Structured Notes may have a variety of protection features that investors should take the time to learn about. The purpose of the protection features are to reduce or the likelihood or severity of a loss if the reference portfolio of the note is negative. The most common types of protection are: principal protection, buffer protection, and barrier protection. They are relatively straightforward, and once you understand the basics, you will be able to quickly understand the investor documentation for notes that incorporate these features. You might come across notes with other features, in which case the investor documentation will provide an appropriate description.
The descriptions here are for educational purposes only, to help investors understand how to read investor documentation for structured notes. Investors should review and understand the investor documentation for any note. Investors should also note that the note issuer is responsible to return the value of the note to the investor at maturity.
This is the strongest form of protection, the issuer protects the entire principal of the note at maturity. Market-linked GICs and Principal Protected Notes will have principal protection.
Investors with a cautious view, who are willing to give up significant income or upside for protection, will elect for notes with buffer protection.
At maturity, if the reference portfolio is negative but above the barrier, the investor will receive the principal. If the reference portfolio is below the barrier, the investor will receive the return of the reference portfolio buffer. This is illustrated graphically below.
Structured Note Buffer Protection
Maturity Monitored Barrier Protection
This is the most common form of protection, and investors will see this type of protection on a wide variety of notes. An investor will have a bullish (positive) outlook on the underlying investment but they want some protection and are willing to take a moderate risk.
At maturity, if the return of a note is negative but above the barrier, the investor will receive their principal back at maturity. If the return is below the barrier, the investor will receive the return of the reference portfolio. The video below shows this graphically