institutional structured products

Institutional Structured ProductsOctober 2013

Agenda

Catley Lakeman Securities / Counterparty Risk

How are Structured Products put together?

Key Categories of Structured Product

How do they fit into client portfolios?

Costs / Liquidity

Why Use Structured Investments?

Appendix

2

Catley Lakeman Securities / Counterparty Risk

3

Catley Lakeman Securities

Founded July 2008

Team of 9

Combined investment sales experience – 42 years

Combined structured investment trading experience – 34 years

Combined structured investment specific experience – 54 years

STUART CHANDLER

Non-Executive Chairman

RUSSELL CATLEY(Partner)

ANDREW LAKEMAN(Partner)

NINA GILLGEORGE HICKEY

Sales SalesSales &

ResearchSales

T 020 7043 0101M 07977 917 238

T 020 7043 0102M 07812 527 172

T 020 7043 0104M 07974 990 280

T 020 7043 0107M 07974 916 971

TOM MAY(Partner)

CHRIS DAGG JONATHAN DAGG

Trading & Structuring Trading & Structuring Trading & Research

T 020 7043 0103M 07876 716 067

T 020 7043 0105M 07841 332 701

T 020 7043 0505M 07921 003 583

4

EDWARD SENIOR

Delta 1

T 020 3397 3156M 07971 958 585

FSA authorised securities and futures firm

Outsourced origination and distribution business, representing seven banks on a contractual

basis

Sell and support (ie in both the primary and secondary markets) private placement securitised

derivative investments to professional asset managers and institutions in the UK

5

Counterparty Risk

Source: Bloomberg, data as at 30-Sep-2013

Royal

Bank o

f Can

ada

UBS

JP M

orga

n

HSBC

Credit

Suis

se

Rabob

ank

Citigro

up

Deutsc

he B

ank

BoA

Nomur

aIN

GBNP

Lloyd

s TSB

Barcla

ys

Goldm

an

Mor

gan S

tanley

Soc G

enRBS

Credit

Agr

icole

Comm

erzb

ank

Banco

San

tande

r

0

100

200

300

400

500

600

700

Credit Spreads since June-2008 - Trading Ranges

Cre

dit

Def

ault

Sw

ap (

CD

S)

leve

ls [

bas

is p

oin

ts o

ver

LIB

OR

per

an

nu

m]

high

low

maximum 1360

current

How are Structured Products Put Together?

6

A structured product is a defined-return investment based on the performance of an underlying asset

Factors to determine at the outset:

o Underlying asset – equity indices, commodities, interest rates, etc

o Payoff – depends on your investment view, the risk/ return profile, income vs growth

o Counterparty – mark-to-market considerations, diversification of issuers

What are Structured Products?

7

8

Estimation of 170% Barclays 5 year FTSE Accelerator Bond (Traded 1-March-2005):

Matured at 117p (estimate)

Share Price at Issue 100.00p

ZCB / Swap inc. funding pickup 74.61p

Aggregate Costs 1.49p

Amount to invest 23.9p

Price of 1 call option at March 2005 14.06p

Therefore with 23.9p, investor can buy 1.7x call options

→ 170% participation

Capital Protected FTSEBack in 2005

GBP1.00Zero-

couponBond/Swap

Option packageProvidingEconomic

Return

GBP1.00Investor’s

Cash

9

Indication of the same 5 year capital protected participation structure today, with an AA- rated issuer:

Hence why these structures are not traded today in the current pricing environment





Price of 1 call option today 12.10p



Capital Protected FTSE Today

GBP1.00Zero-

couponBond/Swap


Return

GBP1.00Investor’s

Cash

10

Selling FTSE downside does look good today. Indication of a 5 year structure today with soft capital

protection at 60%, with an AA- rated issuer:

These structures can be a good alternative to passive or quasi-passive long only funds

GBP1.00Zero-

couponBond/Swap


Return

GBP1.00Investor’s

Cash Sell 5yr European

Put Option on the FTSE Risk At 60%

Strike (‘Knock-In Put’)




Old amount to invest 8.67p

Sell put risk premium 13.52p

New Amount to invest 22.19p




GBP1.00Zero-

couponBond/Swap


Return

Partly Capital Protected FTSE Today

11

How would this have looked in 2005? Estimation of a 5 year structure with soft capital protection at

60%, AA- rated issuer:

GBP1.00Zero-

couponBond/Swap


Return

GBP1.00Investor’s







Old amount to invest 24.72p


New Amount to invest 28.76p

Price of 1 call option at March 2005 14.60p



GBP1.00Zero-

couponBond/Swap


Return

Partly Capital Protected FTSE Back in 2005

Key Categories

1. Accelerators / Supertrackers

2. Defensive Autocalls

3. Range Accruals

12

Categories of Structured Products

CAPPED

UNCAPPED

ACCESS TO A PARTICULAR UNDERLYING

PARTICIPATION

SELLING VOLATILITY

DEFINED RETURN

YIELD ENHANCEMENT

AUTOCALLS

SYNTHETICS

INCOME Sit alongside: Income funds

Sit alongside: ZDPs

Sit alongside: Equity income funds and absolute return funds

Sit alongside: Large cap / core long only funds and ETFs

Sit alongside: Other vehicles accessing the same underlying asset

AcceleratorsSupertrackers Call Spreads

Usually participation in the form of an Accelerator, (but not always)

Autocalls Defensive Autocalls Worst-Of Autocalls

Synthetic ZerosDigitalsRange TradesRange Accruals

Reverse Convertibles DigitalsRange Trades High Income Range AccrualsInflation Plus

13


2. Range Accruals


14

Construction

15

• HSBC 5.5 year Fixed Rate Bond

• Yielding roughly 3.3% per annum at time of issue

• Remove coupons

• Present Value of coupon stream over 5.5 years: 17p

• Left with an HSBC zero coupon bond worth 83p

• Incorporate ‘soft protection’

• 60% soft protection on S&P 500 at maturity

• Sell knock-in put: 12.5p

• Incorporate upside

• 100 – 83 + 12.5 = 29.5p to spend

• 1 S&P call option is 16.5p; 29.5 / 16.5 = 1.79 call options

HSBC 5.5 year Fixed Rate Bond

Remove Coupons

Incorporate ‘soft protection’

Incorporate upside

All data as at time of issuance (Feb-11)

Eg: HSBC 340 US Supertracker (179%)

16

HSBC 340 US Supertracker (179%)

Strike: 16-Feb-11

Counterparty: HSBC

Currency: USD Denominated

Underlying: S&P 500 (1336.32 points)

Maximum Term: 6 years

Platform: EIS (subject to CGT under current tax rules)

Upside: 179% participation (final year averaging)

Downside (60% European Knock-In Put):

if at maturity the S&P has fallen by more than 40% of the initial level (below 801.79 points) at maturity, the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level

Mark-to-Market

17Source: Bloomberg, data to 29-July-13

Feb-11 May-11 Sep-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-13 Aug-1375%

85%

95%

105%

115%

125%

135%

145%S&P 500 Index Per-formance [Price]

US Supertracker Per-formance

Total return of index = 132.70% (dividend reinvestment assuming Net of Corporate Tax rate 20%)

Structure performance to date: 40.89%

S&P TR performance to date: 32.70%

Structure annualised volatility: 20.45%

S&P annualised volatility: 17.63%

Performance

18

• Since launch performance: 40.59% versus 29.75% sector average in the below list of funds

Source: Bloomberg, Financial Express, data to 26-Sep-13

USD Denominated Performance (TR)

Bloomberg Ticker 1 year 3 month 1 month Since Launch

(25-Sep-2012) (28-Jun-2013) (29-Aug-2013) (16-Feb-2011)JPM US Equity Income HLIEX US Equity 21.26% 4.82% 3.19% 41.47%HSBC US Supertracker Series 2 / 3 / 4

B3Z2023 29.71% 10.03% 6.18% 40.59%

Threadneedle Investment Funds American Select

TDNASGA LN Equity 20.98% 10.34% 7.05% 33.62%

S&P 500 SPX Index 19.48% 5.77% 3.40% 32.51%Schroder QEP US Core Fund

SCHRAMA LN Equity 18.48% 5.93% 3.61% 32.07%

Findlay Park American Fund

FINDLPI ID 21.92% 6.27% 4.40% 31.76%

ISHARES S&P 500 SACC LN Equity 17.51% 5.30% 2.80% 31.46%Neptune Investment Funds US Opps

CFNUSAA LN Equity 28.44% 15.72% 7.59% 28.84%

JPMorgan American Investment Trust

JAM LN Equity 15.33% 7.19% 2.14% 27.15%

Brown Advisory US Equity Growth Fund

BRAUSEB ID Equity 18.92% 8.93% 5.03% 26.96%

UBS US Equity Investment Funds

UBSUEAA LN Equity 22.11% 6.96% 3.41% 26.71%

Legg Mason Funds US Equity

LMUSEAA LN Equity 24.74% 9.27% 4.45% 23.71%

M&G Investment Funds American

MGAMDAA LN Equity 19.42% 5.48% 4.08% 20.75%

HSBC 476 US Supertracker Series 5

B92SVS9 - 8.26% 4.68% -


19

USE TYPE EXAMPLE SITS ALONGSIDE

Gearing / Participation Uncapped Accelerator / Supertracker Large cap / core long only funds and ETFs

• Seen by many as a cost-effective ETF replacement

• Given 90% of respondents to the 2012 questionnaire were bullish, it is likely we will

see more of these structures over the next year

• Not usually held for more than 1 to 2 years



3. Range Accruals

20

21

Payoff Example

Level of Index 1st anniversary 2nd anniversary 3rd anniversary 4th anniversary 5th anniversary

100%

60%

0%

6th anniversary

Autocall observation coupon of 32%




Autocall continues to 2nd anniversary

Autocall continues to 3rd anniversary

Autocall continues to 4th anniversary



Capital protection barrier triggered

Ca

pit

al

Pro

tec

ted

Ca

pit

al

Lo

ss



100%95%

90%85%

80%75%

Autocall redeems at 100p

22

Eg: HSBC 260 FTSE Defensive Autocall (10%)

HSBC 260 FTSE Defensive Autocall (10%) EIS

Strike: 7-Oct-10

Counterparty: HSBC

Currency: GBP Denominated

Underlying: FTSE 100 (5662.13 points)



Upside: Defensive autocall, 10% snowballing annual coupon

Autocall Barriers:

Year 1: 100% barrier 110% payoffYear 2: 100% barrier 120% payoffYear 3: 100% barrier 130% payoffYear 4: 95% barrier 140% payoffYear 5: 90% barrier 150% payoffYear 6: 85% barrier 160% payoff

Downside (50% American Knock-In Put):

should the structure not autocall on any of the 6 anniversaries, and the FTSE has fallen by more than 50% at any close over the life, the structure will redeem paying the original capital minus 1% for every 1% the Index had fallen below strike level

23

Payoff

Unless the capital protection has previously been breached

Level of FTSE 1st anniversary 2nd anniversary 3rd anniversary 4th anniversary 5th anniversary

100%

50%

0%

6th anniversary

100%






Autocall continues to 3rd anniversary




Capital protection barrier triggered

Ca

pit

al

Pro

tec

ted

Ca

pit

al

Lo

ss



100% 100% 100%95%

90%85%

Autocall redeems at 100p*


Capital protection barrier

Autocall continues to 3rdanniversary








24

Oct-10 Feb-11 May-11 Aug-11 Dec-11 Mar-12 Jun-12 Sep-12

-15

-10

-5

0

5

10

15

20

25FTSE 100 Total Return

HSBC 260 FTSE DefensiveAnnualised Volatility over the life of the trade: HSBC 260: 14.51% FTSE 100: 19.93%

Outperformance over the Underlying: 9.77%

Total return of index = +10.23% (dividend reinvestment assuming Net of Corporate Tax rate 20%)

Mark-to-Market

Structure outperformance to date: 9.77%


FTSE 100 annualised volatility: 19.93%

Source: A selection of popular UK funds, all rated AAA/AA by Citywire 25

• Called in Year 2 (8th October 2012), with the FTSE at 5841.74 points

• Over the two years since launch, the structure doubled the return of the market with less volatility

Period Range: 7-Oct-10 to 8-Oct-12

Total Return Performance 360 Day Volatility

Structure (HSBC 260 Def Ac) 20.00% 14.51%

BlackRock UK Special Situations 16.70% 19.92%

Threadneedle UK Equity Income 15.79% 17.49%

Underlying (FTSE 100) 10.23% 19.93%

M&G Recovery 11.14% 22.56%

Standard Life Investment GARS 7.62% 4.72%

Jupiter Absolute Return 4.51% 5.51%

Performance


26

• Performance of Defensive Autocallables is predictable and defined

• Bull market: Underperform

• Bear market: Likely to outperform

• “Flattish” market: Outperform significantly

• Autocall Backtest Analysis – illustrating where outperformance tends to occur


Yield Enhancement Defined Return Selling Volatilty

Autocalls Defensive Autocall Equity income finds and absolute return funds

Costs & liquidity

27

Cost/Fee structure of Institutional Structured Investmentso Costs typically between 0.5% to 2.0%

How liquid are Institutional Structured Investments?

Can I buy and sell them?

o Full Intra-day secondary market liquidity

o Institutional structured investment s will price intra-day

o Liquidity has existed on every single trading day for the entirety of the Institutional Market (i.e. over the last ten years, encompassing the Financial Crisis)

o Liquidity exists at the level of the underlying they are referenced to.

o For example, examine the liquidity of S&P 500 or FTSE 100 futures.o Consider for example volume traded on S&P 500 futures – current average for the last

weeks trading is $106.8Bil per day *

Cost and Liquidity of Institutional Structured Investments

28*Source: JP Morgan Global Equity Derivatives & Delta One Strategy 26th July 2013

Summary

29

Why use Structured Investments in a portfolio?

o They can be tailored to an investors’ specific requirements

o They offer an investor access to a wide variety of underlyings (equities, indices, interest rates, inflation, commodities etc)

o They can be structured via a variety of different outcomes at maturity, that are generally very simple to understand

o They tend to do ‘exactly what it says on the tin’- both the returns and the risks are easily definable

o As are the costs

o They should be used as an active investment, which is facilitated by a liquid secondary market (they have proved to be almost the most liquid asset you can hold) that CLS services

Why Use Institutional Structured Investments?

30

31

Appendix

Appendix: Market Colour Data

32

Rates, Credit and Volatility

Sterling Interest Rates

Grinding lower, 10% autocall coupon equates to 15% in 2007 (ceteris paribus)

Source: Bloomberg (30-Sep-2013)

Nov-07 Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2 year currently 0.82%

5 year currently 1.73%

GBP Swap Rates

Sw

ap R

ate

(%)


33


Credit

Clients continue to chase quality

Royal

Bank o

f Can

ada

UBS

JP M

orga

n

HSBC

Credit

Suis

se

Rabob

ank

Citigro

up

Deutsc

he B

ank

BoA

Nomur

aIN

GBNP

Lloyd

s TSB

Barcla

ys

Goldm

an

Mor

gan S

tanley

Soc G

enRBS

Credit

Agr

icole

Comm

erzb

ank

Banco

San

tande

r

0

100

200

300

400

500

600

700

Credit Spreads since June-2008 - Trading Ranges

Cre

dit

Def

ault

Sw

ap (

CD

S)

leve

ls [

bas

is p

oin

ts o

ver

LIB

OR

per

an

nu

m]

high

low

maximum 1360

current

Source: Bloomberg, data as at 30-Sep-2013


34


Volatility in a bit more detail

Source: Catley Lakeman, JP Morgan Derivatives and Delta One Strategy, Bloomberg (17-June-2013)

Feb-07

May-07

Aug-07

Nov-07

Feb-08

May-08

Aug-08

Nov-08

Feb-09

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

Jul-13

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

0.00

5.00

10.00

15.00

20.00Knock-in Put Price (5 year)

Knock-in Put Price (2 year)

Imp

lied

Vo

latil

ity

Kn

oc

k-i

n P

ut

Pri

ce

(%

)

CATEGORIES OF STRUCTURED INVESTMENTS

35


Gearing / Participation Uncapped Accelerator / Supertracker Large cap / core long only funds and ETFs

Synthetics Range Accrual ZDPs

Autocalls Defensive Autocall Equity income finds and absolute return funds

Yield Enhancement

Defined Return

Selling Volatilty

Range Accruals

36

• The other success story over the last year, beyond autocalls

• With the backdrop of falling rates, falling vol and tightening credit, in most cases

these structures have outperformed the market


Yield Enhancement Defined Return Selling Volatilty

Synthetics Range Accrual ZDPs

RESULTING STRUCTUREMANAGER CONSIDERATIONS & DECISIONSHOW TO GET

HIGHER YIELD

Yield : circa 3.00%

Construction (‘Synthetics’)

This slide shows the evolution of a live trade.

HSBC 6y Fixed Rate Bond

*All pricing as at circa early Oct-12

Yield : circa 5.00%

Yield : circa 6.85%

Yield : circa 7.00%

Put capital risk

Put coupon at risk

(via lower barrier)

Put coupon at risk

(add upper barrier)

Which underlying should the structure be linked to? FTSE

At what level should the lower barrier be?

Coupon paid annually as long as the FTSE is over 3500 points.

To what extent is the manager prepared to put capital at risk?

Soft protection at maturity at 3500 points.

At what level should the upper barrier be?

7% annual, accrued daily for every day the FTSE closes within the

range of 3500 to 7500 points.

Any additional considerations?

In this instance the investors wanted semi-annual income, so the

structure pas up to 3.5% semi-annually.

HSBC 6y FTSE Reverse Convertible

HSBC 6y FTSE Digital

HSBC 440 6y FTSE Range Accrual

37

HSBC 6y FTSE Reverse Convertible (5.00%)

38*All pricing as at circa early Nov-12

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500

+0 years +1 year +2 years +3 years +4 years +5 years +6 years

FT

SE

100

Strike: 5800 points

5.0% coupon paid regardless of what the FTSE has done

5.0% coupon paid regardless of what the

FTSE has done


5.0% coupon paid regardless of whatthe FTSE has done



0%

2%

4%

6%

8%


Co

up

on

P

aym

en

ts

Soft Protection at Maturity: 3500 points

Coupon: 5.0%

HSBC Bond Coupon: 3.0%

HSBC 6y FTSE Digital (6.85%)


3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500


FT

SE

100

Strike: 5800 points

6.85% coupon paid as FTSE is above the

lower barrier at the end of the year



no coupon paid as FTSE has fallen

below the lower barrier at the end of the year







0%

2%

4%

6%

8%


Co

up

on

P

aym

en

ts

Lower Barrier: 3500 points


Potential Coupon: 6.85%


HSBC 440 FTSE Daily Range Accrual (7.0%)


3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500


FT

SE

100

Upper Barrier: 7500 points

Strike: 5800 points

7% coupon paid as FTSE stayed

between barriers for whole year

1.75% coupon paid as FTSE exceeded theupper barrier for 75% of

the year

3% coupon paid as FTSE fell below the lower barrier for 50% of

the year

2.3% coupon paid as FTSE fell below thelower barrier for 33% of

the year

7% coupon paid as S&P 500 stayed


7% coupon paid as FTSE stayed


0%

2%

4%

6%

8%


Co

up

on

P

aym

en

ts

Lower Barrier: 3500 points


Potential Coupon: 7%


41Source: Data as at 29-Jan-13

Eg: HSBC 363 FTSE Daily Range Accrual (8.0%)

HSBC 363 FTSE Daily Range Accrual (8.0%)

Strike: 9-Jan-11

Counterparty: HSBC


Underlying: FTSE 100 (5460.38 points)



Upside:8% annual coupon accrued daily, for every day the FTSE closes between 55% and 150% of the initial level ( 3003.21 to 8190.57 points)

Downside (55% European Knock-In Put):

if at maturity the FTSE has fallen by more than 45% of the initial level (below 3003.21 points) , the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level

42

Mark-to-Market

Source: Bloomberg, data as at 17-June-13

Nov-11 Feb-12 Jun-12 Sep-12 Dec-12 Apr-13 Jul-1375.00%

85.00%

95.00%

105.00%

115.00%

125.00%

135.00%

FTSE 100 Index Performance [Price]

HSBC 363 Performance

Total return of index = 126.05% (dividend reinvestment assuming Net of Corporate Tax rate 20%)

Structure performance to date: 24.72%

FTSE TR performance to date: 26.05%


FTSE 100 annualised volatility: 14.28%

43

CS 425 FTSE Quarterly Range Income

Credit Suisse 425 FTE Quarterly Range Income (2.25%) Note

Strike: 13-Sep-12

Counterparty: Credit Suisse


Underlying: FTSE 100 (5819 points)


Platform: Note (subject to income tax under current tax rules)

Upside: 2.25% quarterly coupon paid out quarterly, so long as the FTSE remains between 3500 and 7500 points for the entire quarter.

Downside (3500 points European Knock-In Put):

if at maturity the FTSE has fallen below 3500 points at maturity, the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level

44

How would this have looked in 2005? Estimation of a 6 year structure today with soft capital

protection at 60%

PARTIALLY CAPITAL PROTECTED STRUCTURES6 year Today

GBP1.00Zero-

couponBond/Swap


Return

GBP1.00Investor’s












GBP1.00Zero-

couponBond/Swap


Return

Pricing as at circa mid June 2013

Disclaimer

This is a marketing communication and has not been prepared in accordance with legal requirements designed to promote independence of investment research and

is not subject to any prohibition of dealing ahead of the dissemination of investment research.

The information in this document is derived from sources believed to be reliable but which have not been independently verified. Any prices included within this

communication are for indicative purposes only. Catley Lakeman Securities makes no guarantee of its accuracy and completeness and is not responsible for errors of

transmission of factual or analytical data, nor is it liable for damages arising out of any person’s reliance upon this information. All charts and graphs are from publicly

available sources or proprietary data. The opinions in this document constitute the present judgment of Catley Lakeman Securities, which is subject to change without

notice.

This document is neither an offer to sell, purchase or subscribe for any investment nor a solicitation of such an offer. This document is intended for the use of

institutional and professional customers and is not intended for the use of private customers. This document is not intended for distribution in the United States of

America or to US persons. This document is intended to be distributed in its entirety. No consideration has been given to the particular investment objectives, financial

situation or particular needs of any recipient.

Catley Lakeman Securities is regulated by the Financial Conduct Authority. Firm FSA Reference No. 484826. Catley Lakeman Securities is the trading name of

Catley Lakeman LLP. Registered Office: One Eleven Edmund Street, Birmingham. B3 2HJ. Registration Number: OC336585

DISCLAIMER

45

institutional structured products

Documents

p price

structured investments5

p aggregate costs

p zcb swap

p estimate share price

structured investments4

ftse today gbp1

participation capital