Wrapper Guide Americas 2024
September 2024
Turn Data into Intelligence
The Application Programming Interface (API), is a web-based software application which allows clients to access our data in a controlled manner & integrate it using their own software packages & systems.
Retrieve
• Download real time SRP data directly to excel
• Receive market share on each asset class/payoff for each company of interest
Interrogate
• Monitor & increase your market share
• Carry out accurate trend analysis with comprenhensive product data spanning over 15 years in seconds
Incorporate
• Import data directly into in-house systems/platforms and interrogate the data and risk more effectively
• Combine data sets with other products and visualise it in the context of the larger business
The Americas market features a combination of onshore and offshore inflows worth hundreds of billions of dollars on a yearly basis.
While the US has seen unprecedented growth in its onshore structured notes since 2022, the market also acts as a strategic hub serving Latin American investors, with the presence of European issuers.
Canada, Brazil and Mexico have recorded significant onshore inflows driven by a solid presence of high-net-worth investors.
In view of the sheer market size across the region, the SRP Americas Wrapper Guide 2024 seeks to provide a comprehensive overview of the wrappers used for structured investment products that are popular in the region with the latest data, news and commentary from top industry players, including but not limited to Citigroup, Royal Bank of Canada, Desjardins, BBVA, Santander, Monex and Equitable.
For each market, the SRP Americas Wrapper Guide 2024 first examines market trends by analysing the issuance or sales volume by wrapper from 2019 to the first half of 2024 based on SRP data. It then explains how each wrapper works and contains the latest news and insights from senior executives about the use of the different wrappers and the state of each market. The guide is part of SRP’s goal to deliver educational materials to the market and is aimed at shedding light on the different ways to access structured products in the Americas markets.
Disclaimer: While SRP’s aim is to provide accurate and up-to-date information, the data provided is gathered from third parties. SRP does not take responsibility for the accuracy of the data and will not be held liable for any errors or omissions contained in the information provided. The information and data included on SRP’s market reports uses sources believed to be reliable. SRP assumes no liability or responsibility for the quality, content, accuracy or completeness of the information, text, graphics, links and any other items contained on this report.
Editorial: Amelie Labbé, Pablo Conde, Summer Wang, Marc Wolterink, Jocelyn Yang
Production: Paul Pancham
Marketing: Daniel Evans
Sales: Reihaneh Fakhari
Front cover image: AdobeStock
POLICY:
If you are interested in having a similar bespoke report produced for your organisation, please contact:
Reihaneh Fakhari
US – registered notes drive record growth
During the past five years four different wrappers have been used in the US market.
The US structured products market has gone from strength to strength in recent years. In 2023, the market was worth a record US$120 billion – an increase of five percent by sales volume YoY and up almost 100% compared to 2019, when US$60.3 billion worth of structured products sold. The market continued its progress in 2024, as by 30 June sales had reached around US$82.5 billion – just under 70% of last year’s total.
Issuance was also on the up, increasing by more than 70% since 2019. Most of the volumes were invested in SEC registered notes. In 2023, this wrapper type was responsible for 97% of the total sales, translating in sales of US$116.4 billion (from 35,550 products). Unregistered notes captured
around two percent of the US market, with sales of US$2.3 billion, however, in the first half of 2024 their market share had increased to seven percent.
The other two wrappers used in the US market are the certificate of deposit (CD) and warrants, although the latter is rarely seen on the SRP US database with issuance totalling a mere 55 in the past five years.
CDs collected an estimated US$1.3 billion in 2023 from approximately 530 products with HSBC and Morgan Stanley the main issuers followed by BMO, Goldman Sachs, J.P. Morgan, and Citi.
Tailwinds on unregistered notes, MLCDs
2024, is on course to be another record-breaking year for the US market.
Some 22,000 SEC registered notes that were issued between 1 January and 30 June collected sales of US$76.3 billion –forty percent higher by sales volume compared to the same period last year while issuance was up by more than 28% YoY (H1 2023: US$54.9 billion from 17,150 products).
J.P. Morgan, Goldman Sachs and Bank of America, were the most active issuers in the registered note segment, claiming a market share of 15%, 12% and 11%, respectively. Barclays was the main European bank (9.4% market share) followed by HSBC (3.6%) and Deutsche Bank (0.7%) while there were also several Canadian banks selling registered notes, including Scotiabank (5.9%) RBC (4.2%), and BMO Financial (3.5%), among others.
In the unregistered notes space sales reached an estimated US$6 billion in H1 2024, including around US$5.1 billion from BNP Paribas, which was the dominant issuer by some distance, capturing 84% of the market, ahead of BBVA (four percent), Citi, Barclays (two percent), and Société Générale (one percent), among others.
The latter had been the main issuer of unregistered notes until 2020, when it captured more than 90% of the market, but the following year its market share fell to 23% and by 2023 it had decreased to just six percent. SRP’s coverage of the marketlinked CD (MLCD) market in H1 captured around 150 products worth US$400m.
US H1 2024: SEC registered notes - Top 10 issuer group, market share by sales volume
US H1 2024: unregistered registered notes - top 10 issuer group, market share by sales volume
US H1 2024: certificates of deposit - issuer groups, market share by sales volume
US H1 2024: SEC registered notes - asset class, market share by sales volume
USA
The market offers a variety of issuance wrappers to accommodate the needs of large institutional or high net worth private clients as well as mass retail investors.
The US structured products market is currently the fastest growing market in the world and has undergone significant change since the end of the global financial crisis.
The arrival of issuing platforms approximately around a decade ago has altered the distribution model as wealth managers and financial advisors embraced an open architecture approach and a change on the product mix.
OTC market
Structured note
Structured notes are securities issued by financial institutions whose returns are based on, among other things, equity indexes, a single equity security, a basket of equity securities, interest rates, commodities, and/or foreign currencies. Financial institutions typically design and issue structured notes, and broker-dealers sell them to individual investors.
Some common types of structured notes sold to individual investors include: principal protected notes, reverse convertible notes, enhanced participation or leveraged notes, and hybrid notes that combine multiple characteristics.
Risks: complexity, market risk, issuance price and note value, liquidity, payoff structure (participation rates, capped maximum returns, knock-in feature), credit risk, call risk, tax considerations
Tax considerations: The tax treatment of structured notes is complicated and in some cases uncertain. Before purchasing any structured note, you may wish to consult with a tax advisor. You also should read the applicable tax risk disclosures in the prospectuses and other offering documents of any structured note you are considering purchasing. (Source: US Securities and Exchange Commission (SEC))
1) SEC-registered note
Structured notes generally are senior, unsecured obligations of the issuer that rank pari passu with all of that issuer’s other
unsecured and unsubordinated obligations. Most structured notes are also registered securities where the issuer has filed a registration statement with the SEC for the offering, according to the regulator.
Did you know?
The market has posted record traded notional exceeding US$100 billion in 2023. It is on pace to post another yearly record high despite a downturn in June as the issue amount hit US$67.1 billion in H1 2024, according to SRP data.
Industry voice - Citigroup
David Serraf, director, head of structuring for financial intermediaries
“This year saw a notable shift from autocallable and bullet to issuer call in terms of payoff. However, we’ve seen large inflows with attractive entry point with a lower spot and higher vol while rates remain relatively elevated in the most recent months.”
There’s also growing demand for longer-term notes over three years across all call types. Demand for price efficient alternatives to benchmark, such as S&P rolling future indices, continues to trend up.
Nvidia is the most popular stock underlier while the Nasdaq-100 Technology Sector Index (NDXT) remains favored outside of the broad US indices. Another new underlying we added is the Nasdaq Generations 5 Index (NDXGEN5).
We saw more competitors in the first half of the year. Citi aims to be consistent with our clients throughout the year as opposed to some of our competitors with large differences in term of notional issued from one month to the other.”
Did you know?
Nomura is currently the only Asian issuing bank after it returned to the space in May following an eightyear hiatus. The other 13 issuers are from the US (5), Canada (5), British (2) and Switzerland (1).
To learn more: Search SRP News ‘Nomura returns to US public market, global EQD push gains momentum’
Did you know?
British financial services firm Marex Group plans to enter the market mid-next year following its recent initial public offering (IPO) on Nasdaq.
To learn more: Search SRP News ‘Exclusive: Marex to enter SEC-registered note market’
Industry voice - RBC Capital Markets
Sarah Lem, head of US structured product sales
“A strong US equity landscape drives structured product demand into both new issuance as well as rolling called or expired products. Whilst US investors naturally demand domestic equity exposure, we’ve seen increased interest in thoughtful and strategic ways to establish and retain market access, including more tactical and nuanced exposures, and defensive payoff profiles.
RBC has continued to bring fresh underlying ideas and rationales to the market, including adjusted-return and rolling-futures indices via Solactive and S&P Dow Jone Indices (DJI).
Excitingly, we also launched the S&P 500 Market Agility 10 TCA 0.5% Decrement Index ER (SPMKTD) in
February as investors recognise that 60:40 allocations were particularly challenged in 2022. Structured notes referencing the index were traded shortly afterwards,
with the pipeline continuing to grow across financial intermediary channels.
In addition, we have honed in on thematics including the Magnificent 7 stocks and saw a lot of traction in alternative plays, such as data centres-focused AI baskets.”
Did you know?
RBC issued 1,102 registered structured notes and callable fixed rate notes with total principal US$3.19 billion in H1 2024 (vs 757, US$2.9 billion in H1 2023), according to SRP data.
2) Section 3(a)(2) note
A 3(a)(2) bank note program is a medium-term note program that enables an issuing bank to offer debt securities on a regular and/or continuous basis. The issuer (or a guarantor of the notes) must be a “bank,” as defined in Section 3(a) (2) of the Securities Act of 1933. Bank note programs are exempt from registration under the Securities Act.
There are usually four types of issuers: US branch as direct issuers, US branch as guarantor, headquarter as issuer, US branch as guarantor, SPV/Cayman branch as issuer. (Source: Morrison Foerster)
Did you know?
There’s no regulatory disclosure on the size of the 3(a) (2) bank note programs. BNP Paribas told SRP in an interview that the French bank, traded US$5.6 billion 3(a)(2) notes in 2023, followed by a strong first quarter of the year with US$3.0 billion.
To learn more: Search SRP News ‘BNP Paribas cashes in on defined vol indices in the US’
3) Rule 144A note
A Rule 144A bank note programme provides a nonexclusive safe harbour from the registration requirements of Section 5 of the Securities Act for resales of restricted securities to “qualified institutional buyers” (QIBs). Rule 144A offering for an issuer that is not registered in the U.S. –usually a standalone.
What are QIBs?
QIBs are large sophisticated organizations with the primary responsibility of managing large investment portfolios with at least US$100m in securities. In August 2020, the SEC broadened the definition to include limited liability companies (LLCs) and rural business investment companies (RBICs) as long as they satisfy the US$100m threshold in the QIB definition. Institutional ‘accredited investors’ that are of a type not otherwise listed in the QIB definition, but meet the US$100 million threshold, also qualify as QIBs. (Source: SEC)
Did you know?
There’s no regulatory disclosure on the size of the Rule 144A bank note programs. Nomura told SRP in an interview that the Japanese bank traded approximately US$2 billion in this space for the year ended in June.
4) Regulation S note
Regulation S, which was adopted by the SEC in 1990 provides that offers and sales of securities that occur outside of the United States are exempt from the registration requirements of Section 5 of the Securities Act of 1933. Structured products sales have grown in a wide variety of non-US jurisdictions. Many of these include countries in the US’s backyard, such as Central America and South America, while others are more distant.
Industry voice - BBVA
Daniel Hernandez, head
of e-connectivity sales
BBVA is one of the active issuers in this space targeting Latin American investors via broker-dealers based in Miami. The Spanish bank also serves US onshore investors via the 3(a)(2) program via wholesalers and wealth management calendar offerings, according to at BBVA.
“As a highlight for 2024, BBVA’s structured credit solutions, such as credit-linked notes (CLNs) or even credit tranches, as well as dual currency notes in the foreign exchange (FX) space have complemented our already competitive equity structured products offerings,” he told SRP, referring to both US onshore and offshore market
Did you know?
Nomura also has also increased its footprint in the Regulation S space with approximately US$700m traded in this space for the year ended in June.
US-based structured note desks, for both US and non-US issuers, are increasingly involved in the sales of products to investors in these jurisdictions. These US desks often have the most useful institutional infrastructure and knowledge base within a banking organization to handle these offerings. Depending on investor preference and other factors, many of these offerings are effected from an issuer’s Regulation S program, as opposed to a US registered shelf or exempt bank note program. (Source: Morrison Foerster)
Separately managed account (SMA)
While SMA is not a wrapper for structured investment product per se, SRP has observed an increasing use of such accounts to invest in structured notes in the US.
An SMA is a portfolio of securities that’s professionally managed separately from other portfolios, designed for high-net-worth individuals (HNWIs). The portfolios are made up of stocks, bonds, and other securities and can be customized to align with an investor’s unique goals and preferences. Its targeted nature is one of the key differences between SMAs and mutual funds or exchangetraded funds (ETFs). (Source: John Hancock Investment Management)
Industry voice - NewEdge Wealth
Michaelangelo Dooley, principal, portfolio manager
“I have been managing structured note SMA strategies formally since 2018 and using notes more broadly in portfolios for over a decade. During this time, I have seen much broader utilization of advisory based notes, which is a net positive for investors as transparency around structured note fees improves. Structured note-specific technology and reporting platforms have improved execution and lifecycle management, but still leave much to be desired for many advisors that don’t want to have deep involvement in implementing and managing the asset class.
Structured notes issuance has seen meaningful growth in the US market over the past decade, but I believe that the hurdles of implementation have put a cap on that growth, with DIY note implementation simply not fitting into the way that many advisors run their practice.
SMAs run by dedicated portfolio managers should make notes more accessible to advisors and the returns more consistent for clients, expanding the overall potential market size.
The DIY approach that most advisors have utilized to gain structured note exposure over the last decade and beyond was often out of necessity, not choice. Advisory-based structured notes are necessary to implement through a third-party SMA manager and yet, these advisory notes were not (and may still not be) widely available on all financial advisor investment platforms.
More and more advisors and firms are looking to professional asset managers to invest in equities, fixed income, and alternative asset classes. Structured notes have become the outlier forcing many advisors to implement and manage note portfolios themselves.”
What’s the minimum investment?
At Charles Schwab, the minimum investment for an SMA typically is US$100,000 for equities strategies, US$250,000 for fixed income strategies, US$250,000 for balanced strategies. A tiered, asset-based fee is charged, starting from 1.0%, 0.65% and 0.95% for the three types of strategies, respectively.
Example: SMA structured note advisory portfolio (SNAP) and structured note income portfolio (SNIP) offered by NewEdge Wealth. The two SMAs had US$369m and US$108m AuM as of 30 July.
Market-linked certificates of deposit (MLCD)
The maturities of market-linked CDs vary and typically fall between four and eight years. Some market-linked CDs may contain a call feature. Dividends are typically excluded when calculating the performance of underlying equity market. (Source: Financial Industry Regulatory Authority (Finra))
Tax treatment: it can vary, but it is common for investors to be subject to yearly taxation at ordinary income tax rates on the issuing bank’s estimated comparable yield, commonly referred to as “phantom income.” This occurs even though an investor typically does not receive periodic interest payments. Additionally, all gains associated with MLCDs are considered to be interest, and are taxed as ordinary income. Given these considerations, many investors choose to purchase market-linked CDs in tax-advantaged accounts. (Source: Raymon James)
Fund
1) Derivative income mutual fund
Many mutual funds may contain “derivatives” in addition to purchasing stocks, bonds, and other securities. Derivatives can be used for multiple purposes, such as to reduce risk (hedging), lower costs (such as transaction costs), and to potentially increase returns.
A simple investment strategy is to use futures as a substitute for the underlying asset, for example, buying a futures contract on a stock index instead of buying all the stocks. A more complicated strategy using futures might be a bet on the shape of the yield curve, which is a representation of bond yields with various times to maturity. Forwards are commonly used to manage and hedge a global fund’s currency exposure. Options can be used to hedge a sensitive position. A common swap position is a fixed-for-floating swap, where the portfolio receives a fixed payment (like a bond coupon), in return for paying an amount based on a floating interest rate.
Example: Goldman Sachs US Equity Dividend and Premium Fund (GSPKX). The open-ended buy-write strategy fund has US$3.4 billion total net assets as of 31 July.
2) Leveraged or inverse mutual fund
Certificates of deposit (CDs) are principal-protected products that hold investors’ deposit for a fixed term—usually a preset period from six months to five years—and pay you interest until maturity. Compared with fixed rate CDs, MLCDs, also known as variable rate CDs, are designed to participate in the potential growth of preferred underlying markets such as equities (stocks), commodities, or currencies. They are insured by the Federal Deposit Insurance Corporation (FDIC), but aren’t registered with the SEC.
The leveraged or inverse mutual funds are designed to
deliver multiples or the inverse of the performance of the index or the benchmark that they track. Funds such as these that are reset daily may present many of the same issues as leveraged or inverse ETFs.
Example: Rydex Inverse S&P 500 Strategy Fund (RYURX). Launched in 2001, the mutual fund had US$37.0m total assets as of 31 July.
3) Interval fund
An interval fund is a type of investment company that periodically offers to repurchase its shares from shareholders - generally every three, six, or twelve months. Shareholders are not required to accept these offers and sell their shares back to the fund. Legally, interval funds are classified as closed-end funds, but they are very different from traditional closed-end funds in that: Their shares typically do not trade on the secondary market. They are permitted to (and many interval funds do) continuously offer their shares at a price based on the fund’s net asset value.
Interval funds are permitted to deduct a redemption fee from the repurchase proceeds, not to exceed 2% of the proceeds. (Source: SEC)
Example: SCG Asset Management re-launched its Alternative Strategies Income Fund in Q4 2023, an interval fund that invested in 31 autocallable notes. It is “the first registered fund in the US to use solely equity-linked structured notes for income,” as SRP reported.
To learn more: Search SRP News ‘SCG AM pitches first US interval fund of structured products’
Listed products
Defined outcome ETF
For investors looking to manage volatility, defined outcome ETFs, also called “buffer ETFs,” generally offer protection from some percentage of market losses (the “buffer”) while capping market gains over a specified period. The “definedoutcome” refers to a performance range, and the period is usually one year, after which time the outcome period and exposure reset. (Source: Finra)
Did you know?
The first defined outcome funds were launched by Cboe Vest in 2016. These funds create defined outcomes with flexible exchange options (FLEX options) and differ from standardized options in that they allow for the customization of terms.
At the end of 2018, a total of six defined outcome ETFs had US$183 million in assets under management (AuM). Five years later in August 2023, the industry had grown to more than 180 defined outcome ETFs and nearly $27 billion in AuM. (Source: Innovator ETFs)
The ETFs create defined outcomes with flexible exchange options (FLEX options). These differ from standardized options in that they allow for the customization of terms.
Each Innovator Defined Outcome ETF holds a customized basket of FLEX options with varying strike prices, and the same expiration of around one year. This gives each ETF a defined buffer level and upside growth potential to a cap, over an outcome period. Each ETF intends to roll options components annually, on the last business day of the month associated with each ETF.
Industry voice - Morgan Stanley Investment Management
Anthony Rochte, global head of ETFs
“We have seen strong client demand for downside protection, buffer and managed outcome strategies. This corner of the US ETF market has more than doubled in size over the last five years, and this category of ETFs is driving a significant portion of continued industry growth,” Rochte, global head of ETFs at Morgan Stanley Investment Management, told SRP when the asset manager launched five actively-managed ETFs in November.
Leveraged or inverse ETF
A leveraged ETF generally seeks to deliver multiples of the daily performance of the index or benchmark that it tracks. An inverse ETF generally seeks to deliver the opposite of the daily performance of the index or benchmark that it tracks. Inverse ETFs often are marketed as a way for investors to profit from, or at least hedge their exposure to,
downward-moving markets. Some ETFs are both inverse and leveraged, meaning that they seek a return that is a multiple of the inverse performance of the underlying index.
To accomplish their objectives, leveraged and inverse ETFs use a range of investment strategies, including swaps, futures contracts and other derivative instruments.
Most leveraged and inverse ETFs reset each day, which means they are designed to achieve their stated objective on a daily basis. As a result, they typically are inappropriate as an intermediate or long-term investment.
Did you know?
There are 40 leveraged or inverse ETFs listed in the US, with Direxion Daily Semiconductor Bear 3x Shares owning the largest total assets at US$762.1m, followed by ProShares UltraShort 20+ Year Treasury’s US$268.5m as of 18 August, according to ETF Database.
Exchange-traded note (ETN)
ETNs are a type of debt security that trade on exchanges and promise a return linked to a market index or other benchmark. It is a type of exchange-traded products (ETPs), alongside ETFs and exchange traded vehicles (ETVs). Unlike ETFs, ETNs don’t hold assets - they’re non-convertible debt securities issued by a bank or other financial institution, similar to corporate bonds, with a term of one to 30 years. (Souce: Finra)
Most ETNs are listed on the NYSE Arca with a small number listed on Nasdaq or BATS Exchange (now part of Cboe).
As of 28 August, a total of 50 ETNs are live on NYSE Arca issued by UBS/ETRACS (23 products), MicroSectors (16), MAX (5), Deusche Bank (3), Barclays/iPath (2) and J.P. Morgan (1). Market markers comprised IMC, Flow Traders, Old Mission, Virtu, Jane Street, GTS and Wolverine Trading.
Did you know?
ETRACS is a new brand since 31 May as a result of UBS-Credit Suisse consolidation.
Did you know?
Barclays called nearly half of its US-listed ETNs in April 2023 after it booked a net loss of £600m for the year of 2022 primarily due to its over-issuance of structured notes and ETNs in the US.
Exchange-traded commodity (ETC)
An ETC is structured as trusts or partnerships that physically hold a precious metal or that hold a portfolio of futures or other derivatives contracts on certain commodities or currencies. (Source: SEC)
As of 28 August, a total of 14 ETCs are live on Nasdaq tracking cryptocurrencies issued by Virtune (12) or 21Shares (2).
Annuity
Fixed index annuity (FIA)
An FIA is a tax-deferred, long-term savings option that provides deposit protection when the market goes down, combined with an opportunity for growth. It gives investors more growth potential than a fixed annuity along with less risk and less potential return than a variable annuity. Returns are based on the performance of an underlying index, such as the S&P 500.
A key feature of an FIA is its tax-deferral status, meaning investors don’t owe income tax until receiving payouts. An FIA offers full principal protection, though, that all guarantees are subject to the claims-paying ability of the issuing insurance company. Other benefits include flexibility, lifetime income, earnings credit, beneficiary protection and enhanced death benefits.
What’s the market size?
The individual FIA sales volume reached a record high at US$95.9 billion in 2023 before hitting US$58.3 billion in the first half of 2024, according to Limra.
Did you know?
To learn more: Search SRP News ‘Exclusive: UBS rebrands several covered call ETNs in CS transfer’
Approximately 85% of the indices used in FIAs with an annual point-to-point without a spread crediting method - the most common and simplest type for FIAs - had a positive credit in 2023, according to The Index Standard.
What’s new?
The most recent FIA feature in SRP News is American National’s Strategy Index 10 Annuities, which added the Patriot Technology Index (PATRIOT) in exclusive partnership with BNP Paribas in July.
Landmark rules
The US Department of Labor (DoL) in April released the Retirement Security Rule, which imposes fiduciary duties on financial service providers, applicable to a range of retirement plans including fixed index annuities (FIAs). The regulation has sparked controversy in the industry and invited a lawsuit filed by nine insurance trade associations.
Did you know?
FIAs are not securities, unlike registered index-linked annuity (Rila). Therefore, they are not regulated by the SEC or Finra, but by state insurance departments.
Registered index-linked annuity (Rila)
A relatively new entry in the retirement market, a Rila is a tax-deferred long-term savings option that provides the opportunity for growth and limits exposure to downside risk.
Returns are based in part on the performance of an underlying index or indexes. A Rila also provide an option to convert the annuity into a stream of income payments in retirement through annuitization. Because of its potential for loss, a Rila is riskier than FIAs.
Industry voice - Limra
Bryan
Hodgens, senior vice president and head of research
“At present the latest DoL fiduciary rule is stayed and there are pending lawsuits. That said, most of the industry made adjustments to their operations to adapt to the proposed rules when the initial rule was proposed in 2016. Limra expects when and if the rule is finalized, companies will be well positioned to provide annuities to the many preretirees and retirees who need to protect their retirement savings against market volatility and create guaranteed lifetime income to secure their financial security in retirement.”
“Rilas first entered the market in 2010 and have seen growth year-over-year ever since. A majority of Rila sales have been without a guaranteed living benefit, only 10% of total sales have had a guaranteed life benefit (GLB) in the last few years. Trends in product design include performance locks, uncapped participation rates above 100% and an increase in the number of trigger rates being offered. Index Annuities have had more uptake on adding a guaranteed living benefit rider than RILA, but still most sales are bought for the protected growth. New custom indices have been added to products but the S&P 500 index garners over 80% of the sales.
The independent broker dealer channel represents almost 50% of the total Rila sales in 2023. The career or agency building channel represents 20% of the total sales.”
Source: Limra US Individual Annuities Sales Survey
What’s the market size?
The Rila sales volume again was in record territory at US$47.4 billion in 2023 before delivering US$30.7 billion in the first half of 2024, according to Limra.
Did you know?
New York-based Equitable is the insurance carrier behind the first Rila brought in 2010. It has been the top provider of Rilas by sales volume with a safe lead, according to Limra.
future benefit payments could lose purchasing power due to inflation.
Industry voice - Equitable
Pete Golden, managing director, individual retirement
Market conditions since 2022, combined with the largest cohort of Baby Boomers turning 65 at the rate of 11,000 per day, have set the stage for the rapid growth in annuity salesincluding Rilas - that we are seeing today. For a generation of financial advisors, 2022 was the first year they experienced a significant down market in their careers, with the S&P 500 experiencing a loss of 19.4%, its worst performance since the financial crisis in 2008. With the higher market volatility, we are seeing clients increasingly select higher downside buffers and strategies where clients can still obtain a positive return even if the index is negative.
To cover actual emerging inflation, they may be specified to increase at a fixed rate (such as 2% or 3%) annually. Some life insurers offer benefits that vary based on inflation indices, such as the Consumer Price Index.
Example: In May 2022, Independent Insurance Group launched iStructure, the first uncapped index-linked structured settlement annuity linked to the Franklin BofA World Index, according to the carrier. It was sold over US$100m in six months.
Additionally, a variable product known as the “Market Indexed” structured settlement calls for benefit payments that are indexed to equity market performance, such as the S&P 500. (Source: Annuity.org)
Indexed universal life (IUL)
Structured settlement annuities (SSA)
An SSA is a type of court settlement paid out as an annuity instead of a one-time, lump-sum payment. It typically provides tax advantages to the person receiving it while also providing some savings to the party paying the settlement.
A potential disadvantage of structured settlements is that the annuity benefits are generally fixed at issue and the
An IUL is a type of permanent life insurance policy that includes a cash value that can earn interest tied to a specific index such as the Nasdaq 100, S&P 500 and even proprietary indices like the BofA U.S. Aigility Index.
To learn more: Search SRP News ‘BofA: tactical diversification can help with macro shifts’
Thematic Investing Solutions
The future will be shaped by emerging technological, macroeconomic and geopolitical megatrends. Now there’s a way to capture these themes.
SCAN TO LEARN MORE
Canada – MTNs dominate
The Canadian market is dominated by medium-term notes
(MTNs) with the only other wrapper of note being the certificate of deposit.
The proportion of products wrapped as MTN has consistently increased during the past five-years and in 2023 more than 90% of all products were wrapped as such, compared to 76% in 2019. In 2023, Canadian Imperial Bank of Commerce (CIBC) was the main issuer of MTNs with a 23% market share by issuance (1,089 products).
The bank’s notes were almost all autocalls mainly linked to a single equity-index, with the Solactive Canada Bank 40 AR Index the most frequently used (335 products), or a basket of indices.
National Bank of Canada (NBC) was another active MTN issuer in 2023, with some 826 products issued during the year (17% market share). All its products were autocalls, mostly linked to
single equity indices, with the Solactive Canada Bank 40 AR Index again the preferred option; exchange-traded funds were also a popular option, especially the iShares Core S&P 500 ETF CAD Hedged (91 products).
Other issuers of notes included Royal Bank of Canada (RBC), Scotiabank and Toronto Dominion Bank.
Certificates of deposit were available from five different issuers in 2023, with Desjardins responsible for more than 50% of the total issuance for the year. Some 92% of its products were linked to a basket of shares an asset class that was also used by NBC, although the latter did prefer single indices as underlying for its deposits, ahead of ETFs. Deposits were also issued by RBC and Toronto Dominion Bank.
Canada
The Canadian structured product market is dominated by privately-placed notes and guaranteed investment certificates (GICs) with ETFs complimenting the activities driven by covered call strategies.
Private placements
Structured note
Structured notes, predominantly equity-linked notes, are typically divided into two categories in the Canadian market context: principal-protected notes (PPNs) and non-principalprotected notes (NPPNs), or principal at-risk notes (PAR notes).
PPNs were first introduced in Canada in the 1990s. They are structured as a zero-coupon bond combined with a payoff option linked to the performance of an underlying asset. The market expanded in 2007 with the introduction of NPPNs. (Source: Canadian Investment Regulatory Organization)
Offered to retail investors or customised, majority of structured notes have a tenor of six to eight years and are issued and distributed by local banks. Active issuers include Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CIBC), National Bank of Canada (NBC), Royal Bank of Canada (RBC), and others. These notes are overseen by the Canadian Securities Administrators.
The most popular underlying types year-to-date are single indexes, specifically developed by Solactive with a decrement or adjusted-return overlay, or a basket of stocks mostly on domestic oil, gas or banking sectors. Autocall and barrier reverse convertible is the most-used payoff types in these notes. (source: SRP)
There are two categories for the NPPNs. One is the growth notes aimed to enhance returns when market performance is positive such as the booster or accelerator.
The booster-focused note provides a minimum return at maturity if the performance in the underlying equity investment at maturity is positive but less than the stated booster amount, while the accelerator-focused note provides a multiple of the performance of an equity investment if its performance is positive at maturity.
Alternatively, income notes offer the ability to receive
guaranteed or conditional income - autocallable notes or fixed-yield notes make guaranteed payments on a regular basis and usually offer conditional principal protection at maturity. (Source: RBC)
Did you know?
The Canadian structured note market is highly concentrated on domestic underlying assets, particularly equity indices with a decrement or returnadjusted overlay provided by Solactive.
Industry voice - RBC Capital Markets
Grant Borcharding, head of structured product solutions, Canada
“RBC had a strong first half of the year, especially in Q2, across new issuance and rolling or calling products, during which we saw a higher roll-over speed compared with 2023. We expect this momentum to continue for the rest of the year. We have been investing in our interest-rates linked capabilities as we see increasing interest and queries around this. The fixed income-linked products are issued under our CAD deposit notes programme, including floating rate notes, fixed rate callables and zero-coupon accruals. Our issuances in H1 2024 more than doubled that year-on-year.
We have been investing in our interest-rates linked capabilities as we see increasing interest and queries around this. The fixed income-linked products are issued under our CAD deposit notes programme, including floating rate notes, fixed rate callables and zero-coupon accruals. Our issuances in H1 2024 more than doubled that year-on-year. We’ve also seen strong demand across the product mix. In barrier or
buffers for example, we find our clients generally prefer higher coupons to deeper protection, which has enabled us and our clients to monetize volatility. We have invested heavily in pricing and documentation technology in order to deliver structured notes to clients as efficiently as possible.
Within underlyings, a key trend has been the move into enhanced single stock adjusted-return indices, which offer the potential for more favourable product economics, and have resonated especially well with clients who want to add tailored exposures to their portfolios. In partnership with Solactive, RBC has been the first and sole issuer of structured notes linked to such indices to our knowledge.”
Market-linked guaranteed investment certificate (MLGIC)
Issued and distributed by domestic banks, an MLGIC guarantees 100% principal while earning a fixed or variable rate of return linked to an underlying asset, including stock indices, a basket of equity shares, or interest rates. MLGIC often features capped or uncapped participation payoffs with a typical tenor of three and six years, with some seeing a one-to-three-year tenor or six-to-eight-year tenor. MLCDs are neither an insurance contract nor a security. They are eligible for insurance provided by Canadian Deposit Insurance Corporation (CDIC).
In terms of underlying assets, the market is highly concentrated in Canadian underlying assets like structured notes, featuring banking stocks such as Bank of Nova Scotia, Canadian Imperial Bank of Commerce and BCE. (Source: SRP)
Industry voice - Desjardins
Benoit Bélanger, director, equity derivatives and structured products
“The structured notes market in Canada has shown remarkable resilience amid challenging economic conditions and increasingly divergent views on market directions. It has grown rose significantly year-to-date compared with the prior-year period. Desjardins has issued 119 structured notes in H1 2024.
We forecast that investors will benefit from PPNs that allow them to limit downside portfolio exposure, and benefit from secondary market tailwinds via elevated but falling rates coupled with the potential for risen volatility. More importantly, investors can have both growth and protection.”
“The first half of the year has proven to be excellent for the MLGIC market even in the face of significant headwinds, mainly interest rates. Historically speaking, the demand for MLGICs is inversely correlated to GIC’s prevailing deposit rates, however the historically strong pricing environment and demand for protection has taken precedence. Moving forward, we expect to see clients continue the shift from standard GICs to MLGIC’s if or when interest rates fall as expected and market performance over the tenor has been nothing short of exceptional.
Since 2023, clients have increasingly favored shortterm (three years or less) for MLGICs and those with minimum guarantees. The Zeniture Balanced Guaranteed Investment, which generated gross sales of a few billions from 1 April 2023 to 31 March 2024, has become one of the best-sellers on our structured product shelf.
At the beginning of the year, we observed that many major investments firms had positive expectations for European markets in 2024. In responses we in June launched the Opportunity Guaranteed Investment - European Market, a MLGIC linked to a basket of stocks with a goal to double the returns of prominent European companies across various sectors. The product was offered in June and July with a participation rate of 200% to 240% based on the investment amount. This theme is also made available via a PPN with similar payoff.
Did you know?
As one of the most active providers, Desjardin issued 131 MLGICs worth multiple billions of dollars in the first half of 2024.
Mutual fund
Derivatives are commonly used by Canadian mutual funds. The four types of derivative instruments primarily used are called forward contracts, futures contracts, options contracts and swap agreements. The mutual funds which are designed
to replicate exposure to structured products are also called funds of structured products.
In October 2019, investment management firm Purpose Investments launched Purpose Structured Equity Yield Portfolio, the first fund to replicate the outcome of structured notes in Canada, according to the Toronto-based manager.
Another example is the BMO Strategic Equity Yield Fund since June 2023, a mutual fund that replicates exposure to structured notes such as autocallable notes. The open-end fund amassed CA$252.9m net assets and delivered a 4.97% year-to-date return as of 31 July.
Listed products
Exchange-traded fund (ETF)
Canada’s ETF market gathered a CA$5.2 billion in July, on par with April and May after a record-breaking June figure of CA$10 billion created. It brings year-to-date inflows to CA$38.8 billion. By asset class, equities led the inflow leaderboard again with CA$2.6 billion in net new assets for July, dominated by flows into the US and global regions while Canada suffered a large outflow of CA$1 billion. Fixed Income ETFs registered widespread inflows amounting to CA$1.7 billion. Commodities and Crypto-asset ETFs each had modest inflows. Multi-asset ETFs enjoyed yet another month of solid inflows at CA$637m led by growth and balanced asset allocation ETFs. (Source: NBC)
Covered call ETF
The covered call option strategy is designed to provide an investor with a double source of cash flow: an option premium plus the dividend yield. It is considered a cash flow enhancement strategy because it generates additional cash flows compared to only owning the underlying stock. (Source: BMO)
Canada has seen a prevalence of covered call ETFs, which are listed on Toronto Stock Exchange or Cboe Canada, formerly NEO Exchange. As of 19 August, a total of 47 covered call ETFs denominated in Canadian dollars are being offered across Global X (18), BMO (13), CI Financial (12), Hamilton (2) and RBC (2) with a total size of CA$15.9 billion, according to Morningstar.
Among them, the BMO Covered Call Canadian Banks ETF, launched in April 2016, had the largest fund size at CA$3.0 billion taking a safe lead. Meanwhile, the CI U.S. Aggregate Bond Covered Call ETF - Hedged Common Units had a mere CA$1.0m as the smallest fund.
Did you know?
BMO is the largest provider of covered call ETFs by fund size in the country after its debut of such strategy in 2011, according to the provider.
Buffer ETF
As a relatively new entrant, the buffer ETF is another type of defined outcome ETFs seen in Canada. They use option contracts engineered to provide a layer of protection with a cap on the market participation over the defined period. Within the period, values will depend on the market, intrinsic and time value of the options. The buffered zone and cap on market participation is set at the beginning of the period and only applies at the end of the specified outcome period. Investors trading the ETFs during the period can experience different performance from the stated downside buffers and upside cap. (Source: BMO)
As of 19 August, eight buffer ETFs denominated in Canadian dollars are being listed with combined net assets of CA$175.8m. They all feature exposure to US equity, offered by First Trust Canada (CA$112.2m) or BMO (CA$63.6m), according to Morningstar.
Did you know?
In August 2019, First Trust Canada launched the hedged units of the First Trust Cboe Vest US Equity Buffer ETF – August (TSX: AUGB.F) as its first ‘ETF alternative to structured products’.
Accelerator ETF
Accelerator ETFs is another type of defined outcome ETFs with no use of leverage and have gained limited traction in Canada. They employ options contracts engineered to provide approximately 2x price returns with a cap on the market participation over the defined period.
The accelerator zone and upside cap on market participation are set at the beginning of the period and only apply at the end of the specified outcome period. Investors trading the ETFs during the period can experience different performance from the stated outcomes. (Source: BMO)
BMO is currently the sole provider of two accelerator ETFs listed on Cboe Canada – BMO Canadian Banks Accelerator ETF (ZEBA) and BMO US Equity Accelerator Hedged to CAD ETF (ZUEA). With inception in October 2023, the two funds owned respective net assets of CA$4.1m and CA$2.8m as of 19 August, according to the fund manager.
Mexico – deposits sell best
The Mexican structured products market was worth an estimated MXN331.1 billion (US$16.9 billion) in 2023 – an increase of 10% by sales volume year-on-year.
Certificates of deposit, bonds, and, to a lesser extent, structured warrants are the main wrappers in Mexico.
The former is the largest by sales volume and in each of the past five years it has held a market share of more than 50% (except for 2020 when market share for certificates of deposit was 48%) while the share for structured bonds has mostly hovered around the 40% mark between 2019-2023. By issuance, however, investors have shown more interest in bonds, especially from 2022 onwards – since then they captured around two-thirds of the market.
FX-rates (USD/MXN) and interest rates (Bank of Mexico Interbank Equilibrium Interest Rate – TIIE 28) were the preferred asset classes for certificates of deposit, a category
that was dominated by Monex to such an extent that it claimed 96% market share in 2023, on the back of a sales volume of MXN210.9 billion from 1,905 products.
BBVA held four percent market share, again from USD/MXN and TIIE 28-linked products, while the market share of the only other issuer (Banorte) was negligible.
Roles were reversed in structured bonds space, with BBVA claiming 69% market share against 29% for Monex. Santander was also active, albeit on a smaller scale (two percent).
Meanwhile, the warrant is the preferred wrapper for equitylinked products, mostly structures tied to single stocks, but also ETFs, and single-equity indices.
Mexico: sales & issuance - all wrappers
Mexico
Mexico
Despite the challenges faced by the Mexican stock market due to continuous global financial and political instability, the securitisation market in the country remains an important financing tool for Mexican financial institutions, corporations and government entities.
According to the Securities Market Law, the purchase or sale of OTC derivatives, listed derivative instruments, warrants and structured notes is authorised as long as they are listed in organised exchanges and are physically settled.
Recent regulatory changes have authorised pension funds to use foreign exchange and interest rate derivatives for hedging and investment purposes, and to invest in equities through equity-linked structured notes.
Mutual funds are also authorised to invest in principalprotected structured notes. Soon-to-be implemented changes to the investment regulations affecting mutual funds will allow them to participate fully in the derivatives market.
Bono Bancario Estructurado (structured note)
A bono estructurado is essentially a structured note as adopted in the international market, which can be principalprotected or non-principal-protected. There is an incipient market for structured notes, with coupons payments linked to currency, interest rates and equity, according to the domestic securities regulator, the Comisión Nacional Bancaria y de Valores (CNBV).
Credit derivatives referencing Mexican issuers are exclusively traded offshore. Transactions in the OTC market can be conducted either with a domestic or foreign bank in Mexico, or directly with an offshore dealer.
The coupon payments of the notes are linked to the behaviour of the exchange rate of the Mexican peso vis-àvis the dollar. Most sellers of currency-linked notes hedge their exposure by entering back-to-back transactions.
As an example, domestic bank Monex offers mninimum term investments starting at 7 days with investments in Mexico peso, US dollar or Euro. Underlying assets include USD/MXN, EUR/ USD, EUR/MXN, equity indexes and interbank Equilibrium Interest Rate (TIIE), among others.
The main types of structured notes offered in Mexico include dual bonus, accumulative range, wedding cake and double no touch structures, according to Monex.
Did you know?
Monex claims 56% market share in the onshore structured note market and 41% of the issuance volume.
Industry voice - Monex
Alan Huitrón Fernández, senior rates derivatives trader
“In the first half of the year, we issued 1,392 dual bonds (671 in MXN and 719 in USD) with a total notional of MXN 30.8 billion. This represents a growth of 8% in issuance and 40% in notional year-on-year. The average payout rate of MXN dual bonds was 17.60% and USD dual bonds was 13.88%. Their average tenor was eight days.
As a whole, their payout was up 9% YoY because currency conversion occurred to only 26% of the issuances in the first half of the year, meaning the remaining 74% had positive performance.
All our notes are practically dominated by the short term, thus we have the highest volume. It was profitable to reduce issuance and increase notional.
Double no touch structure has also boosted our volume. Their high payout rates gave us an opportunity to increase a demand of this structures but adding minimum guaranteed rate was the key reduce the risk of the structured and guaranteeing a payout rate.
We issued 865 double no touches (526 in MXN and 339 in USD), up 25% year-on-year, which amassed a total notional of MXN 125.7 billion. The average payout rate was 13.20% and 5.35% for MXN and USD-denominated notes, respectively. Their averaged tenor was 10 days.
In addition, there were 614 range accruals (493 in MXN and 121 in USD), up four percent year-on-year, with a total notional of MXN 35.9 billion. The average payout rate was 11.4% and 4.82% for MXN and USDdenominated ones, respectively. Their averaged tenor was 10 days.
For the rest of the year, we expect an increase in demand of dual bonds, particularly in US dollar, because the volume tends to rise when volatility goes up. The volatility of the USD/MXN will be beneficial. In the meantime, we expect that the demand of double no touches with minimum guaranteed rate to continue to grow.”
Did you know?
The Mexican Central Bank announced in December 2022 that financial entities will be prohibited from using TIIE for terms greater than 1 banking day, effective from 1 January 2025.
reached MXN22.7 billion (US$1.2 billion) this year, coming from issuers BBVA (MXN12.9 billion, 57%), Citigroup (MXN7.1 billion, 31%), Santander (MXN1.33 billion, 6%) and Scotiabank (MXN1.28 billion, 6%), according to BMV.
Did you know?
Citigroup’s market share was an increase from 12% in 2023. In the first seven months of this year, the US bank issued 101 structured warrants, vast majority of which are linked to single stocks with a tenor of three months to three years. The weighted average maturity is 11 months, according to Fabrice Hugon, managing director, global head of solutions, financial intermediaries at Citigroup.
Industry voice - BBVA
Daniel Hernandez, head of e-connectivity sales
“For structured notes, we have seen a high demand for FX notes, particularly dual currency notes (DCNs) for 7-28 day tenors where our clients have benefited from our unique offer for FX Duales in ePricer, hence massively facilitating the investor access to live and real time levels - key for FX markets.
To learn more: Search SRP News ‘Monex debuts CMS play, interest rates-linked products revive’
Títulos opcionales (structured warrant)
Listed on the Mexican Stock Exchange (BMV), structured warrants are primarily used to access equity exposure through structured products in Mexico.
Warrants are securities that will give their holders, in exchange for payment of an issue premium, the right to buy or sell an underlying asset at a previously determined exercise price during a predetermined period or on a predetermined date.
They can use either European or American option exercise. The underlying assets include stock, stock basket or equity index.
What’s the market size?
As of 31 July, the sales volume of structured warrants has
When it comes to rates products, there has been a decrease in the volume allocated to these payoffs mainly due to pricing for short-term notes in a low volatility environment.
We believe the market is getting ready for the phaseout of the benchmark interest rate 28-day TIIE 28d by the year-end, which will be replaced by TIIE de Fondeo, or Funding TIIE (F-TIIE). We are in close conversation with the industry and hoping to build liquidity for derivatives linked to the new rate as soon as possible to make the transition smoother and deliver new products.”
“The Mexican market for equity warrants over 2024 has experienced significant growth and dynamism. We continue to see a high demand with a healthy balance in the different segments such as yield enhancement products, leveraged products, and capital protection products.”
Index Solutions for Structured Products
Morningstar Indexes was built to keep up with the evolving needs of investors— and to be a leading-edge advocate for them. Our rich heritage as a transparent, investor-focused leader in data and research uniquely equips us to support individuals, institutions, wealth managers and advisors in navigating investment opportunities across major asset classes, styles and strategies.
The adoption of derivatives products within the global financial industry has undoubtably grown over the last 20 years. This growth allows investors to benefit from a wider range of investment vehicles, enhance their market access and more closely align their investments with their risk profile. Indexes play a central role within this ecosystem.
From traditional benchmarks and unique IP-driven indexes, to index design, calculation and distribution services, we have the capabilities and expertise to support the structuring community.
Learn more indexes.morningstar.com/morningstarindex-solutions-for-structured-products
Contact us indexes@morningstar.com
Brazil – COEs become mainstream
The certificate of deposit (certificados de operações estruturadas –COEs) has dominated the Brazilian market in recent years. We have to go back as far as 2018 for the last structured funds striking on the SRP Brazil database, but those products have all since matured.
An estimated BRL14.2 billion (US$2.9 billion) was invested in some 4,750 certificates of deposit during 2023. Sales volumes had been on or slightly above the BRL10.5 billion mark since 2021, but prior to that (2019 & 2020) they only reached around BRL5.6 billion per year.
Issuance spiked in 2019, at 9,400 products, but the following years the number of new products saw a steep decline, reaching a low of just 815 in 2021. However, since then they have steadily increased with the figure for 2023, at 4,250 products, up 95% year-on-year (YoY).
Local issuers dominate the market, although large foreign investment banks such as BNP Paribas, Credit Suisse, J.P.
Morgan and Morgan Stanley have also been active in recent years, specialising in structures linked to proprietary indices such as the Índice BNP Seleção de Fundos Internacionais, CS Global Video Gaming and eSports 20% Risk Control Index, JPMorgan Global Total Return FT Index and Morgan Stanley Global Opportunity 9% Index. Currently, however, they are less active.
Structures that return at least 100% of the capital invested have been the preferred option of the Brazilian investor over the years, with very few products putting full capital at risk while the most popular payoffs are those that offer a capped/ uncapped participation in the underlying asset, often with a leverage upside.
Brazil: sales & issuance
Brazil
The Brazilian regulatory framework places constraints on OTC trading, thus encourages the migration of trading to Sao Paulo-based exchange B3 - Brasil, Bolsa, Balcão.
Taxes are levied on revenues and cash flows rather than income or value added create a bias towards a system in which profits and losses of individual contracts can be netted, which reduces the tax burden.
This is the case on exchanges, where purchases and sales of the same contract can be offset against each other, but not in most OTC markets, where positions are closed by offsetting outstanding trades. (Source: Bank for International Settlements (BIS))
Did you know?
COEs were first approved by Law 12.249/10 in Brazil June 2010 with rules finalised by the Central Bank of Brazil in September 2013.
B3 provides registration for OTC derivatives transactions with no central counterparty (CCP) and with more complex scenarios. These structured transactions are domestically known as ‘strategies’. The structure can synthesise a combination of forwards, options and swaps, according to the bourse.
Certificado de operações estruturadas (COE)
A COE is essentially a structured transaction certificate or a structured note as adopted in the international market. It’s available in both protected nominal value and nominal value at risk formats.
Pursuant to CMN Res. 4,623/2013, a COE is a certificate issued against an initial investment, representative of a single and indivisible set of rights and obligations, with profitability structure that has characteristics of derivative financial instruments.
This initial investment should be significantly superior to most likely results of the certificate at the time of its issue, according to and in the form of the criteria established by the Central Bank of Brazil.
Only multiple banks, commercial banks, investment banks and savings banks are authorized to issue COEs. These institutions must indicate a director responsible for issuing, distribution or negotiation trading of the COE.
For purposes of this responsibility, the appointed director may play other roles in the institution, except those relating to third-party resources administration and risk management, which will have to be completely segregated.
Regarding the underlying assets, the COE can be referenced in price indices, bond indexes, securities indexes, interest rates, exchange rates, securities and other underlying assets. (Source: Walter Stuber Consultoria Jurídica)
In a single application, a COE provides diversity and access to new markets. It is easier for investors to monitor performance, since COE is already configured as a single instrument, which also means single taxation.
The COEs are issued by banks and are registered on B3, which is authorised and prepared to make the deposit and also the settlement of the COE. Each COE is exposed to the credit risk of the issuer, has a maturity date, minimum contribution amount, referenced asset (index/ stock) and will deliver gains or losses based on the referenced asset performance banks for different investor profiles.
When issuing a COE, banks follow the rules of suitability, such as analysing the risk appetite of each client. Distributors of COEs are required to verify that the product matches the investor risk profile, knowledge and understanding. (Source: B3)
New rule:
In August, the Central Bank of Brazil approved Resolution No. 5166, greenlighting the use of credit assets for COEs, known as credit-linked notes (CLNs) in international markets.
To learn more: Search SRP News ‘Brazil greenlights credit-linked notes’
What’s the market size?
From August 2023 to July 2024, the traded notional of COEs has reached BRL 803 billion (US$142 billion) with monthly volume ranging from BRL60.2 billion to BRL74.9 billion, according to B3 data.
Did you know?
Santander Brasil, the Brazilian subsidiary of the Spanish Santander Group and one of the most active issuers, traded BRL4.4 billion in H1 2024, an increase from BRL 3.8 billion in the prior-year period, the bank told SRP.
Industry voice - Santander Brasil
Antonio Cesar Polezzi, executive director, head of fixed income sales
Over the past year, the Brazilian financial market has experienced notable shifts, particularly with changes in inflation and the Special System of Clearance and Custody rate (SELIC), the overnight lending rate. The central bank’s aggressive interest rate hikes in 2022 to combat inflation were followed by cuts in 2023 as inflation pressures eased.
This monetary policy adjustment has made traditional fixed-income investments less attractive, driving investors towards structured notes, which offer the potential for higher returns and diversification in a lower interest rate environment. The economic conditions and market sentiment in 2023 have also fuelled demand for structured notes.
As the Brazilian economy recovers, investors are increasingly willing to take on risk in search of better returns, and structured notes provide a way to gain exposure to various asset classes, including equities, commodities and local interest rates such as the Extended National Consumer Price Index (IPCA), the reference for the Brazilian inflation-targeting system, and CDI, the money market interest rate.
Regulatory updates by the Brazilian Securities Commission (CVM) have further bolstered confidence in structured notes. Enhanced transparency and risk disclosure have made these products more accessible
and trustworthy for investors, contributing to their growing popularity as a viable investment option in Brazil’s evolving financial landscape.
Beyond COEs, we’ve been offering financial structures such as ‘box’ options since 2022, which combines four options, provides a payoff profile similar—but not identical—to other traditional fixed income instruments. The Brazilian market has seen a significant surge in interest for equity derivative structures, reflecting a broader global trend towards more complex financial products.”
Structured rollover transaction
A structured rollover transaction, known as a calendar spread with one or more contract month difference, is another type of structure used in Brazil with exposure to single stock and units futures contract.
The goal is to enable investors to hedge against unwanted price fluctuations, while limiting losses under adverse market conditions.
This product was created with the purpose of facilitating investors’ day-to-day operations. It does not represent a new contract, but a mechanism that allows for the simultaneous trading of two maturities.
Typically, structured rollover transactions are carried out by investors wishing to migrate their positions to a longer maturity date due to, ie, lack of liquidity in certain maturities.
In addition, rollover transactions are also widely used by investors who wish to trade price differentials between maturities when they are seeking arbitrage between them, or even directional speculation.
Other benefits include the reduction of risk by allowing trading in two different maturities in a single transaction; the addition of another price arbitrage tool between maturities; and facilitates trading of price differential. (Source: B3)
B3 currently offers a range of structured rollover transactions, including on micro S&P 500 futures contract, S&P 500 futures contract, Ibovespa index, forward rate volatility, interbank deposit spot rate volatility, forward rate agreement on DI x US Dollar spread, on top of commodities including corn, arabica coffee, hydrous ethanol, live cattle and soybean.
YOUR GREAT IDEAS SHOULD AND CAN COME TO LIFE
WITH US ON YOUR SIDE
Societe Generale, Bank of the year for sustainability*, brings you innovative nance solutions to meet your ambitions for a more sustainable future. Discover our clients’ successes: wholesale.banking.societegenerale.com
The communication on this page is not directed at or intended for retail customers.
*Awarded by International Financing Review for 2023. Societe Generale is a société anonyme, with its registered off ice at 29, boulevard Haussmann, 75009 Paris, France, and a capital stock of 1 003 724 927,50 € registered at the Paris Trade register under the number 552 120 222 (and APR no. 651C). Societe Generale is a Frend credit institution (bank) authorized and supervised by the European Central Bank (ECB) and the Autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control and Resolution Authority) (ACPR) and regulated by the Autorité des Marchés Financiers (the French nancial markets regulator) (AMF). Societe Generale London Branch is authorised by the Prudential Regulation Authority and is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request.