This chapter covers the risks in structured notes and structured deposits: issuer and counterparty credit, SPV collateral, the underlying's market moves, liquidity and early redemption, reinvestment, rate, inflation and currency risk, physical delivery, pricing and conflicts, and legal and operational risk. It ends with the Lehman-linked notes and the FAA-G09 disclosure rules. The exam tests these through scenarios and short calculations, so you must work out payouts and early-exit values, not just name the risks.
8 sections·~6 min read
✓Checked against the SCI M8A syllabus chapter 2 (checked 13 Sep 2026); MAS Investigation Report on Lehman-linked structured notes (7 Jul 2009); MAS Guidelines on Structured Deposits FAA-G09 (last revised 28 Jun 2021); MoneySense structured deposits and structured notes guides (last updated 2 Jul 2026); FAA 2001 s.36 and SFA 2001 s.240AA, s.309C, s.309D (current as at 13 Sep 2026); MAS Code on CIS Appendix 1 section 5 (revised 2 Jul 2026). Unofficial prep, not endorsed by MAS or SCI.
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Must-know for the exam
✓A structured note is a debt obligation of its issuer. If the issuer fails, you claim as a creditor and may recover only part of your money (MoneySense).
✓A structured deposit repays principal only if you hold it to maturity AND the bank stays solvent. It is not insured by SDIC (MoneySense; FAA-G09).
✓SDIC covers SGD deposits of non-bank depositors up to S$100,000 per depositor per Scheme member as at 13 Sep 2026. Structured deposits, foreign-currency deposits and investment products are excluded.
✓An SPV exists only to issue notes and/or act as derivatives counterparty (SFA s.240AA(5)). Repayment rests on its collateral and its swap counterparty.
✓First-to-default: the first credit event in the basket (bankruptcy, failure to pay, restructuring) ends the note early, likely below principal. More names means more risk, not less (MAS Lehman report, 2009).
✓Lehman notes (2009 report): Minibond failed when its swap counterparty and guarantor failed; High Notes 5, Jubilee and Pinnacle were redeemed early at zero after credit events.
✓Early-exit value = current bond leg + current option leg - unwind costs. It can be well below principal.
✓Issuer early-redemption grounds (MoneySense): issuer call, event of default, tax imposition, extraordinary or force majeure event, collateral shortfall.
✓Physical delivery: shares = principal / strike; value them at the final market price, then add any coupon received.
✓SGD return = foreign proceeds x new rate / SGD invested - 1. A quanto fixes the conversion.
✓SFA s.309C bars 'capital protected' and 'principal protected' for offered products. A PHS does not replace the prospectus (SFA s.240AA).
✓FAA-G09: best- and worst-case illustrations, principal only if held to maturity, not an insured deposit, written warning to non-advised clients.
✓FAA s.36: a recommendation needs a reasonable basis: the client's objectives, finances and needs, plus product due diligence.
Issuer and guarantor credit risk
•In the exam, credit risk questions usually hide behind a good-looking payoff. The formula tells you what the issuer owes. Whether you get it depends on the issuer paying.
•A structured note is a debt of its issuer (MoneySense). If the issuer goes into liquidation, you are typically an unsecured creditor and share in whatever creditors recover. Worked example: a S$80,000 claim with a 35% recovery rate returns S$28,000, even if the linked index rose.
•A structured deposit carries the bank's credit risk too. MoneySense says principal comes back at maturity only if you hold to maturity and the bank is solvent. It is not insured: as at 13 Sep 2026, SDIC covers SGD deposits of non-bank depositors up to S$100,000 per depositor per Scheme member, and excludes structured deposits, foreign-currency deposits and investment products.
•Bank-issued note: you depend on the bank.
•SPV-issued note: the SPV has no business of its own (SFA s.240AA(5)), so you depend on the collateral it bought and the swap counterparty it dealt with.
•Guaranteed note: you depend on the guarantor. If the guarantor is hit by the same shock as the issuer, the guarantee fails when you need it.
•Credit-linked note: you carry the reference entity's credit AND the issuer's credit.
•Credit risk also shows up before default. A downgrade widens the spread investors demand on the issuer's debt, so the note's secondary price falls even with the index flat. A rating is an opinion that can change; it is not a promise to pay.
•Buying three notes from one issuer on three different indices spreads market risk, not issuer risk.
Trap: treating a bank-issued note or a structured deposit as covered by deposit insurance because a bank is involved.
•Takeaway: every structured product is only as good as whoever must pay. Name the issuer, guarantor and counterparty before you look at the payoff.
Counterparty, collateral and credit linkage
•Structured products embed options or swaps. If the bank on the other side of that derivative fails, the loss can pass directly to you (MoneySense). This is counterparty risk, and it applies even when the issuer is a different, healthy entity.
•Exposure to a counterparty is what you would lose if it defaulted now: the positive mark-to-market of the contract, not its notional. A swap that has moved deeply in your favour means more at stake. The MAS Code on CIS uses the same measure for funds (Appendix 1 section 5, revised 2 Jul 2026).
•Collateral only protects you to the extent of its value. Downgrades of the collateral issuers, or credit events inside a synthetic CDO, cut that value. Collateral issued by the swap counterparty itself is wrong-way risk: one failure hits both. The Code on CIS bars such collateral for funds for this reason.
•The Minibond structure (MAS Lehman report, 7 Jul 2009) shows how the layers stack:
•Minibond Limited, an SPV, issued the notes and used the proceeds to buy underlying securities, mostly synthetic CDOs rated AA/AAA, each referencing about 100 to 150 entities.
•A swap counterparty (Lehman Brothers Special Financing), backed by a swap guarantor (Lehman Brothers Holdings), paid amounts that formed part of the interest.
•The notes were credit-linked to a basket of reference entities on a first-to-default basis.
•Early redemption was triggered by a credit event, by losses on the underlying securities beyond a threshold, or by swap counterparty failure. The amount was likely less, possibly far less, than principal.
•First-to-default means the first credit event among the names ends the note. Adding names raises the chance that at least one defaults, so an eight-name basket is riskier than a one-name note on any of those names.
•Tranche arithmetic: a tranche that absorbs portfolio losses between 4% and 7% has a width of 3%. Portfolio losses of 7% wipe it out completely (3% / 3% = 100%). A high rating does not stop a thin tranche being exhausted by a few defaults.
•Trap: calling a multi-name first-to-default basket 'diversified'.
•Takeaway: in credit-linked notes, one default among many names can end the note, and the swap counterparty can bring it down on its own.
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