The creation of a structured product involves various players, from product structuring — essentially the manufacturing process — to the final subscription by the investor.
An issuer is an entity that issues financial securities. Typically, investment and financing banks issue structured products. A investment bank is a financial institution specialized in market operations, advisory, and intermediation services for other companies. It does not cater to individual clients, a role reserved for commercial or private banks.
Within these banks, several roles contribute to the creation of a structured product. All these roles are typically housed in a trading floor, bringing together different operators:
A request for quotation (RFQ) involves seeking pricing from multiple issuers to compare their offers. Although the request concerns the same product, each issuer will quote a different price.
This variance occurs because each issuer has a financial rating that accounts for factors like solvency. The lower the rating, the higher the risk for the investor, and consequently, the more attractive the product's conditions must be—reflecting the risk/return tradeoff.
Another factor to consider is the issuer's need for liquidity, which determines the product’s funding rate. The more urgently a bank needs funds, the higher its funding cost, and consequently, the more attractive the returns it offers.
Lastly, Traders’ assessments of volatility and dividends vary between operators — this is known as marking. Traders must hedge against volatility, and the cost of this hedge depends on their volatility marking. For dividends, a Trader might apply a more or less significant discount relative to the dividends announced by the company whose stock underlies the structured product. The higher the discount, the less attractive the offered coupons will be.
It’s worth noting that some investment banks have developed commercial franchises, particularly in the French market, under different names. The most well-known include Adequity (Société Générale), Privalto (BNP Paribas), Agapan Solutions (Natixis), and Jinko (Crédit Mutuel IM).
Salespeople working within these structures are not intermediaries since they are exclusively tied to a specific bank.
As the name suggests, an intermediary stands between the issuer and the client. Also known as a distributor, the client is then a sub-distributor before reaching the final investor. The intermediary’s primary role is to conduct an RFQ to compare issuer prices based on the specifications provided by their client. There are different types of intermediaries.
An intermediary cannot offer a better price to a client who requests the same quotation directly from an issuer. One of their added values is that establishing relationships with numerous issuers, and thus obtaining quotations from them, can be complex. Intermediaries grant clients access to trading floors to secure the best possible conditions.
During an RFQ, if the same request reaches a given issuer through two different intermediaries, the investment bank will provide the same quotation to both, regardless of whether intermediary A is a better client than intermediary B or usually conducts a higher volume of business. For the client who requested the RFQ, the only quotation difference will result from the margin policies of the two intermediaries.
All parties involved in the creation of a structured product earn a margin.
The issuer’s margin can be described as soft money. It will only materialize when the product concludes: depending on the positions the Trader took during the product’s creation, this margin may increase or decrease.
Intermediaries earn what is known as hard cash. They take a tangible commission, defined at the product's inception. This commission can take several forms:
The creation of a structured product involves various players, from structuring to investor subscription. An issuer is an entity that issues financial securities, typically BFIs that issue structured products. An intermediary stands between the issuer and the client, also known as a distributor, who conducts RFQs to compare issuer prices based on client specifications. All parties involved in creating a structured product earn a margin.
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