How the “memory effect” works

“Memory effect” is an option of coupon products, thanks to which unpaid coupons do not burn out, accumulate and allow you to recover lost profits.

It works like this: if the underlying assets of the product are below the coupon payment threshold on the observation date, the coupon is not paid, but it is remembered. The investor can receive it on one of the next observation dates if the underlying assets are above the threshold again.
Let’s break down an example
Let’s say you issued a 3-year coupon product in January with a 16% APR in USD and observation dates every 3 months. To receive coupons, the underlying assets of the product on the observation date must be above 70% of the initial prices.
After 3 months, one of the assets has fallen below this mark. This means that the coupon for the past period will not be paid, but will be remembered. If on any of the following observation dates all assets are above 70% of the initial prices again, you will receive not only the coupon for the last period, but also all missed coupons. For example, if the market is in correction for a year and a half and then recovers, on a “successful” observation date you will receive a coupon for the entire period, i.e. 16% + 8% = 24% p.a. (before taxes and excluding commissions)

What else you need to know

“Memory effect” can play into the hands of the investor not only in case of a long correction of the asset, but also in case of its high volatility. If the price of an asset changes frequently and significantly, there is a probability that on one of the observation dates it will still exceed the desired mark.

If you study the charts of behavior of some stocks, it is easy to see that seemingly hopeless situations end more than well. Suppose an investor bought a product on Twitter shares when they were worth $26, and then the stock fell to $13. Obviously, it’s not a pleasant situation. But, after a while, Twitter stock recovered, and now it’s worth $37. Thanks to the “memory effect,” the investor received all the coupons he was entitled to.

By the way, the common name of such products in the world is “Phoenix”. Akin to this mythical bird that rises from the ashes, your coupons are also restored, giving you a potential opportunity to get back all the profitability prescribed in the product, if the assets return to certain values.

Another benefit of “memory effect” products is the ability to lock in a coupon rate for an extended period of time, while products with early termination options may only yield one or a few coupon payments and terminate early. And if an investor whose product has terminated early wants to reinvest the money, there may not be attractive rates on the market. The risk in this kind of products is the reduction of one of the assets at the end of the term of the instrument, below the threshold for the payment of the nominal value. In this case, the amount of your losses will be equal to the landing of this worst asset.
If you do not want to take risks and wait for the payment of “memorized” coupons, you can choose structured products with a guaranteed rate. Their yields are somewhat lower, but coupon payments are made on set dates regardless of the dynamics of the underlying assets.