Early Maturity a.k.a. the Autocall Feature

Another popular aspect of Structured Products is the Autocall feature. To explain it simply, Autocall is when the product matures prematurely.Instead of maturity at the end of a 6 year product term, the product concludes in 2.5 years for example. In most structures, full capital is then returned and final Coupons are paid out when this happens.

Here are some reasons why investors like Structured Products with the Autocall feature:

  • Ability to reinvest into newly available investments
  • Ability to reinvest into another investment as the taste and preferences of the investor had changed
  • Flexibility when there is freed up cash

Of course this list may not apply to every investor. Investors should consult their regulated and licensed Financial Advisers should they have any questions.

When will Autocall Happen?

Performance of the simplest Structured Product is usually tied to the Worst Performer in a basket of stocks or indexes. Similarly, to assess whether Autocall happens or not, we have to look at its performance and therefore the Worst Performer too. The Worst Performer is then compared to the Autocall Trigger.

Let’s use an illustration as an example. Take the product and scenario below:

In Observation One, 90% is the lowest value among all the three Indices, thus the Worst Performer in this case is Euro Stoxx 50. Autocall does not happen in this Observation because the Worst Performer (i.e. Euro Stoxx 50 at 90%) is below the Autocall Trigger of 100%.

In Observation Two however, the Indices have generally gone up in performance. The Worst Performer is now FTSE 100, performing at 100%. It is just exactly at the Autocall Trigger of 100%, thus the product Autocalls. Autocall can happen when the product is performing at or above Autocall Trigger.

In this design, as with most designs in the retail space, Structured Products tend to Autocall in bull markets.

Autocall vs. Selling on the Secondary Market

Structured Products are daily tradeable and can be sold out off on any trading day. The capital received upon selling is dependent on the market price of the product at that time – could be more or less than the invested capital. Something like selling stocks on an exchange, except that the issuing bank is the buyer. Unlike investments like fixed deposits, this means that investors can exit the investment prematurely, and possibly with the full capital returned.

With Autocall, it means the investor has a chance to get their capital back earlier too. The difference is that there is no uncertainty as to how much of the invested cash will be received. In other words, full capital will be returned (as well as any final Coupons, if any).

Stepdown Autocall Feature

In the example above, the Autocall Trigger remains at 100% throughout the product term. Since Structured Products are highly flexible – for investors looking to maximize their chances of early maturity, they can introduce a Stepdown Autocall feature which allows the Autocall Trigger to decrease with each Autocall Observation. Below is a live example:

Autocall Trigger steps down from 100% to as low as 90.5% in the final Quarter. This means that the product can conclude prematurely, even in bear markets!

This product is a real-life example and similar structures are available for investment. For Financial Advisers who would like more information, please send us a LinkedIn message, or email us at contact@districteastcapital.com. For investors, please contact your Financial Advisor for their recommendations and order placement via the correct, regulated channels in your jurisdiction.

Conclusion

Though the Autocall feature allows early maturity, Structured Products are generally not meant to be short-term investments. To maximize the versatility of this asset class to suit you best, investors should contact their Financial Advisor for a recommendation according to their risk appetite and financial goals. If you do not have a Financial Advisor yet, please do not hesitate to get in touch with us at contact@districteastcapital.com and we would be happy to direct you to an authorized Advisor in your region.

If you are a Financial Adviser and would like a PDF version of this article to take to a client meeting, please write to us at contact@districteastcapital.com.

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