Income Autocall
What is an income autocall and how would you explain it to a client?
CAPITAL AT RISK
What is a income autocall?
An income autocall is a type of structured investment whose pay-out is contingent on the performance of an underlying asset. Income autocalls are market-linked investments offering an above-market coupon if automatically matured prior to the scheduled maturity date. The product is automatically matured (“auto-called”) if the reference asset is at or above its initial level on a predetermined observation date.
How does it work?
Example of a payoff:
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Potential return: 3% semi-annual income
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Semi-annual income barriers: 70% of initial level, annual autocall barriers: 100% of initial level
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At maturity - conditional capital protection barrier: 65% of initial level
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The maximum term of the autocall is 6 years
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The investment cost the investor 100p on day 1
Commonly asked questions
The holder of the security will be exposed to the credit risk of the issuer and this security is ranked as Senior Unsecured debt of the issuer.
Typically, orders should be submitted around 3pm on the launch date, ahead of the UK market close. Trade details are confirmed to the buyer’s contact (dealer), who is asked to confirm his intention to the issuer. The trade is then executed with confirmation from issuer to dealer. Atlantic House manages this process. Typically, settlement in the Primary Market is T+10.
The period between execution and settlement is known as the “grey market” during which there is usually no constraint on upsizing notional. Usually, a day or two before settlement the bank will fix the final issue size, which will include some inventory for sale in the Secondary Market. It may also be possible to issue further tranches of shares, subject to demand.
These securities are not to be traded on an organised exchange. The issuer will use reasonable efforts to quote a price in all market conditions; this has proven to be the case historically. The Bid Price at any time is not determined by the requirement to find a buyer but, rather by a range of market inputs that determine the value of the security’s components. These might include, but are not limited to, interest rates, credit spreads, index performance, dividends and volatility.
No, Atlantic House simply acts in the capacity of introducing broker. Your only financial exposure is to the security issuer.
The securities are dynamic, in that they may change throughout their life. It is imperative therefore, that investors understand their Mark-to-Market exposure, to ensure ongoing suitability within portfolios. Atlantic House provides full support in this area.
These securities have a variety of portfolio applications. Generally speaking, they should be allocated to wherever the risk lies. For example, an equity index linked security with risk determined by the FTSE100, should be allocated to UK Equity. It is imperative that investors understand the likely behaviour of this security in a range of market conditions, to ensure continued suitability. Atlantic House provides full support in this area.
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Source: Atlantic House
Distributions
Investors who receive distributions from the Fund should be aware that these payments are made from capital, this will limit the potential for capital growth.
Credit risk
The holder of the investments will be exposed to the credit risk of the issuer.
Market risk
Capital repayment depends on the performance of the underlying; the future performance of which cannot be guaranteed.
Liquidity risk
The investments will not be traded on an organised exchange. The issuer will use reasonable efforts to quote prices in all market conditions.
Exit risk
The secondary market price of the investments will depend on many factors including, but not limited to, the value and volatility of the underlying index, interest rates, dividend rates, time remaining to maturity and the creditworthiness of the Issuer. Prior to maturity, the price may be less than the amount the holder would have received on maturity of the investment.
Tax risk
The tax treatment of structured products can be complex and tax rates and regulations may change during the term of this investment. Guidance is given here, but if in any doubt Investors should seek their own professional tax advice.
Time horizon
Whilst an investor might be happy with the capital erosion prospects at maturity, the reference index/indices may fall throughout the life of the security and the security might fall by more than you would expect.