Volatility and falling markets force Canadian CPPI notes to cash out

Constant proportion portfolio insurance products in Canada have been punished by end-of-year market moves, as volatility and downward slides trigger protection cushions.

The structures work by automatically allocating investor funds between risky and non-risky assets. When volatility hits a certain level, the entire allocation shifts to the secure asset. In certain products, there is no possibility for further upside exposure once this occurs. Products in Canada suffered a rash of cashouts in June 2008 (Structured Products, July/August 2008) but subsequent issuances are still hitting triggers.

TD Securities notified investors on December 1, 2008 that six of its notes issued between December 2007 and June 2008 had experienced what is referred to as a 'protection event' in late November, including a dividend index-linked note and a growth fund-linked note. Investors will receive back principal plus any previously accrued interest at maturity, which is between 2014 and 2016 for the note range. However, no further interest payments will now be paid or earned.

CIBC's products have also suffered amid the market crisis. Around five products cashed out in the immediate wake of the Lehman collapse, followed by around 10 more before mid-November. One product, the seven-year Tradewinds International Value Deposit Note, which is linked to an investment strategy in equity securities, cashed out just seven months after its issue in March 2008. An early trading charge of 6.95% will apply until March 2011.