Grasp the functioning of structured notes, as well as the associated risks and important considerations before making an investment.

Essential Insights

• Structured notes typically lack a guarantee for the principal.
• Your funds may be committed for a predetermined duration.
• Early redemption of the investment might be infeasible or come with significant expenses.

What Exactly Are Structured Notes?

Structured notes are debt instruments, the returns of which are tied to the performance of one or more underlying assets or benchmarks. This linkage might influence the interest payable on the structured note, the principal repayment, or both, depending on the specific performance of the referenced asset or benchmark.

These notes are multifaceted products, and several other elements can impact a structured note’s overall results. Such factors include:

• The issuer’s credit risk, coupled with the credit risk of different parties involved with the issuer
• Fluctuations in the value of any collateral offered

Should the asset or benchmark fall short in performance, your returns or even the principal amount invested could be at risk of a loss.

While certain structured notes might include measures to protect the value of the invested capital through collateral, there remains no assurance that the principal sum invested will be recuperated.

Structured Note vs. Structured Deposit

Investing in a structured note may expose you to the potential loss of the entire amount invested. Conversely, with a structured deposit, the principal amount deposited will be returned upon the maturity of the deposit, although this is still subject to the credit risk of the bank.

Underlying Assets or Benchmarks

Often termed as reference assets or reference benchmarks, these underlying components can encompass a variety of elements:

• Market indices
• Equities
• Interest rates
• Fixed-income products
• Foreign exchange rates
• Commodities prices
• Any mixture of the above

Furthermore, there exist structured notes with returns associated with two or more reference assets or benchmarks. An example of this could be the interest amount and/or principal repayment relying on both the credit standing and share prices of a collection of companies.

Structured notes fall under the category of Specified Investment Products (SIP). Therefore, it is crucial to thoroughly review and comprehend both the Product Highlights Sheet and the Prospectus to fully grasp the features and inherent risks of the product.

Types of Structured Notes

Below is an overview of various types of structured notes that might be accessible:

Equity-Linked

• Returns might be tied to a singular share, a collection of shares, an equity index (such as the S&P 500), or multiple indices.
• Some equity-linked notes may result in the investor receiving shares instead of cash at the time of principal repayment.

Interest Rate-Linked

• Returns might be associated with a specific floating interest rate (like the Singapore Interbank Offered Rate).

Credit-Linked

• Returns might be tied to the occurrence of a “credit event” (e.g., insolvency or loan default of a specific entity or entities); and/or to the credit risk or declining market value of any collateral.

Currency-Linked

• Returns might be tied to a reference currency pair, such as USD/Euro.

Commodity-Linked

• Returns might be linked to a group of commodity-related stocks or indices.

It’s imperative to carefully read the Product Highlights Sheet and Prospectus to comprehend the conditions that may affect interest or principal payments. Don’t hesitate to ask questions and ensure you fully grasp the information contained within these documents before determining whether or not to invest in the structured note.

Returns from Structured Notes

Structured notes are debt obligations issued by the creator of the note, with interest or returns typically paid to investors throughout the term of the notes. The interest might be a fixed coupon or determined by a formula connected to one or more underlying reference assets or benchmarks.

Why Invest in Structured Notes?

Structured notes may allure investors with the prospect of returns higher than those on conventional deposits, and there might even be potential for capital growth. However, these returns or capital gains hinge on the performance of the underlying reference assets or benchmarks, exposing the investor to more diverse risks than traditional deposits would.

What’s the Most You Can Lose?

Since most structured notes do not come with principal guarantees, you could lose all or a large part of your investment under specific circumstances detailed in the Product Highlights Sheet and Prospectus. Your losses may occur if the underlying asset or benchmark performs poorly or if the structured note is redeemed early by the issuer, among other reasons detailed in the prospectus.

Are Structured Notes Suitable for You?

Structured notes might not be the right fit for every investor. Prior to investing, ensure that you:

• Are seeking potentially higher returns but are also braced for fluctuating returns, including the risk of losing a substantial portion or even all of your investment.
• Grasp how the returns are computed and are aware of the factors and scenarios that might influence those returns.
• Comprehend the risks tied to the structured note, including risks stemming from the use of derivatives for hedging or performance enhancement, as well as the risk of default by the provider or counterparty of the derivative.
• Understand the full scope of credit risks linked to the issuer and any assets referred to in the note.
• Are willing to commit your funds until the maturity date of the note and do not require immediate access to them.
• Are ready for the possibility of your investment being redeemed earlier by the issuer, which might lead to losing part or all of your original investment.

Investing in structured notes entails several risks, and understanding them is essential for informed investment decisions. Here’s an outline of the potential risks:

1. Underperformance of Underlying Asset or Benchmark:

• Structured notes often have returns tied to the performance of an underlying asset or benchmark (such as a stock index, commodity price, etc.).
• If the underlying asset or benchmark fails to perform as expected, it may lead to reduced returns or losses.
• This risk is particularly pertinent to investors who are relying on a specific movement in the underlying asset to achieve their expected returns.

2. Issuer Default:

• The issuer of a structured note is obligated to make payments as detailed in the investment terms.
• If the issuer defaults on these obligations (perhaps due to bankruptcy or other financial troubles), investors could lose part or all of their investment.
• It highlights the importance of understanding and assessing the creditworthiness of the issuer.

3. Derivative Risks:

• Structured notes usually include derivatives like options or swaps, which are financial instruments that derive their value from an underlying asset.
• These derivatives introduce additional complexity and risks:
  • Counterparty Risk: If the other party (counterparty) in the derivative contract defaults (e.g., fails to make a required payment), it can lead to losses.
  • Price Risk: The value of the derivatives can be volatile and is subject to market risks, potentially leading to losses.
  • Liquidity Risk: There may be times when it becomes challenging to buy or sell the derivative at a reasonable price.
• The integration of derivatives into the structured note means that investors are not only exposed to the performance of the underlying asset but also to the functioning and risks of the derivative contracts themselves.

Risks Associated with Various Types of Structured Notes

Within the investment landscape, structured notes offer different options, each with unique market risks. Here’s a closer look:

Equity-Linked Notes

• Your gains are tied to underlying assets like shares or equity indices. If these don’t behave as expected, you might not see the gains you were counting on.
• If returns are linked to several assets, the calculation might not be a straightforward average. Some assets, especially the underperformers, might weigh more heavily.
• The issuer might decide to put a ceiling on returns, particularly if the assets do exceedingly well. In that scenario, you could miss out on profits you would have earned by investing directly.
• If the repayment is in shares rather than cash, you might find yourself owning shares worth less than what you initially invested.

Interest Rate-Linked Notes

• These returns are influenced by fluctuations in interest rates. If the rates don’t shift as you expected, your returns could suffer.
• The unpredictability of interest rates means there’s a risk they might not move the way you anticipated, affecting the outcome of your investment.

Credit-Linked Notes

• Here, your returns are tied to the creditworthiness of specific entities or even underlying collateral. A default or other credit event could lead to a significant loss.
• As an investor in credit-linked notes, it’s on you to gauge the potential for a credit event related to the entities involved. This requires a deep understanding of both the entities themselves and the collateral that might be involved.

Understanding the Universal Risks of Investing in Structured Notes

Investing in structured notes also presents some broad-ranging risks that you should be aware of:

Early Redemption Risks

• Certain events might force an early redemption of the notes, potentially leading to a loss of all or most of your original investment.
• Early or mandatory redemption could come with transaction or unwinding costs, reducing the amount you receive back.

Credit Risk of Issuer

• If the issuer is a Special Purpose Vehicle (SPV), understanding the assets that back it is crucial. Should the issuer default on a payment, it’s considered a breach of contract, with repercussions for your investment.

Derivative Counterparty Defaults

• If a derivative counterparty doesn’t meet its payment obligations (due to insolvency or bankruptcy, for instance), the issuer may not receive any payments under the derivative contract, like a swap or option. This could lead to the issuer defaulting on its payment obligations under the notes.

Collateral-Related Risks

• The value or performance of collateral might degrade. If other parties have prior rights to the collateral, or if the collateral’s value drops significantly, you may recover little or none of your investment.

These general risks add another layer of complexity to structured note investments. Whether you’re an ambitious young professional or an experienced working adult, understanding these risks can guide your investment decisions, helping you align them with your financial goals and risk profile.

Additional Considerations and Hazards for Structured Note Investors

Liquidity Concerns – Think about whether you might require the funds you’ve invested prior to the maturity date. Knowing whom to turn to for selling the structured note or obtaining a valuation can also be vital.

Early Sale Consequences – If you sell the structured note before it matures, you might face a reduction in your returns, lose a part of your principal, or both.

Reinvestment Risks – An early call or redemption of the structured note can present challenges, as you might have to reinvest the funds at less favorable rates.

The Impact of Inflation – Bear in mind that inflation might diminish the real value of the returns on your investment.

Precautions and Key Considerations for Early Redemption and Other Factors in Structured Notes

Early Redemption Possibilities

Most structured notes permit the issuer to redeem or “call” the notes before they mature, paying back the full amount. In the event of early redemption, you could confront reinvestment challenges and possible losses if you can’t find investments with comparable returns for the principal. Specific triggers for early redemption may include:

• Event of Default: Such as the issuer not fulfilling payment obligations.
• Tax Imposition: On either the issuer or the note’s payments.
• Extraordinary or Force Majeure Events: Detailed in the note’s prospectus.
• Insufficient Collateral Security: Particularly if the collateral’s market value declines.

In these scenarios, you may end up losing some or all of your initial investment.

Understanding Fees and Charges

Issuers may levy fees for managing the reference assets or for hedging related risks. All such costs, typically deducted from asset-generated returns, should be outlined in the structured note’s prospectus. Additionally, if the note is exchange-traded, be aware of clearing and trading fees, plus broker commissions.

Essential Documentation

When considering a structured note, expect to receive both a prospectus and a Product Highlights Sheet (PHS).

• Prospectus: This document is essential for retail investors, containing details of the offer, issuer information, risk factors, and the specific terms and conditions. It’s vital to read and understand the prospectus thoroughly.
• Product Highlights Sheet (PHS): Alongside the prospectus, the PHS gives a concise overview of the structured notes, spotlighting essential features and potential risks. While including helpful visual aids like graphs, the PHS doesn’t replace the prospectus; both should be studied before making a purchasing decision.

Essential Questions to Consider Before Investing in a Structured Note

When contemplating the purchase of a structured note, it’s crucial to make an informed and confident decision. Here are some vital questions to guide you:

1. What Are Your Individual Financial Goals and Needs?

• Reflect on your specific needs, goals, personal situation, and risk tolerance.

2. How Well Do You Understand the Structured Note?

• Ensure alignment with your investment objectives.
• Grasp the factors influencing your returns; are you familiar with the underlying asset and comfortable with the market exposure?
• Understand and be comfortable with the associated risks; recognize scenarios where you could lose a significant portion or all your capital.
• Evaluate the credit risk of the structured note’s issuer.
• If collateral is involved, be aware of its composition and assess your comfort level with it.

3. How Does This Investment Compare to Others?

• Explore alternative investment products and evaluate how they stack up against the structured note in terms of risk and return.
• Consider if adding this product to your portfolio could push your risk exposure beyond comfortable levels.

By asking these essential questions, you’re taking crucial steps toward ensuring that your investment aligns with your financial objectives and risk profile. Always consult with a financial professional if you have any doubts or need more information about the specific structured note you’re considering.