to meet their payment obligations to you. This counterparty risk therefore also applies to capital protection products. It is possible you may get back less than the protection value or even lose your entire investment. The counterparty risk depends on the future situation of the issuing institution's credit rating. Counterparty risk is also known as credit risk or debtor risk.
• In the case of bonds and structured products, you must also take into account any bail-in under the European Bank Recovery and Resolution Directive (BRRD). The government can decide to bail-in if it wants to save a bank that is at risk of bankruptcy. This means that the bank has to defer or even cancel some or all of the interest payments and redemptions on the bond or structured product. Even if the issuing institution does not go bankrupt, you may lose some of your rights to repayment of your principal as an investor. By applying a bail-in, less or no public money is needed to prevent the bank from going bankrupt. Many countries outside Europe also have similar arrangements.

• Liquidity risk:
  This risk reflects how difficult it is to sell the structured product before its maturity date. Often, there is no secondary market organised for these types of products. Therefore, the price obtained on sale before maturity may not accurately reflect the actual intrinsic value of the structure.
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• Price risk:
  The value of the structured product depends on market conditions such as the price and volatility of the underlying asset.
  
  
• Exchange rate risk:
  This risk is only present if a structured product is denominated in a foreign currency. Currency exchange rates fluctuate every day. If the currency in which the share is listed falls in value, you may receive back less than your original investment in your base currency.
  
  
• Interest rate risk:
  The interest rate risk depends on the composition of the structure. It is obviously greater for structures that include fixed-income assets.
  
  
• Credit risk:
  The issuing institution's creditworthiness may change during the term of the structured product, which may affect its value. The risk of debtor insolvency can also not be ignored.
  
  
• Risk of early termination:
  In the event of circumstances that disrupt the market, the issuing institution reserves the right to terminate the REX early. This situation may arise if it is no longer possible for the issuing institution to take positions in the underlying asset or because the issuing institution can no longer hedge the risks. The risk of early redemption may also occur if there are changes in legislation and regulations. In the event of early redemption, the payout can be expected to be lower than the nominal value.

• Tax on stock exchange transactions (TST):
  You only have to pay stock market tax for structured products on the secondary market.
  
  
• Withholding tax on interest:
  You only have to pay withholding tax on the interest received in Belgium on structured products that pay interest.
  
  
• Brokerage fee:
  The cost of executing your orders on the secondary market.
  
  
• Custody fee:
  The fee for holding an instrument in a custody account.