Clifford Chance

This article was written by Terry Yang and Greg Chan of Clifford Chance, Sherry Shan of Shanghai He Ping Law Firm*, and Viona Yiu of Bank of America. Further details about the authors are provided at the end of the article

EXECUTIVE SUMMARY

The structured notes market has experienced remarkable growth over the past decade. SRP reports that the US structured notes market reached a record US$149.4 billion in 2024, marking a 46% rise from the previous year.^[1] In Hong Kong, the most recent 2024 joint survey by the SFC and HKMA indicated that sales of structured products increased by $59 billion in 2023 compared to 2022.^[2] This growth necessitates scalable infrastructure to accommodate increasing demand.

Structured notes are characterised by high volumes of indications, fast response time and large numbers of tickets, all of which rely heavily on automation systems to meet client demand.

Digital solutions now shorten the journey from trade idea generation to security settlement, allowing issuers to quote faster, prepare trade documentation quicker and support mass-customisation without proportional increases in resource requirements. For legal partners, technology provides much-needed consistency, reduces manual drafting risk and facilitates evergreen template maintenance across various product types. Success, however, depends on close collaboration between various functions in the issuance workflow. The rise of artificial intelligence ("AI") technology may also fundamentally change how the documents are prepared.

The Structured Notes Issuance Workflow

A typical structured notes issuance begins with clients requesting specific underlyings and payoff features and issuers responding with pricing. A product term sheet that sets out the summary of key economic terms will be provided to the client. Upon trade execution, the issuer will prepare for the issuance of the note. A pricing supplement or final terms, which is a short document that sets out the specific terms of the issue and supplements the programme offering circular, will be drafted, executed and delivered to the issuing and paying agent before the issue date to arrange for issuance, followed by settlement of trade on the issue date.

WHY AUTOMATING TERM SHEETS AND FINAL TERMS MATTERS

The structured notes business is a flow business with a large number of requests and trades executed daily. It is important that the process is standard, efficient, responsive to client demand and can support the volume. The traditional approach of handling term sheets and final terms manually is time-consuming and costly, as it involves a labour-intensive process to prepare and review documentation. This may not be sustainable to cope with rising trade volumes as well as the faster turnaround time needed from clients in a volatile market environment.

The benefits and reasons for moving to automation include:

• Structured notes are products with standardised payoff features and product terms, making them suitable for automation;
• Reduced time in producing documents, enabling banks to respond to client requests quickly;
• Improved consistency in documentation;
• Cut down human drafting errors and human resources requirements; and
• Ability to handle large volumes and numerous different products with different combinations of payoff features

ADOPTING TECHNOLOGY IN STRUCTURED NOTES ISSUANCE

Technology-Driven Pricing

The use of technology in the pricing stage is essential. Modern systems now employ sophisticated algorithms to transform the pricing process:

Clients would send a request for quotes (“RFQ”) and product providers would respond to the RFQ. Clients would pick the quote that is the best price and that has responded within the required timeframe. In the old days before the use of automatic pricing systems, when a client requested quotes for a particular product, product providers would manually calculate the price and call back the client to provide pricing. Responses would be slow, and the number of quotes that a product provider could handle was limited.

Today, product providers receive tens of thousands of RFQs on structured notes daily. While some RFQs come directly from clients via email or electronic communication, many private bank clients and distributors use third-party quote aggregators to request and accept quotes. These third-party quote aggregators provide standardised formatting and communication channels for both distributors and product providers. Product providers with connectivity to these third-party quote aggregators receive notifications from the system and, if interested, will reply with pricing. All of these happen within seconds, and usually no more than three minutes. Furthermore, many private bank clients committed to providing best execution to their end customers impose cut-off times, so interested product providers need to respond as quickly as possible and in any event before the cut-off time.

Nowadays, pricing is very advanced. Product providers use technology such as autopricer to handle pricing. Machines can read RFQs, calculate prices and automatically generate responses. This requires a high degree of standardisation. Quote templates need to be standardised in language and used across the market. Any additional language or bespoke terms would add complexity to the system and increase the risk of errors.

Automated Template Solutions and Document Generation

Law firms have been investing in developing systems to automate the preparation of pricing supplements or final terms. Even before the age of AI, various efforts have been made to automate legal documentation preparation, including:

• Smart template systems that automatically populate legal documents using structured data extracted from term sheets;
• Automated checking where system logic is implemented to cross-check documents for inconsistencies and errors; and
• Approval process automation where templates for generating approval requests are created to suit different product types (requiring different approvals from different teams, etc.).

However, the implementation of collaborative automation requires careful planning and ongoing management:

• Master template development: Good planning is needed when developing a comprehensive master term sheet and pricing supplement/ final terms template that covers a wide range of product types and payoff features. Combination of product features can add complexity and requires careful consideration of any changes or additional language required when different features are combined to form new products;
• Standardised language: Standard descriptions and definitions should be used across all templates and documents where possible;
• Simplification principle: Keep it simple – complex systems are more prone to errors and harder to maintain;
• Training and adoption: Personnel involved in the process should be trained on the workflow, and if any technological system is used, the use case and the limitations of the system; and
• Fallback Procedures: Fallback procedures need to be developed for when automated systems encounter exceptions or failures.

Post-Issuance Management Technologies

Financial institutions would use technology to monitor and handle lifecycle events. It can be an in-house solution or an external solution. Third-party quote aggregators are moving from being merely a price aggregator to providing post-trade lifecycle management services as well. They monitor lifecycle events such as coupon payments, autocall events, corporate actions and notify the clients. The use of technology for post-trade management issuance has greatly helped free up the frontline employees’ time in handling pricing, calculation and reporting.

Providing MTM (mark-to-market) is an important part of the structured note business. Private banks use MTM as part of their credit assessment on their clients and to determine the loan-to-value and margin calls. It is crucial that product providers provide accurate MTM and provide it in a timely manner. Product providers would use technology to calculate the MTM and publish it on different venues such as Bloomberg and Reuters.

FUTURE HORIZONS: THE ROLE OF AI

The integration of artificial intelligence represents a potential next frontier in structured notes issuance, with the capability to transform every aspect of the process from initial product design to post-issuance management.

While currently, the use of AI in the structured notes issuance process can be seen as limited, AI applications have the potential to accelerate the documentation process further.

Potential use cases

The more immediate implementation of AI may be in the preparation of pricing supplements or final terms. For example, AI may be used in:

• Identifying the correct termsheet/template for the current transaction: AI systems could analyse product features, underlying assets and client requirements to automatically select appropriate documentation templates;
• Populating information from the termsheet to prepare the first draft of pricing supplements/final terms: Extracting commercial information from the term sheet with precision and inserting this information into the pricing supplement or the final terms. A more advanced system would be able to read the term sheet and then choose the relevant options for the current trade in the relevant template pricing supplement or final terms; and
• Preparing approval or signing requests: Intelligently extracting relevant information from client communications, market data and internal systems to generate approval or signing requests.

Confidentiality and Security Considerations

However, as commonly encountered in the application of AI in legal practice, the implementation of AI in structured notes issuance raises critical security and confidentiality concerns:

• Client confidentiality: Ensuring AI systems maintain strict client data privacy and comply with relevant regulatory requirements. Financial institutions should include provisions in their agreements with law firms regarding how AI can be used and how client data should be protected;
• Model governance: Establishing robust oversight frameworks for AI model training, validation and ongoing monitoring. Client confidential documents should not be inadvertently disclosed and used for model training; and
• Audit trails: Maintaining comprehensive documentation of AI decision-making processes for review.

The future of structured notes issuance will likely see AI playing an increasingly important role, but success will depend on balancing innovation with risk management. The collaboration between financial institutions and legal partners will be crucial in navigating this evolution while maintaining the integrity and security of the structured notes market.

CONCLUSION

The structured notes market stands at a pivotal moment where technology adoption is transitioning from a competitive advantage to a business necessity. The convergence of artificial intelligence, automation and collaborative digital platforms is reshaping how financial institutions and legal partners work together to serve increasingly sophisticated client demands. The collaboration between financial institutions and legal partners will be the cornerstone of this development, combining financial innovation with legal expertise to serve the evolving needs of global investors.

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AUTHORS

Terry Yang

Partner in Clifford Chance’s Asia Pacific Financial Services Regulatory Group

Terry specialises in structured finance, OTC derivatives and financial markets regulations concerning a wide variety of structured products, including equity and credit linked structures, repackagings, fund linked derivatives, ISDA close-outs and hedging.

Sherry Shan

Senior Associate in Shanghai He Ping Law Firm's Financial Regulatory Group

Sherry focuses on financial regulatory, structured finance, banking and is specialised in advising financial institutions on financial regulatory issues.

Greg Chan

Associate in Clifford Chance’s Asia Pacific Financial Services Regulatory Group

Greg specialises in structured finance, derivatives, securitisation and debt capital market transactions, and regularly advises on financial regulatory matters and projects. He also participates in various innovation initiatives at the firm.

Viona Yiu

Assistant General Counsel and Director – Bank of America

Viona is an Assistant General Counsel in Bank of America’s Legal Department in Hong Kong, covering the structured note business in Asia. She has over 15 years of experience in structured products. She advises the fixed income and equities businesses on all aspects of structured note issuance, drives platform build-out and supports business expansion.

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[1] Structured Retail Products US Market Review 2024: market size and issuers breakdown

[2] SFC-HKMA Joint Survey on the Sale of Non-exchange-traded Investment Products 2023, issued in September 2024

* Clifford Chance LLP and Shanghai He Ping Law Firm have established a Joint Operation in the China (Shanghai) Pilot Free Trade Zone under the name Clifford Chance LLP and Shanghai He Ping Law Firm (FTZ) Joint Operation Office with the approval of the Shanghai Bureau of Justice