SPR Autocall Review 2022 Update

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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 themaximumduration and themore frequent the callablematurity 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. Between 2010 and 2014, both inclusive, no capital-at-risk autocalls released into the sector had a maximum duration of over six years, whereas by 2019 80.75% 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%

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

g Under 6 years

g 6 years

g Longer than 6 years

Prior to the market correction in 2020, these extended terms proved inconsequential. However, the market correction and infectious uncertainty arising from the Covid-19 pandemic is an example of a ‘Black Swan’ event that the introduction of the longer terms sought to overcome, by providing more opportunities for the investment to mature with a positive outcome. Whilst themarket has recovered from the pandemic fall it is still fundamentally our view that common sense should prevail here; the longer aplanhas to run, thegreater the chanceof positivematurity through recovery in the event of amarket crash, whilst benefiting from snowballing coupons. Ultimately, we hope that no situation arises whereby short term autocalls are caught by adverse conditions to loss-making effect, but we will continue to advocate the obvious benefit of the extended maximum term not least because they provide very welcome peace of mind right when it is needed.

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