Lowes Autocall Review 2022 Update

Capital Protection Barriers

There have been two types of contingent capital protection barrier utilised in the sector: European and American. European Barriers are observed only at the very end of the maximum investment term and then, obviously only if the investment did not mature sooner. A 65% European barrier for example, protects capital from falls in the underlying of up to 35%. If the autocall does not mature positively and the underlying ends the term, say 34% lower, all of the original capital would be returned but if it was 36% lower, only 64% of capital would be returned. American Barriers are observed throughout the term and if they are breached, then there is effectively no barrier at the end of the term. For example: 60% American barrier, the underlying falls 40.1% in the early years, a positive maturity is not subsequently triggered and the underlying finishes the term below the strike level by any percentage. In this instance the loss will be in line with the fall over the term, no matter how small. Whilst all products issued early in the sector’s evolution utilised American barriers, these have been replaced to the extent that all products, bar two issued in 2021, now utilise the European variety. The two plans issued in 2021 that don’t utilise a European barrier in isolation, incorporate a combination of the two protection barrier types; if the European barrier is breached at the end of term, the loss is equivalent to a fixed percentage for each day the underlying was below the barrier during the term.

Maximum Durations

The maximum duration of an autocall only has a bearing if the investment does not call / mature before the final maturity date. Clearly, the longer the maximum duration and the more frequent the callable maturity dates, the greater the potential for the investment to mature with a gain. A longer duration also defers the ultimate loss determination date, which may prove beneficial in adverse market conditions. Over the previous decade we have been consistent in our advocacy of an extended maximum investment term for new issue autocall structured products. In our Retail Structured Product Review of the Sector 2010 – 2019 we outlined several crucial developments enjoyed by the sector, including the extended maximum investment term of capital-at-risk autocalls. By way of illustration, between 2010 and 2015 no capital-at-risk autocalls released into the sector had a maximum duration of over six years, whereas by 2019 80.74% of all new issues had a maximum duration of more than 6 years. However, over the last year there has been a significant re-emergence of autocall products being released into the UK retail space with reduced maximum investment terms of not just 6 years, but 5 years. The evolution of maximum durations and move to European barriers is shown below.

Maximum lengths of capital-at-risk autocall structured products

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

2017

Under 6 years 2014

2013

2021

2012

2018

2015

2019

6 years 2016

2020

Longer than 6 years

6