ACTIVELY MANAGED CERTIFICATE (AMC)

An AMC is a structured product whose underlying assets are managed, in whole or in part, on a discretionary basis. The organization of an AMC includes an allocation advisor, an issuer and a calculation agent. Those products have become very popular thanks to their flexibility, transparency and lower costs than investment funds or ETFs.

AUTOCALL

The “Autocall” mechanism indicates that the product can be automatically redeemed in advance as soon as a predefined condition is met. In most cases, the product will be redeemed early as soon as its underlying closes, on a predefined observation date, above a early redemption barrier (very frequently its initial level).

BEST EXECUTION

European Investment firms must take all reasonable steps to obtain the best possible result for their clients when executing orders. The best possible result should be determined with regard to the following execution factors: price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order.

BID-ASK SPREAD

The bid-ask spread is the difference between the price at which a market maker is willing to buy an asset (bid price) and the price it is willing to sell at (ask price).

CALLABLE

The “Callable” mechanism indicates that the product may be redeemed early at the issuer’s discretion. Such early redemption is generally possible according to a pre-determined schedule and may be decided by the issuer without any justification on its part.

CAPITAL PROTECTION

Varying degrees of capital protection can be built into a structured product. Some products offer 100% protection of the nominal meaning that at maturity, holders would be sure to receive 100% of the invested nominal even if the underlying has moved against their expectations. Some products may offer only partial capital protection which limits the potential loss to a predetermined level.

It is important to note that any capital protection remains subject to the solvency of the issuer of the structured product.

COMPLEX PRODUCTS

Complexity is a relative term, and depends on the risk-reward profile and other characteristics of the product. Usually most products being or embedding a derivative and/or using opaque indices and/or having fixed investment terms with barriers to exit and/or having returns/pay-off structures involving multiple variables or complex mathematical formulas and/or include capital protection that may be conditional or partial and that can be withdrawn on the occurrence of certain events are deemed complex.

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CONDITIONAL CAPITAL PROTECTION

On certain structured products, the investor is exposed to a capital loss if the underlying finishes on expiry lower than its initial level (Strike) and depending on the occurrence of an event.

• Barrier event at maturity: Products with this mechanism aim at repaying the invested capital at maturity, provided that the underlying has not declined at maturity by more than a certain predefined percentage. The performance of the underlying is calculated from its initial level and is only observed at maturity. For example, a product with a conditional protection barrier at maturity of 60% and whose underlying has fallen by less than 40% at maturity would be fully repaid at maturity. If, however, this level is breached at maturity, the final value of the underlying generally dictates the magnitude of the capital loss at maturity.
• Intraday barrier event: Products with this mechanism aim to repay the invested capital at maturity, provided that the underlying has never declined by more than a certain predefined percentage. The performance of the underlying is calculated from its initial level and observed at any time during the term of the investment. For example, a product with an intraday conditional protection barrier of 60% and whose underlying has never declined by more than 40% during the specified period would be fully redeemed at maturity. If, however, this level is breached during the period, the final value of the underlying generally dictates the magnitude of the capital loss at maturity.
• Daily closing barrier event: Products with this mechanism aim at repaying the invested capital at maturity, provided that the underlying has never closed down by more than a certain predefined percentage. The performance of the underlying is calculated from its initial level and observed at each daily closing during the term of the investment. For example, a product with a daily closing conditional barrier level of 60% and where the underlying has never closed down more than 40% during the specified period, would be fully repaid at maturity. If, however, this level is breached on a daily closing, the final value of the underlying generally dictates the magnitude of the capital loss at maturity.

It is important to note that any capital protection remains subject to the solvency of the issuer of the structured product.

DECREMENT

The “decrement” mechanism consists of deducting from the value of an underlying (generally an index) a pre-determined amount, either a fixed amount (decrement in points) or calculated as a percentage of the value of the index.

DERIVATIVE

A derivative is a financial contract linked to the fluctuation in the price of an underlying asset or a basket of assets.

ISSUE PRICE

It corresponds to the price of the structured product at the time of its issue. Often 100% of the nominal value, this price can still differ from the nominal value. If the issue price is higher than the nominal, the product is said to be issued above par and conversely if the issue price is lower than the nominal.

ISSUER

An issuer is an entity that creates, registers and offers securities, such as structured products. By issuing a structured product, the issuer raises debt from the investors who subscribe to it. These investors become the owner of a debt security, redeemable under the terms defined in the prospectus.

ISSUING PROGRAM

A securities issuance program is a document registered with a market authority allowing the issuance of securities (EMTN) in a fast and flexible manner. Once the program is registered, the issuer can appeal to investors by issuing securities whose terms and conditions (Final Terms) refer to the program’s base prospectus. The program also identifies the dealers responsible for connecting investors with the issuer, the paying agents and the central depository.

KIDs

KIDs are information documents written according to a model imposed by the regulations in 3 pages and whose content is strictly framed: What does this product consist of? What are the risks of the product? Performance scenarios; Costs and charges; Target market; How to make a claim? Other information.

LIQUIDITY

Liquidity reflects how easy or difficult it is to buy or sell an asset without affecting the price significantly. For most structured products the issuer, or the issuer’s affiliates, intends, under normal market conditions, to provide bid and/or offer prices on a regular basis. But it does not mean that the issuer, or the issuer’s affiliates, makes a firm commitment to provide liquidity and assumes no legal obligation to provide it. In certain circumstances, there may be no secondary market for the structured product.

LISTING

Listing a structured product consists in referencing it on a stock exchange. You may find more information on the Luxembourg Stock Exchange website: https://www.bourse.lu/listing-programmes

MULTILATERAL TRADING FACILITY (MTF)

An MTF is a system, or “venue”, which brings together multiple third-party buying and selling interests in financial instruments in a way that results in a contract, MTFs can be operated by investment firms or market operators and are subject to broadly the same overarching regulatory requirements as regulated markets and the same detailed transparency requirements as regulated markets.

PHYSICAL DELIVERY

When purchasing a structured product, the investor is not investing directly in the underlying. However, certain structured products may result in the owning of the underlying asset at maturity. Redemption of the product is made in the form of units of the underlying delivered at maturity (physical delivery). In the majority of cases, this physical redemption occurs when the final value of the structured product ends below par.

PROSPECTUS

A prospectus is a formal document that provides details about an investment offering. The document contains relevant information about the investment security and the issuer.

QUANTO

A Quanto feature means the currencies of the underlying assets are different to the payment currency of the structured product. This feature means that when calculating the redemption of the structured product, the performance of the underlying assets in their base currency is not adjusted according to the exchange rate between those two currencies.

SECURITIES FINANCING TRANSACTIONS

Securities Financing Transactions include a variety of secured transactions that have similar economic effects such as lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions (reverse repo) and buy-sell back or sell-buy back transactions, including collateral and liquidity swaps.

SETTLEMENT

The completion of a transaction or of processing through the transfer of money and/or securities. Most of structured products are settled through the Delivery versus Payment (DVP) process.

SHORT SELLING

Short selling is the sale of a security the seller does not own at the time of entering into the agreement with the intention of buying it back at a later point in time in order to deliver it.

TERM SHEET

A Term Sheet is a non binding document outlining the basic terms and conditions of the structured product.

UNDERLYING

The underlying is the asset to which the structured product relates. The underlying assets are often equities or equity indices but can also be commodities, bonds, interest rates, exchange rates, swaps, etc…

In its simplest configuration, the underlying is a single asset. However, it can also be a basket where the components are weighted according to a predefined rule, a Worst-of (the underlying is the component of a basket with the worst performance calculated since its initial level), a Best-of (the underlying is the component of a basket with the best performance calculated since its initial level), etc…

VOLATILITY

The implied volatility represents the degree of unpredictable change in the price of the underlying. Implied volatility does not indicate if the underlying will move up or down but it represents the magnitude of the potential move. A volatile instrument will have positive and/or negative fluctuations in a greater extent than one that is less volatile. Before maturity, changes in the expected volatility of the underlying can impact the valuation of the structured product in multiple ways.