Express Certificate

What is an Express Certificate?

An express certificate is a type of certificate that offers the option for early termination at a predetermined termination amount on multiple occasions throughout its term. This termination is possible if the underlying quotes meet or exceed the termination level at any of the valuation dates specified in the certificate terms.

Express Certificate Explained

Express certificates are financial instruments that offer investors the opportunity for early redemption under specific conditions. When these certificates are initially issued, they typically have a maximum term to maturity ranging from 3 to 6 years.

During the term of the certificate, predetermined "observation days" are set, typically once per year. On each observation day, the price of the underlying instrument is evaluated. If the price of the underlying instrument on the observation day is equal to or higher than a specified threshold level, the express certificate is redeemed prematurely. This results in the investor receiving an early payback of their investment, often yielding a total return averaging between 5 to 8 percent on an annualized basis.

Conversely, if the price of the underlying instrument is below the threshold level on the observation day, the certificate will continue to remain active until the next scheduled observation day. This process repeats until either the threshold level is breached, leading to premature redemption, or until the certificate reaches its maturity date.

In the event that the threshold level is never exceeded on any observation day throughout the certificate's term to maturity, investors typically receive repayment of the issuance price. However, this repayment is contingent upon the underlying instrument not falling below a predetermined safety threshold. If the underlying instrument does fall below this safety threshold, investors may incur a loss at the certificate's maturity.

Features

1. Underlying Asset. Express certificates are linked to shares or market indices, serving as the foundation upon which their value is derived.

2. Term Structure. The term of an express certificate is segmented into multiple periods, often on an annual basis. The minimum term extends until the initial valuation date, while the maximum term spans until the final valuation date.

3. Termination Level. A crucial aspect of express certificates is the termination level, representing a predefined threshold. If the closing price of the underlying asset reaches or surpasses the termination level on any of the valuation dates, the certificate is subject to early redemption, preceding the maturity date.

4. Termination Amount. This denotes the sum payable upon early termination of the certificate. It reflects the value realized by the investor at the termination date, which may differ from the initial investment.

5. Barrier. The barrier acts as a critical threshold for the underlying asset, intended to remain untouched or unbreached throughout the certificate's term. Breaching the barrier at this juncture may trigger redemption based on the underlying's performance or result in the physical delivery of shares.

6. Initialization. At the outset of the term, specifically at the initial valuation date, the closing price of the underlying asset is established as the starting value. Additionally, the barrier level is determined, along with the termination level, which is typically set equal to the starting value. This termination level serves as the trigger for potential early termination of the express certificate.

7. Valuation Dates. Throughout the term of the certificate, there are multiple valuation dates where the closing price of the underlying asset is compared to the termination level. If the closing price of the underlying asset is at or above the termination level, the certificate is redeemed prematurely before reaching maturity. Investors receive the predefined termination amount upon early redemption. However, if the closing price of the underlying asset falls below the termination level, the term of the certificate is extended, usually by one year. This extension leads to increased termination prices and yield opportunities. For example, in the first year, the yield might be 4%, in the second year 8%, and so forth. The longer the term, the higher the respective termination amount.

8. Final Valuation Date. If the certificate is not redeemed prior to maturity and the closing price of the underlying asset is below the termination level at the final valuation date, an additional safety mechanism comes into play. At this point. If the closing price of the underlying asset is above the barrier (with observation solely at the end of the term), investors receive 100% of the nominal value at the maturity date. However, if the closing price of the underlying asset is at or below the barrier, the certificate is terminated based on the underlying's performance. This typically involves calculating the percentage performance from the starting value to the closing price at the final valuation date. If the underlying asset is a share, redemption is usually executed through the delivery of shares, known as "physical delivery." In both scenarios, the investor may incur a loss.

Things to Consider

1. Market Risk. The value of an express certificate is closely tied to the performance of the underlying asset. Any unfavorable movements in the underlying asset's performance can lead to fluctuations in the certificate's price, potentially resulting in partial or total loss of invested capital.

2. Barrier Event. If the barrier is touched or breached during the term of the certificate, the safety mechanism is deactivated, exposing the investor fully to market risk. In such cases, redemption at the end of the term is determined by the underlying asset's performance or through physical delivery of shares in the case of express certificates linked to individual stocks.

3. Performance. The price of the certificate during its term is influenced not only by the underlying asset's performance but also by various other factors such as volatility, interest rates, issuer solvency, and remaining term. Selling the certificate before maturity may result in partial or total loss of invested capital.

4. Cap. Express certificates typically have a maximum payout amount defined in their terms. This cap represents the highest achievable profit for the investor.

5. Currency Risk. If the underlying asset is quoted in a currency different from the certificate's currency, and if the certificate is not hedged against currency fluctuations, changes in exchange rates during the term can impact the certificate's price. This can potentially increase the investor's exposure to losses due to market risk.

6. Payouts of the Underlying. Dividends and other payouts from the underlying asset are factored into the structure of the certificate but are not directly paid out to the investor. Instead, they are reflected in the performance of the certificate over its term.

Example

The investor acquires an Express Certificate for USD 1,000 with the subsequent key data:

• Underlying: “Alpha” index

• Term of Express Certificate: 5 years

• Issue Price: 100%

• Starting value = closing price of index 3,000 points

• Barrier: 60% (equals 1,800 points)

• Valuation dates: annual

The minimum term is one year, the maximum term is five years. Investors may generate profit between 7% and 35%. The termination level is always 100% during the term, i.e. to trigger early termination at the respective termination amount, the price must remain unchanged or must have increased compared to the starting value at the annual valuation date.

ASSUMPTION 1: The term ends prematurely after two years.

The index quotes at 2,700 index points at the first annual valuation date. The index thus quotes below the termination level and the term extends by another year.

The index quotes at 3.100 index points at the second annual valuation date. The index thus quotes above the termination level and the certificate is redeemed prior to the maturity date.

ASSUMPTION 2: The certificate matures after five years.

The index quotes below the termination level at the first, second, third and fourth annual valuation date. The certificate terminates at the fifth and final valuation date.

At the fifth and final valuation date the index's closing price is compared with the termination level. One of the following scenarios will apply:

Scenario 1: Index quotes at/above the termination level of 3,000 points. Redemption is effected according to the termination amount of 135%, i.e. the investor obtains USD 1,350 and, in relation to the issue price, generates 35% profit in five years.

Scenario 2: The index quotes below the termination level of 3,000 points. The index's closing price is compared to the barrier. The index quotes above the barrier. The Express Certificate is redeemed at the nominal value of USD 1,000. The investor neither generates loss nor profit.

The index quotes at/below the barrier. At the maturity date, the certificate is redeemed according to the index's performance.