JPMorgan’s $290,000 notes on MerQube index use decrement to boost terms

By Emma Trincal

New York, April 6 – JPMorgan Chase Financial Co. LLC’s $290,000 of autocallable contingent interest notes due April 2, 2027 linked to the MerQube US Tech+ Vol Advantage index offer exposure to a rules-based, volatility control index, which can provide better pricing due to its decrement feature, sources said.

A decrement is a fee deducted from the index performance.

The notes will pay contingent quarterly interest at an annual rate of 11% if the index closes at or above its 70% interest barrier on the related review date, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called at par plus the coupon if the index closes at or above its initial level on any quarterly review date after six months.

The payout at maturity will be par plus the final coupon if the index finishes at or above its interest barrier.

If the index finishes below the interest barrier but at or above the 50% trigger level, the payout at maturity will be par. Otherwise, investors will be fully exposed to the decline of the index from its initial level.

Decrement index

The MerQube US Tech+ Vol Advantage index is subject to a 6% per annum daily deduction.

The decrement reduces the performance of the underlying but so does the non-payment of dividends in a typical structured note, according to a financial adviser who said he likes notes tied to the MerQube US Tech+ Vol Advantage index for the terms the exposure may provide on the notes.

“You get much better pricing and that’s not because of the embedded strategy; it’s because of the decrement. If you decrement the index, it gives you that extra income,” this adviser said.

Volatility control

The “embedded” strategy consists of a volatility control strategy with a 35% target.

The MerQube US Tech+ Vol Advantage Index provides a dynamic rules-based exposure to an unfunded rolling position in E-Mini Nasdaq-100 futures, which reference the Nasdaq-100 index, while targeting a level of implied volatility, according to the prospectus.

The index can enhance up to 500% the exposure to the futures contracts based on the implied volatility of the Invesco QQQ Trust, Series 1, which tracks the Nasdaq-100 index.

The index’s participation in the futures contracts will be increased to up to 500% when the implied volatility of the QQQ fund is below 35%. Inversely, if the implied volatility rises above the 35% target, the index’s exposure to the futures contracts will be less than 100%.

“There’re leveraging on the upside and deleveraging on the downside,” the adviser said.

“If the Nasdaq implied volatility is at 25% and a spike pushes it above 35%, they’re going to short the Nasdaq futures to bring the volatility down to 35%.”

Implied versus realized

A structurer explained how the volatility control improves the underlying performance.

“First, they’re using the implied volatility, not the backward-looking historical vol, which doesn’t do much,” he said.

“The idea is to better predict the future of volatility so you can invest accordingly.

“If you can predict that the market will be less volatile going forward, theoretically you can increase the leverage and hopefully, make more money.

“If, on the other hand, you can predict greater volatility, you can use that to deleverage your position.”

Another advantage of the strategy was the 35% volatility target, which represents a “very high level,” according to a separate source.

Tradeoff

The 6% per annum daily deduction will be a drag on the performance of the index, warned the prospectus.

“Of course, the performance is not as good if you have the decrement. But the decrement is what gives you the better terms,” he said.

“I’m intrigued when buysiders pitch those notes because the terms look better. Of course, they look better! You get a 6% cut in the index return, so the optics are great.

“Do you see a difference between selling two half-a-dozen eggs and one dozen? I don’t.”

The index was developed by MerQube, in coordination with J.P. Morgan Securities LLC and was established on June 22, 2021. In September 2021, a JPMorgan affiliate purchased a 10% equity interest in MerQube, which is the index sponsor.

A total of $133 million in 56 deals have been issued with a link to this index since its creation, according to data compiled by Prospect News.

The notes are guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes settled on Monday.

The Cusip number is 48133DS43.

The fee is 4%.

© 2015 Prospect News.
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