Liquidity and the Secondary Market for Structured Notes

Investors who are used to stocks, ETFs, and mutual funds tend to assume every investment can be sold on any given day at a fair, transparent price. Structured notes work differently, and understanding that difference is one of the most important parts of deciding whether they belong in your portfolio.

A structured note is designed around a specific payoff calculated over a stated term, commonly somewhere between one and seven years. The return you're targeting, whether it's tied to downside protection, an enhanced upside cap, or an income stream, is generally only realized if you hold the note to its stated maturity date.

This is a fundamentally different design than a stock or an ETF. Those instruments have no term and no maturity date; you can buy and sell them daily with the expectation that the market price reflects real-time supply and demand. A structured note is closer to a customized contract between you and the issuing bank. The economics baked into that contract, the protection level, the cap, the participation rate, are calculated assuming you stay in for the full term.

Life doesn't always cooperate with a note's maturity date. If you need liquidity before the term ends, most structured notes can technically be sold back to the issuing bank or to a market maker on a secondary market. But it's important to go in with realistic expectations about what that sale will look like.

The price you're offered on an early sale isn't calculated the same way your original purchase price was. Instead, it reflects current market conditions at that moment, including:

• Movement in the underlying index or stock since you purchased the note
• Where interest rates sit relative to when the note was issued
• How much time remains until stated maturity
• The issuing bank's own credit spread, which can widen or narrow independent of the underlying investment

Because of these factors, the price offered for an early sale can be at a meaningful discount to the amount you originally invested, particularly in the early part of the term or during periods of market volatility. The secondary market price is a function of where the note's economics stand today, not a return of your original principal.

It's worth being clear about a distinction that often gets blurred. Selling a note early on the secondary market is a choice you make voluntarily, at a price the market or the issuer offers you. An autocall or issuer-call feature is something else entirely: a built-in mechanism in the note's structure that can end the note before its stated final maturity based on predetermined conditions being met, regardless of what you'd prefer.

We cover how autocall and other payoff features work in more depth on a companion page in this Structured Notes Education Center. The key point here is simply that these are two separate ways a note's timeline can diverge from what you originally expected.

• Structured notes are generally designed to be held to their stated maturity, commonly one to seven years, to receive the intended payoff.
• Selling before maturity is usually possible through the issuer or a secondary market, but the price reflects current conditions and may be at a meaningful discount to your original investment.
• Secondary market pricing depends on movement in the underlying, interest rates, time remaining, and the issuer's credit spread, not simply a return of principal.
• An autocall or issuer-call feature is a separate mechanism from a voluntary early sale and can also end a note before its stated final maturity.
• Only allocate funds you're comfortable committing for the full term, and keep separate liquid reserves for near-term spending needs.

Structured notes are complex investments that involve risks, including potential loss of principal, issuer credit risk, limited liquidity, and early redemption features that may limit returns. They are not suitable for all investors and, except for certain market-linked CDs within applicable FDIC limits, are not bank deposits or FDIC-insured. Past performance is not indicative of future results. Investors should carefully review the relevant offering documents and consult their advisor before investing.