The secondary market

The secondary market is essentially the "second-hand" market for structured products. These products have already been issued and have a reference value — known as the net asset value (NAV) — which fluctuates over time, primarily based on the performance of the underlying asset.

🕰 The different markets

The primary market refers to the day the product is launched, where all conditions are set definitively. During the product's marketing period, it is in the grey market. The upfront conditions may change based on various factors (underlying asset price, volatility levels, interest rates, dividends...), even though the product doesn't yet have a reference price — known as the strike. After the product is issued, it enters the secondary market.

📉 The sensitivity of Net Asset Value

On the secondary market, structured products have a net asset value or mark-to-market value. This reflects the price at which a product can be bought or sold on the secondary market. Structured products are a combination of bonds and options, with each component affecting the NAV differently.

Bonds are sensitive to interest rate changes. If rates rise, the bond component's value decreases.

Options— which are derivative financial instruments — are influenced by several factors known as "Greeks." These are concepts from financial mathematics and option pricing models, representing the impact of parameter variations on price:

• Delta: the price change according to the underlying asset's price;
• Gamma: the change in delta, representing the speed of delta's change;
• Thêta: the price change over time;
• Rhô: the price change due to interest rate variations;
• Véga: the price change due to underlying asset volatility;
• Epsilon: the price change due to dividend variations.

💡 A source of opportunities

The secondary market presents opportunities for investors. If the underlying asset has appreciated since the product's launch, the NAV may exceed 100%, reflecting higher return probabilities and lower risk for the investor. Conversely, if the underlying asset has declined, the secondary market offers bargains. However, it's crucial to remember that a larger percentage gain is required to recover from a loss: for example, if an underlying asset falls 50% from its initial level, it needs to rise 100% to return to its starting point.

Most products bought on the secondary market are sold before maturity due to buying or selling opportunities based on NAV fluctuations. However, the secondary market is best suited for experienced investors, as prices can change rapidly. There's often a 24-hour delay between placing an order and its execution, during which market conditions can evolve.

🤝 Buying and selling

On the secondary market, products can be sold at any time. The price at which the issuer agrees to purchase the product from an investor holding it in their portfolio is the bid price. The price at which the issuer offers to sell it to an interested investor is the offer price. A regulatory spread of 1% between buying and selling prices is outlined in the contractual documentation (the termsheet), barring exceptional events. This spread allows the issuer to make a margin on the transaction.

Unlike other asset classes, finding a buyer to sell your structured product or vice versa isn't necessary. The issuer acts as the counterparty, or dealer, ensuring the product's liquidity. The trader buys or sells the different instruments composing the product on various markets accordingly.

💰 The margin

Remember, fees related to structured products are directly integrated into the initial capital and impact the conditions (return, protection, maturity...). The margin, or upfront, isn't charged in addition to the product's value at issuance.

To prevent a sharp decline in NAV the day after issuance, the margin is amortized linearly over time, typically until the first early redemption date. If markets rise significantly or to prevent the risk of a client exiting the product too quickly, fees may be amortized faster to avoid the issuer incurring a loss on the initial upfront payment.

Each client can manage their amortization period, generally between 3 and 12 months. If the client sells the product before the margin amortization is complete, the issuer bears the loss. Conversely, if a client subscribes to a product before the amortization period ends, they will receive the remaining margin.