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Structured Notes

(recent development of ETFs that exibit Structured Notes like characteristics)





   My experience:


> I've traded Structured Notes for decades. Over this time-span I've traded 100+
> Notes, and I've lost small sums of money only in 3 notes and for all others
> I've gained good profits. Therefore, my experience with the structured notes
> is extremely positive, and of course profitable.
> 
> In spite of my positive experience, it's worth noting that the Structured
> Notes are not insured by the FDIC. The Structured Notes do have the risk of
> losing complete principal.
> 
> The Structured Notes are illiquid - the market for these is almost
> non-existent after the inital valuation and earlier than the final valuation.
> I always purchase these on the first day at the initial valuation, and after
> that I let them go to maturity or get called, whichever occurs earlier. I have
> never purchased any structured note in between the term, and never redeemed
> any structured note before the maturity, or before the call.
> 
> I use brokers TD Ameritrade, LPL Financial, and Vanguard to purchase the
> Structured Notes. (Actually, I've developed a great working relatiohsip with
> the brokers from the Bond Desk at TD Ameritrade!)
> 
> > I've used UBS Wealth Management Service for Structured Notes, however I do
> > not have postitive experience with UBS.
> > I've explored HSBC Welath Management, amd Morgan Stanley Wealth Management
> > as well, however the policies were not favorable, and both were non-starter
> > for me.



   Facts / Characteristics / Personal preferences:


>  * A Structured Note is a Debt Obligation of the issuing institute.
>    
>    
> 
>  * The Structured Notes are backed by the faith and credit of the issuer.
>    (This indicates that if the issuer is no longer credit-worthy during the
>    term of the Structured Note, then any accured coupon-payment/gain and even
>    the principal may not be paid by the issuer, and the owner of the
>    Structured Note may lose it all.)
>    
>    
> 
>  * There are various kinds of Structured Notes:
>    1. Principal Protected Structured Note:
>       
>           Here the entire principal is protected from loss.
>       
>       
>    2. Partially Principal Protected Structured Note:
>       
>           Here some portion of the principal is protected from the potential
>       loss. These often time offer a small buffer to avoid downside, and place
>       a cap on the potential gain.
>       
>       
>    3. Non Principal Protected Structured Note:
>       
>           Here there is no protection offered to the principal, and there is a
>       larger amount of buffer offered to avoid downside, and often times there
>       is no cap on the gain, and/or there's a contingent periodic interest. (I
>       almost always use these types of Structured Notes.)
>       
>       
>    4. Non-Callable Structured Note:
>       
>           Here the issuer cannot call-back the structured note ahead of the
>       maturity.
>       
>       
>    5. Callable Structured Note:
>       
>           Here the issuer may call the notes ahead of the maturity.
>       
>       
>    6. Phoenix Autocall Structured Note:
>       
>           Here the issuer sets a condition for the call, and upon meeting the
>       condition the Structured Note gets automatically called ahead of the
>       maturity. If during the term the call condition is not met, then the
>       structured note stays effective till maturity.
>       
>       
>    7. Reverse Convertible Structured Note:
>       
>           Here the structured note is tied to performance of a few stocks. The
>       purchaser might get back the underlying stocks if the issuer issues the
>       stocks rather than redeeming and giving back the monetary proceeds.
>       
>       
>  * The gains/losses resulting from purchase/redemption of structured notes are
>    reported on 1099-B (Broker and Barter Exchange Transactions).
>    
>    
>  * When applicable, the coupon payments made for the structured notes are
>    reported using 1099-OID (Original Issue Discount).
>    
>    
>  * I never purchase Reverse Convertible Structured Notes, Partial Protected
>    Structured Notes with "Cap", and Non Principal Protected Structured Notes
>    that are tied to performance of Currencies or Commodities.
> 
>  * I tend to purchase Non Principal Protected Structured Notes that offer some
>    buffer against the downside, with some contingent coupon, that are tied to
>    performance of
>    
>    * DOW Jones Industrial Average
>    * S&P 500
>    * Russell 2000
>    * Nasdaq 100
>    * Euro STOXX 50
>    * Various ETFs
>    * Constant Maturity Swap Rates for 10 year T-Bond, minus 2 year T-Notes
>      (which is the Yield Curve)
>    * Stocks: AAPL, GOOG, NFLX, AMZN, C, BAC, WFC, UPS, FDX, TSLA ...
>    * ETFs: XLF, XLE, XLK, XLY, JETS, ICLN, TAN, ARKK ...
>      
>      
>    
>      > I publish Python/MatPlotLib generated Yield Curve values on this
>      > web-page with about 2 days lag.)
>    
>      




   Issuers:



> Following are some of issuers of Structured Notes. (I've used Structured Notes
> from each of them):
> >  1.  JPMorgan Chase Financial Company LLC
> >  2.  Barclays Bank PLC
> >  3.  HSBC USA Inc.
> >  4.  Credit Suisse AG
> >  5.  GS Finance Corp.
> >  6.  Toronto-Dominion Bank
> >  7.  Citigroup Global Markets Holdings Inc.
> >  8.  BMO Capital Markets Corp.
> >  9.  BNP Paribas Group
> >  10. Lloyds Bank Corporate Markets plc




   ETFs with some characteristics of Structured Notes:



> From July 2018 for the first time an ETF issuer started offering ETFs that
> have a few characteristics of structured notes. The issue is Innovator ETFs.
> As of this writing, there are 6 ETFs offered. (Refer to their web-site for the
> up-to-date details.) Innovator ETF calls these types of ETFs as "Defined
> Outcome ETFs".
> 
> Following ETFs are available:
> >  * Innovator S&P 500 Buffer ETF (July Series) ... Ticker: BJUL
> >  * Innovator S&P 500 Buffer ETF (October Series) ... Ticker: BOCT
> >  * Innovator S&P 500 Power Buffer ETF (July Series) ... Ticker: PJUL
> >  * Innovator S&P 500 Power Buffer ETF (October Series) ... Ticker: POCT
> >  * Innovator S&P 500 Ultra Buffer buffer ETF (July Series) ... Ticker: UJUL
> >  * Innovator S&P 500 Ultra Buffer buffer ETF (October Series) ... Ticker:
> >    UOCT
> 
> As the names of each ETFs suggests, the performance of these ETFs is tied to
> the performance of S&P 500 Index, however the performance does not try to
> match the performance of S&P Index. (These ETFs are not expected to track the
> performance S&P 5000 Index. They are different in that aspect from the ETFs
> like SPY, IVV, VOO which are designed to track the performance of S&P 500
> Index very closely.)
> 
> Also as the names of each of these ETFs suggests, there is some amount of
> protection against loss offered when S&P 500 Index loses value. This is quite
> similar the buffer offered by some of the Structured Notes.
> 
> The gain in each of these ETF relative to S&P 500 Index is 'capped' at some
> levels. (In theory, the gain in S&P 500 is limitless, however the gain in each
> of these ETFs is always capped, therefore even in theory the gain is not
> limitless.) Again this is similar to the 'cap' present in some of the
> Structured Notes.
> 
> The underlying securities used to make the Structured Notes are same/similar
> to those that are used to make these ETFs, therefore some of the
> charactristics are shared between these ETFs and the Structured Notes.
> 
> These ETFs are my on watch-list, and I plan to trade these over the years to
> come.



   SEC - EDGAR:



> Securities and Exchange Commission is one of the regulators that regulates the
> Structured Notes.
> 
> The issuers are required to file the preliminary prospectus (Forms : FWP,
> 424B2) with the SEC.
> 
> All of these forms from different issuers are available for free at the
> 'Electronic Data Gathering And Retrival' system. Here are links to DOCs from
> some of the issuers. These links are working at the time of writing. These of
> course may stop working in the future.)
> 
> >  1. Morgan Stanley
> >  2. GS Finance
> >  3. Toronto Dominion Bank
> >  4. Barclays Bank PLC
> 
> Generally the Structured Notes are considered as special products. Lots of
> brokers simply do not offer these at all .. or .. do not offer these to retail
> traders at all. As of March 2019 brokers like Charles Schwab, Fidelity,
> Interactive Brokers, E*Trade, Robinhood, and Alpaca do not offer these to
> retail traders at all. (From time-to-time Fidelity offers Structured CDs -
> however there's big difference between Structured CD and Structured Note.)
> 
> Getting details for Structured Notes is not a easy task. Institutional Trading
> Firms have "Bloomberg Terminals" where the details for Structured Notes are
> readily available. It is said that a single user license for a Bloomberg
> Terminal is more than 20k per year. (That's much more than what a single user
> SFDC license or NetSuite License costs !)
> 
> > So ... I download the details from SEC's EDGAR. I've given details of the
> > Regulation, and Jupyter Notebook using which I download the details, and
> > then scan thru them using grep at this link.
> > 
> > > That's my "retail" trader/coder method of doing for free, what
> > > "institutional" investors would do using 20k single-user license of
> > > "Bloomberg Terminal". *smile*




   Useful details fom SEC:


>  1. Securities and Exchange Commission (SEC.gov): Investor Bulletin:
>     Structured Notes
>  2. Securities and Exchange Commission (SEC.gov): Investor Bulletin:
>     Structured Notes with Principal Protection
>  3. Securities and Exchange Commission (SEC.gov): Guide to Investing in
>     Structured Products
>     
>     
>  4. Preliminary Prospectus for CUSIP# 40056EWF1
>  5. Preliminary Prospectus for CUSIP# 09709TNZ0
>  6. Preliminary Prospectus for CUSIP# 48130UPF6
>  7. Preliminary Prospectus for CUSIP# 06746XL92
>     
>     
>  8. Comments by SEC Commissioner: Kara M. Stein
>     
>     
>     > Cautionary comments (mostly negative), to discourage retail customers
>     > from using Structured Notes.
>     > 
>     > > Excerpts:
>     > > 
>     > > > Take, for instance, over-the-counter structured notes linked to
>     > > > bespoke indices. The index methodologies on which these products are
>     > > > based often involve some form of calculus or advanced math. The
>     > > > imbedded fees can be mind-numbingly complicated. Notably, the
>     > > > underlying investments can include instruments that would not be
>     > > > available to a retail investor directly. Despite this, these
>     > > > products are often sold to retail investors by financial
>     > > > professionals who make a lot of money by selling complex products.
>     > > > What's more, it's not even clear that all of these financial
>     > > > professionals fully understand the products they are selling.
>     > > 
>     > > > > --------------------------------------------------------------------------------
>     > > > > 
>     > > > > 
>     > > > > Yes, I do believe that Ms Stein has a couple of points. One of
>     > > > > them I believe is wrong, and the other I believe is right.
>     > > > > 
>     > > > > 
>     > > > > > Wrong point:
>     > > > > > 
>     > > > > > 
>     > > > > > I'm a retail customer. I'm an engineer, and used to work as a
>     > > > > > professor of Math, in an engineering college, and I fully follow
>     > > > > > the algos/math used for the structured products.
>     > > > > > 
>     > > > > > But the implied assumption, that a retail customer absolutely
>     > > > > > must understand these calculations, to be able to use these
>     > > > > > products, seems questionable. The implied assumption, that
>     > > > > > retail customers can only understand dumbbed-down/simple
>     > > > > > products, therefore ought to use only simple products is so very
>     > > > > > inaccurate.
>     > > > > > 
>     > > > > > How many of us understand the internal-combustion-engines, and
>     > > > > > the spark-plugs, and how many of us understand the MP4, and the
>     > > > > > FLV formats? ... Yet we drive the cars, and play the videos
>     > > > > > without thoroughly understanding these anyways -   don't we?
>     > > > > > *smile* ...   So the knowledge of the inner working/calculations
>     > > > > > of Structured Products may not be necessary for a retail
>     > > > > > customer, to profit from it.
>     > > > > > 
>     > > > > > 
>     > > > > > Right point:
>     > > > > > 
>     > > > > > Yes, the (so called) financial professionals do make a lot of
>     > > > > > money, and yes, I have my doubts whether these people themselves
>     > > > > > understand the algorithms and calculations given in the
>     > > > > > Prospectuses (Forms 424B2, and FWP) that they are selling.
>     > > > > > 
>     > > > > > 
>     > > > > > > (When I order my brokers to purchase Structured Notes for me,
>     > > > > > > then such orders are classified as 'unsolicited' orders,
>     > > > > > > therefore my broker is not expected to understand these
>     > > > > > > products at all, instead I take the full responsibility of
>     > > > > > > understanding the products I'm purchasing.)




   Real Life Example:



> I purchased Structured Note CUSIP# 61760QJF2 in December 2015. Part of TD
> Ameritrade statement is given below. I've redacted some of the details.
> 
> 
> 
> > 
> 
> 
> 
> Click here to get the full Form 424B2 (Prospectus). The relevant details are
> given below.
> 
> > > DetailValue Maturity DateDecember 23, 2035 CallableNo CouponFixed 8% for
> > > first 5 years
> > > Contingent 9% for next 15 years ContingencyOn each day within the last 15
> > > years
> > > if 30 year Constant Maturity Swap Rate is lower than 2 year CMS Rate
> > > or if S&P 500 is lower than 1,303.6075
> > > or if Russell 2000 is lower than 728.663
> > > then coupon is 0% for that day
> > > else the coupon is 9% for that day Contingent Principal PaymentAt Maturity
> > > if
> > > either S&P 500 is lower than 1,002.775
> > > or Russell 2000 is lower than 560.51,
> > > then 50% of Principal will not be paid.
> > > Each Subsequent Drop in S&P 500 or Russell 2000 will result in each
> > > percent loss in Principal




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