June 10, 2024

Navigating the $2.5 Trillion Market: Comparing issuance and benefits of structured notes and structured deposits

As of 2023, the global market for structured financial products is estimated to be over $2.5 trillion, reflecting their integral role in modern financial strategies. Structured notes and structured deposits, two mainstays of this market, offer distinct advantages tailored to varying investor needs and institutional strategies. For financial professionals, understanding the nuanced differences in issuance and the strategic benefits these products offer is crucial. Let’s explore the landscape of structured notes and structured deposits in detail.

The Fundamentals: Structured Notes vs. Structured Deposits

Structured Notes are debt instruments issued by financial institutions that combine traditional bonds with derivatives. These notes are typically tied to the performance of underlying assets such as indices, commodities, or currencies, providing customised risk and return profiles. Structured notes are usually unsecured, relying on the creditworthiness of the issuing bank, making them attractive to high-net investors seeking higher returns linked to market performance.Structured Deposits are savings products that offer returns linked to the performance of specific assets, indices, or a basket of assets while providing capital protection. These products are insured and issued primarily by retail banks, offering a blend of security and potential for higher returns compared to standard deposits. They appeal to risk-averse investors who still want exposure to market-linked returns.

Issuance Differences: Top 4 Factors

The issuance of structured notes and structured deposits involves several key differences. Here are the top four:

Product Complexity and Customisation:

  • Structured Notes: These instruments are highly customisable to meet specific investor needs. They can incorporate a wide array of underlying assets and derivative features, requiring advanced financial engineering and sophisticated risk management. The design process is intensive, involving extensive research and financial modeling to ensure alignment with market conditions and investor expectations.
  • Structured Deposits: These products are simpler and focus on providing a balance of capital protection and market-linked returns. Customisation is generally less complex, making the design and issuance process more straightforward and efficient. Depending on the country and circumstances, they might be treated similarly to standard deposits but could be monitored differently by local regulators. In some cases, they may also be protected by a country’s deposit insurance scheme.

Regulatory Environment:

  • Structured Notes: Issuers must comply with complex securities regulations, which vary across jurisdictions. This involves detailed disclosure requirements and ongoing reporting. Compliance can be resource-intensive, requiring significant investment in legal and compliance infrastructure.
  • Structured Deposits: These products face less stringent regulatory requirements compared to structured notes. Issuers must ensure compliance with banking regulations, which focus on capital protection and transparency. The regulatory framework for structured deposits is typically more straightforward, reducing the compliance burden on issuers.

Target Market and Distribution Channels:

  • Structured Notes: Targeted primarily at institutional investors and high-net-worth individuals, these products are distributed through investment banks, wealth management firms, and global financial markets. The distribution strategy focuses on reaching sophisticated investors who understand the complexities and risks involved.
  • Structured Deposits: Aimed at retail investors, these products are distributed through retail banking networks. The focus is on attracting a broad customer base with varying risk appetites, from conservative savers to those seeking moderate growth. Retail banks utilise branch networks and digital platforms to market these products widely.

Another difference is that a note is a transferable security, while a deposit is a bank product that remains within the bank.

The benefits these products offer to banks can be easily understood, varying according to the size of the institution.

For Large Banks:

  • Risk Management and Hedging: Large banks that already offer investment products can utilize structured notes to effectively manage risk and hedge clients’ positions and their exposure to specific assets or market movements. This strategic use of structured products helps maintain a balanced portfolio in the face of volatility.
  • Capital Raising: Structured notes serve as an efficient method for large banks to raise capital from investors, supporting various business activities and expansion plans. This capital infusion can provide a significant boost to the bank’s growth trajectory.
  • Enhanced Yield on Deposits: Offering structured deposits enables large banks to attract substantial deposits from customers seeking potentially higher returns than traditional deposits. This helps strengthen the bank’s deposit base and diversify its funding sources.
  • Client Relationships: Providing structured products fosters stronger relationships between large banks and high-net-worth clients, as well as institutional investors, who are often on the lookout for sophisticated investment options. These enduring relationships can lead to increased customer loyalty and referrals.

For Small to Medium-Sized Banks:

  • Diversification of Product Offerings: Embracing structured notes and structured deposits allows small banks to diversify their product range, granting clients access to more sophisticated investment options. This diversification can strengthen their market position and cater to diverse investor preferences.
  • Competitive Edge: By providing structured products, smaller banks gain a competitive edge over local competitors that may not offer such products. This distinction helps attract investors actively seeking unique and attractive investment opportunities.
  • Fee Income: Structured products often generate higher fees and commissions for banks. For small banks with limited revenue streams, this additional income can prove to be a valuable contribution to their financial standing.

In the wake of the 2008 financial crisis, institutions with diversified product offerings, including structured products, demonstrated greater resilience. Today, as the market for structured products grows, according to a 2023 report, the structured products market has maintained steady growth, boasting a compound annual growth rate of approximately 7% over the last five years, financial institutions can leverage these instruments to drive innovation and growth.

Understanding the unique features of structured notes and structured deposits allows banks to strategically position themselves for success. These instruments provide attractive options for investors and enhance a bank’s product portfolio. With the right approach, structured notes and structured deposits can be powerful tools in a bank’s financial arsenal, ensuring competitiveness and resilience in an ever-evolving market. The journey from safeguarding principal to achieving potential returns is now more attainable than ever, thanks to the sophisticated world of structured products.