Understanding structured deposits

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29 Oct 2018 | 7 min. read

Find out how structured deposits work and what you should know before you invest.

Key takeaways

  • The return on a structured deposit is usually dependent on the performance of an underlying financial instrument
  • The full principal amount of the investment will be returned to you if you hold your investment to maturity, and the bank remains solvent

What are structured deposits?

A structured deposit combines a deposit with an investment product. The return on a structured deposit depends on the performance of an underlying financial asset, product or benchmark. These may include market indices, shares, interest rates, bonds or other fixed-income securities, foreign exchange rates, or a combination of these.

Structured deposits may be suitable for investors who want exposure to assets or markets that are not easily accessible to retail investors.

What are the returns?

Your return is calculated according to a formula set out in the structured deposit’s terms and conditions.

A structured deposit is different from a fixed deposit. Structured deposits may provide the potential for higher returns compared to fixed deposits, but you take on more risks, including the possibility that you receive returns that are lower than expected.

At maturity, you will receive the principal amount of the structured deposit. But just like traditional deposits, the return of the principal and any returns is subject to the credit risk of the bank holding the deposit. If the deposit is withdrawn early, you may not get back 100% of the money invested.

Structured deposits versus fixed deposits

In the case of fixed deposits, the returns and maturity periods are fixed. Structured deposits, on the other hand, have variable returns, and in some cases, variable maturities as well.

Let's review the main features of structured deposits and fixed deposits:


Structured deposits Fixed deposits

Minimum deposit

A higher minimum investment amount may be required (usually $5,000).

Minimum amount for a fixed deposit can be less at $1,000.

Maturity period

Varies from 2 weeks to 10 years.

Varies from 1 month to 3 years.

Principal

Principal (or capital) will be repaid in full at maturity or if bank redeems (or "calls") deposit before maturity.

Principal (or capital) will be repaid in full at maturity.

Returns

  • Potentially higher returns compared with fixed deposits. But you are exposed to more risks. Returns depend on performance of underlying asset or index.
  • Returns you receive may further depend on: i) "cap" rate on underlying asset or index; and/or ii) participation rate.
  • Returns are usually lower.
  • Funds are normally placed in money markets for a short period of time (for example, overnight).
Risks involved
  • Riskier than traditional deposits because returns depend on performance of other assets or indices. You may receive no returns although you would be repaid the principal invested at maturity.
  • Where a structured deposit is callable, you may be exposed to reinvestment risk, i.e. risk of having to reinvest your money at less attractive rates.
  • Investor is also exposed to credit risk of deposit-taking bank, i.e. risk that bank defaults on payments due to you.
  • Considered low-risk as banks are obligated to repay the principal in full at maturity.
  • However, depositors are exposed to credit risk of deposit-taking bank, i.e. risk that bank defaults on payments due to you.

Early withdrawal by depositor

  • You may lose part of return and/or principal if deposit is withdrawn before maturity. Amount repaid depends on market value of underlying asset or index linked to structured deposit.
  • Structured deposits may not be valued daily. If so, you may not be able to withdraw your deposit immediately.
  • Early withdrawal may attract certain bank charges.
Early redemption / callable by issuer (variable maturity) Structured deposit may allow the bank to redeem (or "call") the deposit early. This means the maximum returns to you are capped. No early redemption by bank.
Covered by the Deposit Insurance Scheme? No Yes
Guaranteed payments
  • Some structured deposits provide higher guaranteed early payments compared to traditional fixed deposits. Such payments are usually only for the first few months or years; payments in later years may be variable.
  • Ask about the effective rate of return for the structured deposit you are considering.
  • Interest is guaranteed and fixed throughout term of fixed deposit (provided there is no early withdrawal).

What's the most you can lose?

You may lose some or all of your return depending on how the return is structured and whether the underlying financial asset, product or benchmark underperforms.

The principal amount you invest is also subject to the credit risk of the bank your structured deposit is held with. Further, if you withdraw the deposit early, you may not receive 100% of the principal you invested.

Checklist

Are structured deposits suitable for you?

Not everyone should invest in structured deposits. Before you invest, check that you:

  • Want potentially higher returns BUT are also prepared for variable returns
  • Understand how returns are calculated and are clear about the factors and scenarios that can affect returns
  • Understand the risks associated with the structured deposit. Structured deposits use derivatives to hedge risks and to improve performance. Investors should be aware of the risks associated with the use of derivatives, including the risk that the provider or counterparty of the derivative defaults.
  • Are prepared to leave your money tied up for the periods required. If you need to convert your investments to cash in the short-term to meet specific needs every now and then, a structured deposit may not be suitable for you.
  • Are comfortable with the credit risk of the bank offering the structured deposit. If the bank defaults, you could lose all of your investment.

Types of structured deposits

Here are some of the different structured deposits available:

Equity-linked

  • May be linked to return of a single share, basket of shares, equity index (e.g., the S&P 500) or a basket of indices.

Bond-linked

  • May be linked to return of a single bond (e.g., Singapore Government Securities), basket of bonds, bond index, or a basket of bond indices.

Interest rate-linked

  • May be linked to a specified floating interest rate (e.g., the Singapore Interbank Offer Rate).
  • Returns may be directly linked to the specified interest rate, i.e. if the specified interest rate rises, your returns will rise and if the interest rate falls, your returns fall. But some returns are inversely related, i.e. when the specified interest rate falls, you get better returns and if the interest rate rises, your return falls. Such products are usually called "inverse floaters" or "reverse floaters".
  • Payments may also rise or "step up" on fixed dates if deposit is not redeemed by issuer.

Credit-linked

  • May be linked to credit quality of a specified entity or entities.
  • If there is a "credit event" (e.g., if specified entity becomes insolvent or defaults on its loans), there may be no returns for investor.

Note

Structured deposits may be offered in "tranches". Each tranche has either a fixed offer period or is available until the tranche is fully subscribed. The tranches may come with differing features and returns.

What are the risks?

Common risks associated with structured deposits include the following:

Withdrawal before maturity date

  • There may be substantial losses to your principal if you choose to end the investment early.
  • You should also bear in mind that structured deposits may be subject to periodic valuation, which may not be on a daily basis. This means that you may not be able to withdraw your deposit immediately.
  • Check the terms and conditions for early withdrawal of the deposit with your bank.

Credit risk

  • If the bank defaults, you could lose all of your investment.

Reinvestment risk

  • If the structured deposit is callable, you may risk having to reinvest your money at less attractive rates.

No deposit insurance

You can lose money if the underlying asset or index performs below your expectations.

Here is a brief description of the key market risks involved for some commonly available structured deposits:

Equity-linked
  • The underlying share, basket of shares, share index or basket of indices may not move in the direction and/or by the amount you expected.
  • If returns are capped, you bear the risk of foregoing potentially higher returns that you could receive from investing directly in the underlying asset.
Bond-linked
  • The underlying bond, basket of bonds, bond index or basket of bond indices may not move in the direction and/or by the amount you expected.
  • If returns are capped, you bear the risk of foregoing potentially higher returns that you could receive from investing directly in the underlying asset.
Interest rate-linked
  • Returns depend on the direction and/or amount by which interest rates move.
  • You are exposed to risk that interest rates do not move in the direction and/or by the amount you anticipated.
Credit-linked
  • Returns are exposed to the credit risk of specified entities and/or to the credit risk and change in market value of the underlying collateral, if any.
  • You must be able to assess the likelihood of a credit event occurring to specified entities as well as entities that constitute the underlying collateral.
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General risks of structured deposits

In addition, some of the risks that apply generally to structured deposits are listed below. Please note that there may be transaction or unwinding costs associated with early or mandatory redemption that could lower the amount you receive.

Reinvestment risk
  • If a structured deposit is “called” or redeemed before maturity, you are exposed to reinvestment risk if you have to reinvest your money at less attractive interest rates.
Liquidity risk
  • There is limited liquidity for structured deposits. You cannot sell a structured deposit to another investor. You can only deal with the bank holding your structured deposit.
Credit risk
  • You are exposed to the credit risk of i) the deposit-taking bank and may be exposed to the credit risk of ii) the derivative counterparty, depending on the structure.
  • Credit risk refers to the risk of default by a bank (or the derivative counterparty) on its payment obligations when due.
  • Structured deposits are not covered under the Deposit Insurance Scheme.

Fees and charges

Please check with your bank to find out about fees. If you make an early withdrawal, you may have to forgo some of your returns as there could be transaction or unwinding costs.

Documents should you receive

There is no specific document to be provided by your financial advisory representative. However, he is required to tell you information about:

  • The product’s features and risks, fees and charges, provisions for early termination
  • Any warnings, exclusions or disclaimers which may apply
  • The product provider.

Checklist

Before you buy: Things to note

When choosing a structured deposit, ensure that:

  • Investing in the structured deposit is in line with your own investment objectives
  • You understand the factors that will impact your returns; are you familiar with the underlying financial asset, product or benchmark and are you comfortable with the exposure and the market view you are taking
  • You understand all the risks and are comfortable that they match your own risk profile
  • You are comfortable with the credit risk of the bank you are placing your money with

Find out about alternative investment products and compare their risk-return profile and features with the structured product introduced to you. Always ask whether the addition of this product to your investment portfolio will expose you to more risks than you are comfortable with.

Last updated on 07 Nov 2018