Section 0.5
The ecosystem
Essential question
A structured product is not provided end to end by a single entity: it is the result of a chain of actors with distinct roles. Which ones are involved, what are their respective roles, and how are they paid?
Behind a structured product operates a chain of actors, each playing a precise role and earning a distinct remuneration. For the investor, there is still a single point of contact: they deal with their manager, who orchestrates this chain on their behalf. But it is precisely because the manager is that single point of contact that they must know the chain end to end: who carries which risk, who does what, and where to find each answer — costs being only one aspect among others. It is also the direct continuation of the previous section: if the product is a wrapper, you still need to know who conceives it (the broker, or product advisor), who manufactures it, who commits to pay, and who quotes its price day to day.
The chain can be summed up in six roles, best walked through from upstream to downstream. Upstream, two distinct advisory roles: the client's manager (external manager or banker), on the client side, who understands the client's need and has a view of their portfolio; and the product advisor (the broker), on the solution side, who owns the product engineering: starting from the expressed need and a market view, they design the appropriate structure and put issuers in competition to obtain the best price. At the centre, the investment bank above all offers a price: it prices the product, issues it and hedges its risk throughout its life (trader, treasury, structuring desk). Its signature is what carries the promise to pay. Downstream, the custodian bank holds the client's securities and settles the transactions. These roles remain distinct, and it is useful to separate them mentally to read a product and its documentation correctly. The goal is not for the client to approach each actor in turn, but for their manager to know, for every question, which link in the chain to turn to.
Before the map, think it through
“Who are you really buying a structured product from?”
An investor buys a structured product through their bank. Who actually carries the promise of repayment at maturity: the bank that sold it, the manager who advised on it, or the exchange on which it trades?
Click on each actor to see what they do and how they are paid. The common thread: a single actor takes the final economic risk (the client), a single house carries the promise to pay (the investment bank, which issues).
Subscribes to the product and holds it with all its advantages and drawbacks: they receive the gains just as they bear the losses, and carry the final economic risk of the investment (including the issuer's credit risk). The investment decision may be taken by the investor themselves, or by their manager when portfolio management has been delegated to them. They then hold the product to maturity, or sell it back during its life, pursuing a specific objective (yield, protection, cash flow, exposure).
Nothing other than the product's payoff: what the formula pays them — coupons during the product's life (e.g. an autocall) and/or redemption at maturity — no more, no less. All the other actors are paid upstream.
A product's life involves two periods. At issuance (primary market), the client's money goes to the investment bank, which manufactures and delivers the product. During the product's life, i.e. after the product's issue date (secondary market), if the client wants to buy or sell the product, it is this same bank that quotes a bid price and an ask price.
Note: the issuer is not legally required to buy back the products. In practice, however, including during acute market crises, it has always been possible to obtain a resale price, at the market price of the moment.
Illustrative orders of magnitude. Out of 100 paid in, most of it funds the product's mechanics; a fraction (often a small percentage, varying with complexity and horizon) pays the actors. This remuneration takes the form of an up-front commission: it is paid once, when the product is put in place, whatever its duration (not spread out year after year). These costs do not appear as a separate line: they are in the price. Hence the importance of being able to compare, on the same payoff, the prices of several investment banks (or even several brokers): competition is what reveals the margin actually taken.Module 4 · Pricing and comparing offers
Which actor does each question concern?
Key message
A structured product involves a whole ecosystem of actors: the client bears the final economic risk, the manager translates their need and provides ongoing monitoring, the product adviser (broker) designs the product and puts issuers in competition to deliver the best product at the best price, the investment bank manufactures the product, issues it (and therefore carries the promise to pay and the credit risk) and makes its market day to day, the custodian bank holds the securities, and the regulator (FINMA) and the industry association (SSPA) supervise and standardise. For the client, there remains a single point of contact, their manager, who orchestrates the whole on their behalf and ensures over time that the product remains suited to their portfolio and their objective: that is why the manager must know the ecosystem end to end. The most important thing remains to always make sure the product is relevant within the portfolio: in light of the client's needs, the product's behaviour and the portfolio's composition.
In practice, the roles are clearly distributed. The manager handles the relationship with the client and with the custodian bank: they own the objective, the fit with the portfolio and the monitoring of the relationship. For the entire technical part (product selection, price, parameters, reading the secondary market), they turn to the broker, or to their in-house structured products expert advisor if they operate within a bank. The latter is the one who interfaces with the investment bank. The client, for their part, has a single point of contact: their manager absorbs this machinery for them.
On costs, the right reflex is not to look for an isolated fee line (it often does not exist as such), but to put issuers in competition. This is one of the broker's reasons for being: through a request for quotes, they simultaneously approach several investment banks on an identical payoff (a specialised broker may maintain around thirty open lines with investment banks). The gap between their prices reveals, better than any figure, the most relevant issuing bank for that particular product.Module 4 · Comparing offers
Question 1 / 5
Who carries the promise of repayment of a structured product at maturity?
Question 2 / 5
A client wants to sell back their product three years before maturity. Who do they contact first?
Question 3 / 5
Where do the costs paid by the investor on a structured product mainly sit?
Question 4 / 5
Does an investment bank have an interest in the client losing money on the product?
Question 5 / 5
Within an investment bank, the structurer, the trader, the treasury and the sales department all work on the same product. Which reading is correct?