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Structured Investment Products

Structured Products are providing investors with defined investment parameters during incredibly uncertain economic times.  Obviously the uncertainty with the Global Economy has led to investment market volatility which now seems to be disconnected from economic reality.

The swings in the indices, along with the interest rate position, has produced a challenge for all providers of structures.

Our readers/investors will have recently seen early closure of many product issues.  This has mainly been caused by high demand and the inability to obtain the same terms/inventory as initially offered for the excess to the initial capacity.


It is often (mostly) impossible to predict the demand from investors, regardless of how attractive the contract terms are… Under more normal circumstances, purchasing further inventory to cope with the demand from investors is possible but as the component parts of pricing that impact how the ‘Contract Terms’ are constructed change so rapidly, an issuer/provider is presently finding it impossible to match demand with supply (in the simplest terms possible!).

A simple explanation of how early closure develops

  • A Bank agrees (as an example) to sell £1 million worth of a FTSE 100 XYZ to a Structured Product provider.

    The £1 million is sold to the issuer for 99p on £1.00.  The 1p is the profit (for this example – all fees are included in relation to the product shape).

  • The £1 million has been sold to investors.  Demand quickly exceeds supply on the terms provided, so the issuer enquires to the Bank in order to gather further supply capacity – if little has changed since the initial price quoted, the issuer may be able to purchase further capacity for 99p on the £1.00.  It’s business as usual and no major disruption.
  • In reality, since the initial supply terms were agreed and purchased the index, implied volatility and interest rates and other factors influencing the Bank’s pricing will have changed, which sometimes means that for the same £1.00 the price may be 98p – which provides a commercial benefit, an improvement and uplift to the contract terms (such as Tempo’s previous pledge) – or conversely the price could increase to £1.02 – meaning the provider would pay more for any new capacity than the profit made from the original £1 million capacity purchased.  This forces change (and it is how this change is handled and managed that sets providers apart) and early closure or amended terms for the surplus demand.  (Similar to any other supply/demand strain and pricing outcome in other businesses).

In recent days and weeks the ‘implied volatility’ has reduced significantly, with rates cut and ultimately pricing inputs for plans subdued.  Issuers have taken advantage of the odd day of volatility and bought a set amount of capacity – but when demand outstrips supply the recent experience of closure develops – especially if investors identify strength in a product offering.

If a provider could understand the ‘demand’ position at outset the supply terms would not be interrupted but this is realistically impossible and we are not operating in normal times.

As a retail advisory business, it is virtually impossible for our business to gauge demand for products issued, although we can ‘guess’ based upon the contract terms, if plans will be successful or not…  It is therefore unrealistic for product providers to accurately secure the supply to the demand needs.

Action point

It is therefore imperative that if an investor wishes to invest in a plan – as the contract terms are attractive – action should be taken promptly, otherwise demand may outstrip supply.  Many will know from recent experience that even when urgent action is taken, initial terms are not guaranteed to be secured – based upon the above impacts.

We assure our investment clients that we work to action applications promptly and do all we can to secure investment positions.  We are working to develop a reservation allocation with all providers (although this only applies to the immediate/prompt transfer of investment money with the completed application form).

We trust this simple overview provides some idea of the challenges of the present market and why early action is essential.

Click the link to read more about our Structured Product page:

As always, don’t forget the risks.

If you have any questions or require advice, get in touch.

Best Regards.

Richard and the Best Price FS Team

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