In Structured Product Teach- 11 th November 2010
Agenda • • Who we are What is a structured product? Under the bonnet Actual pricing We don’t just do equity linked notes Secondary market Summary
Who we are
Introduction • • LLP – Team of 6 + Non-Executive Chairman FSA authorised securities and futures firm Origination and distribution business that offers and supports Private Placement securitised derivative products to professional asset managers and institutions in the UK Issued over GBP 558 mm primary market and over GBP 250 mm secondary market trading in two full financial years since 1 August 2008
How we operate • • • We talk to you directly We coordinate each bank’s trading, structuring and settlement teams, issuing securities that optimise your investment views You trade and settle with the respective banks directly using Crest/Euroclear We coordinate, advise and support all sales and redemptions for each bank We advise on product platforms and regulatory issues, deferring to external lawyers where necessary We offer structured products and derivative strategy training We can offer you access to the products, platforms and trading expertise of five leading investment banks In addition, we are able to source swaps (bonds and derivatives) from additional third parties where attractive Our website is fully functioning and will act as a portal for clients to access the primary and secondary market products of each of our partner banks
Costs • • • We are not an extra layer of costs but are replacing each bank’s resource in this market in return for a share of its P&L We are not brokers who will change [XX%] on top of the banks’ issue costs We have agreed with each bank that charges will be in a range of 0. 5%-2% of notional, to include prospectus, hedging, taxation advice and P&L. Our fee is a share of the P&L part of the costs – we can resource ourselves much more efficiently than can a sales team within a bank. Every penny is real to us - this will be reflected in competitive pricing We aim to be extremely agile and dynamic
Banks we work with predominantly • HSBC • • Rating AA / Aa 2 Solid Capital Base, popular counterparty. One of the tightest Credit Default Swaps Key vehicles; Exchangeable Warrant Programme; MTN Note Programme • JPMorgan • • • Rating A+ / Aa 1 Solid capital base, one of tightest Credit Default Swaps Key vehicles; EIS, MTN • Societe Generale • • Rating A+ / Aa 2 Solid capital base. Strong links to its Government Leading derivatives player Key vehicle; Lyxor Funds (Lux), ESOL Notes, CODEIS (Lux)
Banks we work with • Citi • • Rating A / A 3 Relatively good funding spreads Best secondary market process Key vehicles; Symphony Structured Products (Jersey) Ltd; Allegro Investment Corporation • Nomura • • Rating A- / Baa 1 Good funding spreads. Key vehicle; STAGs (Securities Taxed As Gains) exchangeable bonds (similar to Barclays Simple) EIS, MTN • Collateralization • Most structures can be collateralized to mitigate counterparty credit risk if required
What is a Structured Product ?
Something where the investor sets the parameters Capital Protection Income or Growth Wrapper Investment Objective STRUCTURED PRODUCT Underlying Asset Taxation Investment Term Counterparty
Equities/ Indices Currencies/ Credit Interest rates Inflation/ Commodities Volatility/ Correlation/ Dividends Funds/ Absolute return WRAPPERS Medium Term Notes Warrants/PCC/ Excluded Indexed Securities UCITS III RISK MANAGEMENT Capital Protection Defined Risk & Return Conditional/ Unconditional return Liability Driven Reduced Volatility Predictable paths MULTI ASSET UNDERLYINGS
Under The Bonnet
It’s all about the maths Using examples, this presentation aims to illustrate how seemingly complicated structured products can be decomposed into simpler component parts. Having determined the component parts of these sample products, the pricing parameters that determine the value of these component parts can then be explained
Funding Swap + Option GBP 1. 00 Investor’s Cash Share Price at Issue GBP 0. 75 Investor’s Cash Funding Swap 100. 00 p 75. 00 p Aggregate Costs 1. 50 p Option Premium 23. 50 p GBP 1. 00 Option Providing Economic Return Funding Swap Option Providing Economic Return
What determines Structured Product pricing? • Two Price Components • Zero Coupon Bond Price • Interest rates • Credit • Option Price • Volatility • Time to expiry • Spot price • Strike price • Dividends • Interest rates
Volatility – It’s all about the bell curve!
Or in simple terms! 250 200 High Implied Volatility 150 100 50 0 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 20092009201020112011201220122013201320142014 250 200 Low Implied Volatility 150 100 50 0 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 20092009201020112011201220122013201320142014
Actual Pricing
Participation Summary Type FTSE S&P Eurostoxx Nikkei 100% PP 75% 58% 68% 44% 95% PP 100% 81% 92% 62% 50% soft 170% 120% 158% 64% Note: All GBP (hedged) with a 5 yr term and assuming HSBC / SG PP – principal protection, 50% soft refers to a European KIP
We boil everything down to this Participation demand Income demand High interest rates Low option prices High option prices Strong market trend Weak market trend Participation Notes Autocallables / BRC’s Twin-Win
Standard Auto-Call Pricing FTSE S&P Eurostoxx Nikkei 9. 5% 8. 4% 9. 5% 5% GBP (hedged) 6 years, auto-call at 100%, 50% European KIP Increase or decrease the risk / return profile?
Decreasing Risk / Return • • Defensive Autocallables single most popular structure over last 3 years Pick a return target and downside and work back with the auto-call barriers With lower rates the potential coupons (nominal returns) are lower (see handout) Some clients will to take a view on more than one market to boost returns
We don’t just do equity linked notes!
What we have on the go • • • Bonds – clients have discussed hedging rising yields, playing the shape of the yield curve as well as simple cash enhancement (fixed-floating) Currencies – EM vs USD currency baskets potentially trading next week Commodities – not as popular as 2006/07 as rates low and many commodities in contango though there are some interesting ideas on gold
Secondary Market • • • Derivative contracts are as liquid as their underlyings, which are in the main major market indices or stocks The value of the ‘package’ should reflect the fair value of the sum of the component parts, however, this may mean the investor gets back less than the amount invested Bid/offer should be 50 bps either side of the fair price on mainstream assets All Structures are priced on a daily basis and these can be tracked on Bloomberg/ Reuters or via the www. catleylakeman. com It is quite normal for structures to be traded prior to maturity or bought post launch Catley Lakeman can provide guidance as to how each trade will M 2 M during its life, given chosen inputs
Private Placement Structured Products are: • • No more complicated than equities and bonds Unique in their ability to precisely tailor your risk/return objectives Liquid and cost efficient Certain to deliver the results set out to your clients from outset
• Disclaimer • • 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 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 a LLP registered in England Wales, Registered Office : One Eleven Edmund Street, Birmingham, B 3 2 HJ. Registration Number: OC 336585, Vat Number: 936371705, FSA Reference: 484826
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