You guide to investing in structured products

In return for exposing their principal at risk, traders may be offered higher current yields than could be gained by investing directly in an equity security.

Originated in Europe, structured products have gained popularity in the United States, where they are traded as SEC-registered products. It means that retail investors have access to them in the same way as to bonds, stocks and exchange-traded-funds (ETFs).

Offering customised exposure to various hard-to-reach asset classes, structured products have proved themselves as an effective supplement to traditional well-diversified portfolios.

What are structured products?

Also known as market-linked investments, structured products represent pre-packaged structured financial instruments, which are based on the performance of a single security, a basket of securities, indices, commodities, options, debt issuance or foreign currencies. Structured products are issued by banks and have various terms, payouts and risk profiles.

Like other popular market instrument, many structured products are hybrid securities. Typically, they consist of two parts – a note and a derivative. The note may bring you an interest at a particular specified rate and interval. The derivative part determines payment at maturity, which gives the issuer the right to sell you or buy from you the referenced security at a specified price.

the US Securities and Exchange Commission (SEC) defines structured products as “securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to changes in the value of underlying assets, indices, interest rates or cash flows”.

Most structured products presuppose fixed maturity and may pay you an interest rate or coupon rate. They are usually created to meet the special needs that can’t be met through the use of standard financial instruments, available on the market.

structured products

Structured products examples

You wonder how do structured products work? Consider that a famous and trustworthy bank issues a structured product in the form of notes with a face value of $1,000. Each note represents a package, which consists of the two components – a zero-coupon bond and a call option on the underlying asset (a common stock or an ETF, following the popular market index). The maturity of this note is 3 years.

The underlying principle of this instrument is pretty simple. On the issue date you pay the face amount of $1,000. This note is fully-protected and you will get your money back at maturity, no matter what happens to the underlying asset.

Speaking about the performance component, the underlying asset is priced as a European call option and will have intrinsic value at maturity, if its value at this date will be higher than its value at the issue date. If applicable, you will earn that return, if not – you’ll get nothing in excess of your $1,000.

Although, a full principal protection offers a key benefit of investing in structured products, an investor may trade off some a part or all the protection in favour of more attractive performance protection.

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Types of structured products

Structured products are not homogeneous and may be subdivided into several types. First, they may be principal-protected and non-principal protected. Further, they can be classified by different derivatives and underlying assets.

Principal protected structured products offer return of principal at maturity. They are suitable for traders and investors, who want to profit from a certain view of the market, but at the same time want to protect the principal value of their investment. Usually, they are 100% protected, but they can be also protected partially. The returns on this type of products are usually payable at maturity and depend on the performance of the underlying assets – commodities, indices, or equities.

Non-principal-protected structured products won’t return the principal at maturity. In return for exposing their principal at risk, traders may be offered higher current yields than could be gained by investing directly in an equity security.

Particular structured products provide direct exposure to certain global markets and sectors that may not be available to investors directly, or may be too expensive.

Besides, the structured products can be classified according to the underlying asset, including: interest rate-linked notes and deposits, FX and commodity-linked notes and deposits, equity linked notes and deposits, credit-linked notes and deposits, market-linked notes and deposits, etc.

Features and benefits of structured products

For those who investigate the option to include structured products into their investment portfolio, here are some major characteristics and benefits:

  • Potential for increased risk-adjusted returns. Structured products may work as an effective supplement to a well-diversified portfolio by accumulating features of several asset classes in one single investment. For example, if we take an index-linked note, it will perform like an underlying index if it increases its value, otherwise, if it’s value decreases, it will act more like a debt security. Structured products may decrease the overall portfolio’s volatility, offering the opportunity to enhance returns.

  • Customisation of risk/return profile. Structured products provide the possibility to tailor the risk/return profile of the underlying investments to either maximise expected performance or hedge risks related to individual securities — commodities, currencies and other investments. Many enhanced growth and enhanced yield structured products are developed to outperform the underlying asset, while many principal-protected products are made to hedge against the risk of loss.

  • Access to previously unattainable investments. Many structured products provide individual investors with an access to various markets that were not readily available through traditional investments due to their high cost or overall complexity. Structured products are considered cost-efficient instruments.

  • Limited maximum potential loss. One of the most attractive features of structured products is that the maximum potential loss is limited to the initial invested amount. Structured products do not presuppose margin.

Risks of structured products

To take the decision of whether to include structured products or not into your investment portfolio, you should not only consider their key benefits, but also weigh up risks. Some of the most significant risks of structured products include the following:

  • Potential principal loss. Some structured products are principal-protected at maturity. It means that an investor may return the full principal amount only if he holds the structured product to maturity date. However, structured products are considered medium-term investments (1-10 years) and during this period the price may fluctuate considerably. If the investor sells this product before the maturity, the price may be lower than the initially invested amount.

  • Market price fluctuations. The value of structured products depend on numerous factors, which may be pretty unpredictable, including: the underlying asset’s price, dividend rates, interest rates, time to maturity and geopolitical environment.

  • Credit risk. Some structured products are issued in the form of unsecured debt. It makes them dependent on the issuer’s credit risk and default risk.

  • High complexity. It is not very easy to calculate the returns from structured products. It means it is more difficult to estimate and predict the performance of the structured products than that simply own the underlying asset.

  • Lack of liquidity. Structured product may be traded on stock market exchanges as well as over the counter. Even if traded on a traditional exchange, there is no guarantee of a liquid trading market for a particular structured product.

Investing in structured products

Structured products trading can be performed either on the traditional stock exchanges or over-the counter. Traded as ordinary shares on the regulated exchanges, structured products provide investors with a high level of regulatory oversight and market supervision.

Issues of structured products must comply with all the listing authority’s requirements and provide all the necessary documents containing full details about their products. There is a huge variety of structured products available on stock exchanges. You should carefully consider whether they are suitable for your portfolio and meet all your investment requirements before trading.

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CME looks to double monthly open positions limit of its bitcoin futures contracts

The Chicago Mercantile Exchange (CME Group), the only exchange that currently provides bitcoin futures contracts in the U.S., is looking to double …

The Chicago Mercantile Exchange (CME Group), the only exchange that currently provides bitcoin futures contracts in the U.S., is looking to double open positions limit of the product.

CME has written to the U.S. Commodity Futures Trading Commission (CFTC) for the proposed move, which would increase the limit from 1,000 contracts per spot month to 2,000.

One contract is for five bitcoins, which means the change, once cleared by the CFTC, would increase a trader’s maximum exposure to 10,000 bitcoins from the current 5,000. The change would then take place from the Oct. 2019 contract month and all contract months thereafter.

CME Group has been offering bitcoin futures contracts since late 2017, and the exchange is now gearing up to launch another bitcoin derivatives product, as reported by The Block last week. The new product could launch before the end of this year.

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Staked Automates the Best DeFi Returns With Launch of Robo Advisor

The New York startup announced a seed round in January backed by Pantera, Coinbase, Winkelvoss Capital and others. With RAY, investors can put …

Investors in decentralized finance (DeFi) have a new way to generate the best possible returns.

Staked’s new Robo Advisor for Yield (RAY) service, which launches today, automates the process of finding high-yielding opportunities. Normally, investors have had to watch constantly and reallocate quickly to catch an enhanced DeFi return. Now they can set a smart contract to do the monitoring and allocating for them.

“This product is targeted to people who hold eth or dai and want to earn yield on it,” CEO Tim Ogilvie told CoinDesk in an interview. “If you hold ETH, you can earn more ETH. If you hold DAI, you can earn more DAI.”

Related:Coinbase to Invest $2 Million USDC in DeFi Protocols Compound and dYdX

Staked already helps investors place funds with various proof-of-stake protocols (blockchains that reward users for locking up their coins for periods of time, such as Tezos, Decred and Dash). The New York startup announced a seed round in January backed by Pantera, Coinbase, Winkelvoss Capital and others.

With RAY, investors can put their assets (ETH, USDC or DAI) into an asset-specific pool and the smart contract will automatically invest all or part of that pool into contracts with the best yield at any given time. For now, it will invest only on the money market Compound and with the derivatives protocols DYDX and BZX. But Staked is vetting additional smart contracts for safety and reliability.

An example of how RAY works: Imagine an investment pool has one million dollars worth of ETH in it and Compound is offering 5 percent. But then DYDX starts offering 7 percent for collateral on ETH-based derivatives. RAY would move as much of its collateral as DYDX had space for, and the entire pool would share in the extra return.

“We’re not necessarily saying we are going to beat the market. We’re just saying you’ll get the best of what a savvy watcher would get in the market,” Ogilvie said.

Related:Crypto Lender Dharma Pivots to Stablecoin Savings Accounts

“The vision we are building toward is the same level of sophistication the fixed income markets have in traditional finance,” he added.

Staked smart contract store

Staked is building a pool of liquidity that will automatically move to where there’s opportunity. Right now, every investor has to decide which DeFi app to put their assets in, which means that entrepreneurs need to get enough people’s attention to get that collateral. With Staked, there is a pool of capital ready to move automatically if an application shows attractive returns.

Tom Bean, CEO of BZX, a derivatives protocol that lets users long and short different crypto assets, told CoinDesk he was “excited” about a new pool to tap into.

“We put a lot of emphasis on integrations, because once we’ve plugged in, that’s easy liquidity,” he said. As a newer company that isn’t venture backed, it hasn’t been able to attract capital as easily as some others. The Staked pool could remove this pain point for BZX and any other new smart contract that gets whitelisted, Bean said.

On a day-to-day basis, the returns for providing capital to any smart contracts tends to be fairly uniform, meaning the market is generally efficient, as both Ogilvie and Bean noticed. But Ogilvie noted that it’s still new enough that returns on one smart contract spike over the others from time to time, and a vigilant investor can do well by catching those upticks. The point of RAY is to take advantage.

To encourage participation, Staked is set up so RAY makes a return only if it beats a baseline.

“We take a benchmark rate of Compound, and we’ll take a percentage of anything we can make above that,” Ogilvie explained. RAY makes 20 percent returns above whatever the funds would have made if they were all just in Compound.

The tech behind RAY

Proving at long last that non-fungible tokens (NFT) aren’t just for games, RAY will rely on the same ERC-721 standard the runs CryptoKitties. Instead of proving ownership of a procedurally generated cartoon, it will authenticate rights to part of a financial product.

When users put assets in RAY, they will get an NFT that indicates how much they put in and when. That token will be redeemable for the assets and whatever returns they made, whenever the user is ready to take it out.

“Everything we do is non-custodial,” Ogilvie said. The token goes into a smart contract, not into RAY, and the assets can only be transferred back to the wallet where they originated from.

“It pools everyone together and you get the benefit of scale,” he said.

Ogilvie sees RAY as just the beginning of an ever increasing set of decentralized finance (DeFi) products. It’s easy for him to imagine a future where ever bigger robo advisors serve specific tranches of investment clients.

“You can just allocate it optimally, subject to your risk preferences. You shouldn’t have someone like a Goldman Sachs creating a giant haircut on it,” Ogilvie told CoinDesk. He noted:

“All of these things benefit from scale and the thing that’s cool about DeFi, and that scale is embodied in a smart contract that is open source. It’s always getting better, and it’s accessible to everybody.”

Photo of Tim Ogilvie, CEO and co-founder of Staked, right, with Max Mensch of Fabric Ventures, from Consensus 2019 (via CoinDesk archives)

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Seed CX Subsidiary Zero Hash Launches Support for Crypto Derivatives

After procuring a virtual currency license from the United States Financial Crimes Enforcement Network in July, Zero Hash — which also received a …

Zero Hash, a calculation and settlement agent and subsidiary of cryptocurrency platform Seed CX, has added support for derivatives.

According to a press release published on Sept. 11, Zero Hash now allows the settlement of bilateral derivatives transactions and supports settlement functions for forwards.

The newly released service provides collateral management for derivatives, including options such as “the calculation of variation margin, initial margin and final settlement values […] the sending of margin-call notifications.”

Expansion to new options

After procuring a virtual currency license from the United States Financial Crimes Enforcement Network in July, Zero Hash — which also received a money transmitter license — can now operate as a money transmitter for trading activity resulting from SCXM, which is its affiliated exchange.

Back in January, Seed CX also launched a digital asset wallet solution with on-chain settlement, developed together with Zero Hash. Seed CX stated then that dispersing digital asset holdings across multiple unique wallets helps to mitigate the risk of hackers accessing pooled assets via a single vector of attack.

Growing interest in crypto derivatives

Earlier in September, major cryptocurrency exchange Binance showed growing interest in the cryptocurrency derivatives market by acquiring JEX, a crypto-asset trading platform that offers spot and derivatives trading services.

In August, Dutch crypto derivatives exchange Deribit and U.S.-based trading communication platform Paradigm jointly launched a block trading solution.

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Zero Hash Announces Successful Launch of Settlement for Derivatives

CHICAGO, Sept. 11, 2019 (GLOBE NEWSWIRE) — Zero Hash, a digital asset and fiat currency custodian, calculation agent and settlement service, …

CHICAGO, Sept. 11, 2019 (GLOBE NEWSWIRE) — Zero Hash, a digital asset and fiat currency custodian, calculation agent and settlement service, today announced the launch of support for derivatives, providing participants the ability to settle bilateral derivative transactions. Zero Hash is now able to support all back-office settlement functions for forwards, and will be expanding to options soon.

In its support of forwards settlement, Zero Hash performs collateral management for derivatives throughout their lifecycle, including:

  • The calculation of variation margin, initial margin and final settlement values,
  • The sending of margin-call notifications, and
  • The movement of funds, significantly reducing operational and counterparty risk.

The support of derivatives on the Zero Hash settlement service allows participants to customize the settlement of their forwards contracts, and to decide the frequency in which those calculations occur, providing greater flexibility to institutional investors in the digital asset space.

“Derivatives are a rapidly evolving area within the digital asset industry, yet there is a critical demand in the market for a regulated post-trade settlement utility, like Zero Hash,” said Brian Liston, Seed CX co-founder and President of Zero Hash. “We’re excited to service that demand with the launch of this new functionality. Zero Hash can now enable any trading platform or set of participants to trade and settle forwards in an efficient and secure manner.”

“We see a growing demand for third-party settlement platforms to handle margin and settlements between counterparties,” said Darius Sit, Managing Partner at QCP Capital. “Zero Hash has been leading the way in this space, and the launch of derivatives support in addition to its spot settlement infrastructure is a testament to their focus and expertise.”

Zero Hash announced in July that it had received a virtual currency license from the New York Department of Financial Services (NYDFS). In June, Zero Hash was voted Innovator of the Year by the 2019 Profit & Loss Readers Choice Awards. This followed the subsidiary’s successful launch of a suite of over-the-counter (OTC) trade settlement services for digital assets earlier this year.

About Seed CX

Through its subsidiaries, Seed CX offers a market for institutional trading and settlement of spot digital assets, and plans to offer a separate market for CFTC-regulated derivatives. Seed CX is backed by Bain Capital Ventures, and was recently voted Best Institutional Digital Asset Provider by the Profit & Loss 2019 Readers’ Choice Awards. Furthermore, Seed CX secured the award for Best Cryptocurrency Exchange in the 2019 FinTech Breakthrough Awards, and earlier this year, Seed CX cofounders Edward Woodford and Brian Liston were namedForbes 30 Under 30 for Enterprise Technology 2019.

Seed Digital Commodities Market is a spot exchange for digital asset commodities and holds a virtual currency license from NYDFS

Zero Hash is a FinCen-regulated Money Service Business and FX Dealer as well as a Money Transmitter in more than 30 states. Zero Hash custodies both fiat and digital assets, with on-chain settlement. Zero Hash holds a virtual currency license from NYDFS.

Seed SEF is a CFTC-regulated Swap Execution Facility (SEF) that plans to offer a market for CFTC-regulated digital asset derivatives.

Seed Digital Securities Market is pending registration as a Broker Dealer with FINRA and an ATS with the SEC.

Media Contact: Hunter Stuart, hunter@propllr.com

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