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Institutional Structured ProductsMay 2013
Agenda
Catley Lakeman Securities
Institutional Structured Investments Composition
Institutional Structured Investments Examples – Accelerators / Supertrackers
Institutional Structured Investments Examples – Range Accruals
Institutional Structured Investments Examples – Defensive Autocalls
Why Use Structured Investments?
Appendix
2
CATLEY LAKEMAN SECURITIES
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 GILL
Sales Sales Sales & Research
T 020 7043 0101M 07977 917 238
T 020 7043 0102M 07812 527 172
T 020 7043 0104M 07974 990 280
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
Catley Lakeman Securities
Source: Bloomberg, data as at 01-May13
Royal
Bank o
f Can
ada
HSBC
JP M
orga
nUBS
Rabob
ank
Credit
Suis
se
Deutsc
he B
ank
Citigro
up BoA
Goldm
an
Barcla
ys ING
Mor
gan S
tanley BNP
Lloyd
s TSB
Nomur
aRBS
Comm
erzb
ank
Credit
Agr
icole
Soc G
en
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
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high
low
maximum 1360
current
INSTITUTIONAL STRUCTURED INVESTMENT COMPOSITION
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 STRUCTURES5 year 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
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 91.79p
Aggregate Costs 1.49p
Amount to invest 6.72p
Price of 1 call option today 9.70p
Therefore with 6.72p, investor can buy 0.69x call options
→ 69% participation
CAPITAL PROTECTED STRUCTURES5 Year Today
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash
10
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
PARTIALLY CAPITAL PROTECTED STRUCTURES5 year Today
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash Sell 5yr European
Put Option on the FTSE Risk At 60%
Strike (‘Knock-In Put’)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 91.79p
Aggregate Costs 1.49p
Old amount to invest 6.72p
Sell put risk premium 14.93p
New Amount to invest 21.65p
Price of 1 call option today 9.70p
Therefore with 21.65p, investor can buy 2.23x call options
→ 223% participation
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
11
How would this have looked in 2005? Estimation of a 5 year structure with soft capital protection at
60%, AA- rated issuer
These structures can be a good alternative to passive or quasi-passive long only funds
PARTIALLY CAPITAL PROTECTED STRUCTURES5 year in 2005
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash Sell 5yr European
Put Option on the FTSE Risk At 60%
Strike (‘Knock-In Put’)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 73.79p
Aggregate Costs 1.49p
Old amount to invest 24.72p
Sell put risk premium 4.04p
New Amount to invest 28.76p
Price of 1 call option at March 2005 14.60p
Therefore with 28.76p, investor can buy 2.05x call options
→ 205% participation
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
12
How would this have looked in 2005? Estimation of a 6 year structure today with soft capital
protection at 60%
These structures can be a good alternative to passive or quasi-passive long only funds
PARTIALLY CAPITAL PROTECTED STRUCTURES6 year Today
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
GBP1.00Investor’s
Cash Sell 5yr European
Put Option on the FTSE Risk At 60%
Strike (‘Knock-In Put’)
Share Price at Issue 100.00p
ZCB / Swap inc. funding pickup 89.10p
Aggregate Costs 1.49p
Sell put risk premium 17.96p
Amount to invest 27.37p
Price of 1 call option today 10.64p
Therefore with 27.37p, investor can buy 2.58x call options
→ 258% participation
GBP1.00Zero-
couponBond/Swap
Option packageProvidingEconomic
Return
INSTITUTIONAL STRUCTURED INVESTMENT CATEGORIES
1. Accelerators / Supertrackers
2. Range Accruals
3. Defensive Autocalls
13
CATEGORIES OF STRUCTURED INVESTMENTS
14
USE TYPE EXAMPLE SITS ALONGSIDE
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
INSTITUTIONAL STRUCTURED INVESTMENT CATEGORIES
1. Accelerators / Supertrackers
2. Range Accruals
3. Defensive Autocalls
15
Acclerators / Supertrackers
16
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
Construction
17
• 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%)
18
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
19Source: Bloomberg, data to 1-May-13
Feb-11 May-11 Sep-11 Dec-11 Mar-12 Jun-12 Oct-12 Jan-13 Apr-1375%
85%
95%
105%
115%
125%
135%
S&P 500 Index Performance [Price]
US Supertracker Performance
Total return of index = 123.04% (dividend reinvestment assuming Net of Corporate Tax rate 20%)
Structure performance to date: 27.25%
S&P TR performance to date: 23.04%
Structure annualised volatility: 21.31%
S&P annualised volatility: 18.67%
Performance
20
• Since launch performance: 29.35% versus 18.20% sector average in the below list of funds
Source: Bloomberg, Financial Express, data to 1-May-13
USD Denominated Performance (TR) Bloomberg Ticker1 month
(2-Apr-13)3 month
(30-Jan-13)1 year
(27-Apr-12)Since Launch (16-
Feb-11)
HSBC US Supertracker Series 2 / 3 / 4 B3Z2023 3.45% 12.56% 22.49% 29.35%
HSBC 476 US Supertracker Series 5 B92SVS9 2.73% N / A N / A N / A
UBS US Equity Investment Funds UBSUEAA LN 2.67% 5.44% 11.92% 14.96%
JPM US Equity Income HLIEX US Equity 2.34% 7.59% 17.14% 32.80%
S&P 500 SPX 1.84% 6.82% 15.93% 24.21%
ISHARES S&P 500 SACC LN 1.79% 6.62% 15.85% 23.72%
Schroder QEP US Core Fund SCHRAMA LN Equity 1.16% 4.64% 13.53% 21.55%
Legg Mason Funds US Equity LMUSEAA LN 1.06% 3.20% 11.58% 9.41%
JPMorgan American Investment Trust JAM LN 1.05% 5.15% 12.04% 17.08%
Findlay Park American Fund FINDLPI ID 0.51% 4.86% 17.80% 22.87%
Neptune Investment Funds US Opps CFNUSAA LN 0.31% 2.33% 10.24% 8.19%
M&G Investment Funds American MGAMDAA LN -0.03% 2.83% 13.01% 11.78%
Threadneedle Investment Funds American Select TDNASGA LN -0.20% 1.64% 7.91% 18.47%
Brown Advisory US Equity Growth Fund BRAUSEB ID -1.53% 2.19% 5.27% 13.38%
Source: Bloomberg,
Financial Express, data to 2-May-2013
INSTITUTIONAL STRUCTURED INVESTMENT CATEGORIES
1. Accelerators / Supertrackers
2. Range Accruals
3. Defensive Autocalls
21
Appendix:
22
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
Range Accruals
23
• 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
USE TYPE EXAMPLE SITS ALONGSIDE
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
24
HSBC 6y FTSE Reverse Convertible (5.00%)
25*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 what the FTSE has done
5.0% coupon paid regardless of whatthe FTSE has done
5.0% coupon paid regardless of what the FTSE has done
5.0% coupon paid regardless of what the FTSE has done
0%
2%
4%
6%
8%
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
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%)
26*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
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
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
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
6.85% coupon paid as FTSE is above the
lower barrier at the end of the year
0%
2%
4%
6%
8%
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
Co
up
on
P
aym
en
ts
Lower Barrier: 3500 points
Soft Protection at Maturity: 3500 points
Potential Coupon: 6.85%
HSBC Bond Coupon: 3.0%
HSBC 440 FTSE Daily Range Accrual (7.0%)
27*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
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
between barriers for whole year
7% coupon paid as FTSE stayed
between barriers for whole year
0%
2%
4%
6%
8%
+0 years +1 year +2 years +3 years +4 years +5 years +6 years
Co
up
on
P
aym
en
ts
Lower Barrier: 3500 points
Soft Protection at Maturity: 3500 points
Potential Coupon: 7%
HSBC Bond Coupon: 3.0%
28Source: 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
Currency: GBP Denominated
Underlying: FTSE 100 (5460.38 points)
Maximum Term: 6 years
Platform: EIS (subject to CGT under current tax rules)
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
29
Mark-to-Market
Source: Bloomberg, data as at 01-May-13
Nov-11 Feb-12 Jun-12 Sep-12 Dec-12 Apr-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 = 124.28% (dividend reinvestment assuming Net of Corporate Tax rate 20%)
Structure performance to date: 24.89%
FTSE TR performance to date: 24.28%
Structure annualised volatility: 5.84%
FTSE 100 annualised volatility: 14.32%
30
CS 425 FTSE Quarterly Range Income
Credit Suisse 425 FTE Quarterly Range Income (2.25%) Note
Strike: 13-Sep-12
Counterparty: Credit Suisse
Currency: GBP Denominated
Underlying: FTSE 100 (5819 points)
Maximum Term: 6 years
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
INSTITUTIONAL STRUCTURED INVESTMENT CATEGORIES
1. Accelerators / Supertrackers
2. Range Accruals
3. Defensive Autocalls
31
Defensive Autocalls
32
• 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
USE TYPE EXAMPLE SITS ALONGSIDE
Yield Enhancement Defined Return Selling Volatilty
Autocalls Defensive Autocall Equity income finds and absolute return funds
33
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 observation coupon of 40%
Autocall observation coupon of 48%
Autocall observation coupon of 24%
Autocall continues to 2nd anniversary
Autocall continues to 3rd anniversary
Autocall continues to 4th anniversary
Autocall continues to 5th anniversary
Autocall continues to 6th anniversary
Capital protection barrier triggered
Ca
pit
al
Pro
tec
ted
Ca
pit
al
Lo
ss
Autocall observation coupon of 16%
Autocall observation coupon of 8%
100%95%
90%85%
80%75%
Autocall redeems at 100p
34
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)
Maximum Term: 6 years
Platform: EIS (subject to CGT under current tax rules)
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
35
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 observation coupon of 40%
Autocall observation coupon of 50%
Autocall observation coupon of 60%
Autocall observation coupon of 30%
Autocall continues to 2nd anniversary
Autocall continues to 3rd anniversary
Autocall continues to 4th anniversary
Autocall continues to 5th anniversary
Autocall continues to 6th anniversary
Capital protection barrier triggered
Ca
pit
al
Pro
tec
ted
Ca
pit
al
Lo
ss
Autocall observation coupon of 20%
Autocall observation coupon of 10%
100% 100% 100%95%
90%85%
Autocall redeems at 100p*
Autocall continues to 2nd anniversary
Capital protection barrier
Autocall continues to 3rdanniversary
Capital protection barrier
Autocall continues to 4th anniversary
Capital protection barrier
Autocall continues to 5th anniversary
Capital protection barrier
Autocall continues to 6th anniversary
Capital protection barrier
36
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%
Structure annualised volatility: 14.51%
FTSE 100 annualised volatility: 19.93%
Source: A selection of popular UK funds, all rated AAA/AA by Citywire 37
• 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
COST AND LIQUIDITY
38
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 $128.4Bil per day * *Source: JP Morgan Global Equity Derivatives & Delta One Strategy 6th May 2013
Cost and Liquidity of Institutional Structured Investments
39
WHY USE INSTITUTIONAL STRUCTURED INVESTMENTS?
40
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?
41
42
APPENDIX
TYPES OF STRUCTURED INVESTMENTS
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
43
Defensive Autocall terms HSBC
6 year maximum term
GBP denominated
FTSE underlying
8% annual snowballing coupon
5% falling barriers
(100/ 95/ 90/ 85/ 80/ 75 as a
percentage of strike)
Soft protection at 60% at maturity
(European Knock-In Put)
TWO COMMON PAYOFFSDefensive Autocall
44
Alternatives for higher yield Move autocall barriers
Move soft protection level
Different Counterparty
Flat Autocalls
Worst- Ofs
Phoenix
Start Date: Investor invests 100p
Start Date + 1 year: Is FTSE above 100% Structure terminates and
of Start Level? pays back 108p
Start Date + 2 years: Is FTSE above 95% Structure terminates and
of Start Level? pays back 116p
Start Date + 3 years: Is FTSE above 90% Structure terminates and
of Start Level? pays back 124p
Start Date + 4 years: Is FTSE above 85% Structure terminates and
of Start Level? pays back 132p
Start Date + 5 years: Is FTSE above 80% Structure terminates and
of Start Level? pays back 140p
Start Date + 6 years: Is FTSE above 75% Structure terminates and
of Start Level? pays back 148p
Is FTSE above 60% Structure terminates and
of Start Level? pays back 100p
Structure terminates and investor loses 1% for
every 1% the FTSE has fallen from start to end date
YES
YES
YES
YES
YES
YES
YES
NO
NO
NO
NO
NO
NO
NO
Range Trade terms HSBC
6 year term
GBP denominated
FTSE underlying
8.5% paid out coupon
Range: 3500-7500 points,
annually observed
Soft protection at 3500 (60%)
at maturity
(European Knock-In Put)
TWO COMMON PAYOFFSRange Trade
45
Alternatives for higher yield Narrower range
Move soft protection level
Different Counterparty
Less yield Memory feature
Range Accrual
Start Date: Investor invests 100p
Start Date + 1 year: Is FTSE between Investor receives 8.5p coupon
3500 and 7500? Investor receives no coupon
Start Date + 2 years: Is FTSE between Investor receives 8.5p coupon
3500 and 7500? Investor receives no coupon
Start Date + 3 years: Is FTSE between Investor receives 8.5p coupon
3500 and 7500? Investor receives no coupon
Start Date + 4 years: Is FTSE between Investor receives 8.5p coupon
3500 and 7500? Investor receives no coupon
Start Date + 5 years: Is FTSE between Investor receives 8.5p coupon
3500 and 7500? Investor receives no coupon
Start Date + 6 years: Is FTSE between Investor receives 8.5p coupon
3500 and 7500? Investor receives no coupon
Is FTSE above Structure terminates and pays
3500 (60%)? 100p
Structure terminates and investor loses 1% for
every 1% the FTSE has fallen from start to end date
YES
NO
YES
NO
YES
NO
YES
NO
YES
NO
YES
NO
YES
NO
Appendix: Market Colour Data
46
Rates, Credit and Volatility
Sterling Interest Rates
Grinding lower, 10% autocall coupon equates to 15% in 2007 (ceteris paribus)
Source: Bloomberg (01-May-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
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
5 year currently 0.91%!
2 year currently 0.58%!
GBP Swap Rates
Sw
ap R
ate
(%)
Appendix: Market Colour Data
47
Rates, Credit and Volatility
Credit
Clients continue to chase quality
Source: Bloomberg (01-May-2013)
Royal
Bank o
f Can
ada
HSBC
JP M
orga
nUBS
Rabob
ank
Credit
Suis
se
Deutsc
he B
ank
Citigro
up BoA
Goldm
an
Barcla
ys ING
Mor
gan S
tanley BNP
Lloyd
s TSB
Nomur
aRBS
Comm
erzb
ank
Credit
Agr
icole
Soc G
en
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
Appendix: Market Colour Data
48
Rates, Credit and Volatility
Volatility in a bit more detail
Source: Catley Lakeman, JP Morgan Derivatives and Delta One Strategy, Bloomberg (01-May-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
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
(%
)
The information in this document is derived from sources believed to be reliable but which have not been independently verified. 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
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Catley Lakeman Securities is a LLP registered in England and Wales, Registered Office : One Eleven Edmund Street, Birmingham, B3 2HJ. Registration
Number: OC336585, FSA Reference: 484826
DISCLAIMER
49