• Background
• Facts – Complexity
• Facts – Liquidity
• Facts – Costs
• How We Work With Brewin Dolphin
• Appendix
Agenda
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The most difficult subjects can be explained to the most slow-witted man if he has
not formed any idea of them already; but the simplest thing cannot be made clear to
the most intelligent man if he is firmly persuaded that he knows already, without a
shadow of a doubt, what is laid before him.
Leo Tolstoy, 1897
“Spread bets on steroids”Martin Wheatley, Chief Executive and FCA Board Member
Fiction
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Evolution of Market
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Not originally related to the Retail Structured Product market Building Societies
Bank Branch
IFA distribution (latterly)
The Private Placement SP market started as an extension of the Investment
Trust market
Closely linked to the Asset Liability Matching market for institutional pension
schemes
Original participants were Merrill Lynch, Citi and Barclays around 2003
Discretionary Asset Managers have been involved from the start
Simple Outcomes
Structures are essentially simple!
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Payoff Summary
Level of Lower Index
1st anniversary 2nd anniversary 3rd anniversary 4th anniversary 5th anniversary
100%
60%
0%
6th anniversary
Autocall observ ation coupon of 38.36%
Autocall observ ation coupon of 47.95%
Autocall observ ation coupon of 57.54%
Autocall observ ation coupon of 28.77%
Autocall continues to 2nd anniv ersary
Autocall continues to 3rd anniv ersary
Autocall continues to 4th anniv ersary
Autocall continues to 5th anniv ersary
Autocall continues to 6th anniv ersary
Capital protection barrier triggered @ 60% lev el
Cap
ital P
rote
cted
Cap
ital L
oss
Autocall observ ation coupon of 19.18%
100% 100%
65%
Autocall observ ation coupon of 9.59%
100%
100p Capital redeemed 60%
100%100%
Unlike Shares
Companies’ Balance Sheets are complex – most of these were on most Wealth
Managers’ Stock buy lists / in most large cap funds when they suffer large losses or
effective bankruptcy
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Spot the Difference
HSBC 5 Year ≈ 3.0%
Issuer: HSBC Bank Plc
Status: Senior unsecured
Ratings: Aa3 (M) / AA- (S) / AA- (F)
Trade Date:
Term: 5 Years
Clearing: CREST
Principle: 100
Coupon: 3.0%
HSBC 336 FTSE/SPX Digital Accrual (8.10%)
Issuer: HSBC Bank Plc
Status: Senior unsecured
Ratings: Aa3 (M) / AA- (S) / AA- (F)
Trade Date: 21st July 2011
Term: 5 Years
Clearing: CREST
Principle: 100
Return: More later..
IT’S A BOND WITH DIFFERENT RISK/REWARD PAYOFF
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Other Defensive Assets?
Real property is by nature illiquid
Property Equity (REITs/IPD) is liquid but correlated to equity ultimately
Funds of Hedge Funds
Absolute Return Funds
Bond Funds..?
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Liquidity at Major Index Level
Trading in the top ten traded UK stocks is 29% of FTSE 100 futures
volume
The underlying securities are highly liquid, and therefore so are the products
themselves
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Market data as of October 2013
Liquidity at Major Index Level
Current S&P 500 futures volumes are $175.3 BIL
Daily!
Futures - Weekly Average Daily Volumes
Current 1 month ago 1 year ago
Americas USD 230.7bn USD 232.6bn USD 151.4bn
S&P 500 USD 175.3bn USD 176.1bn USD 115.7bn
Europe EUR 89.4bn EUR 95.8bn EUR 77.0bn
EuroStoxx 50 EUR 26.1bn EUR 30.7bn EUR 22.3bn
FTSE 100 EUR 6.8bn EUR 6.8bn EUR 5.1bn
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How You Buy And Sell a Structured Product
Any deal placed by Investment
manager is being dealt economically
directly with the Bank as the sole
Issuer
Desk at the bank wires money to the
Issuer/Treasury
Desk at the bank arranges with the Risk Book to provide the exposure required by the
Note payoff (Structured Investment)
Dealer at stockbroker buying Note (structured investment) directly from
the bank (via Catley Lakeman trading *)
Investment manager places dealing instruction to dealer at stockbroker
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Past Exceptions
Close Brothers & ELDerS - collateralised with British, Irish and some Icelandic
banks and building societies. Different to modern structures.
Retail Structured Product market
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Cost Comparison
Comparing Structured Products to Other Investments
Actively Managed Fund
ETFStructured
Product
Total expense ratio 1.0% 0.5% 0.0%
Other costs including upfront fees 0.0% 0.0% 1-1.5%
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Example Product – HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%)
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HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%)
Strike: 21-Jul-11
Counterparty: HSBC Aa3 (M) / AA- (S) / AA- (F)
Currency: GBP denominated
Underlying: FTSE 100 / S&P 500
Term: 5 years, 5 days (do not have to hold until maturity)
Upside:
8.1% annual coupon accrued daily if both indices close above 60% of their initial level (3521 FTSE points / 788 S&P points)
I.e.: (days indices over barrier)/260*8.1%)
Rolled up and paid at maturity.
Downside:
If at maturity either index has fallen by more than 40% the structure will redeem paying the original 100p capital minus 1% for every 1% the Index has fallen below strike level observed at maturity
I.e.: capital protected at maturity up to 3521 FTSE points / 788 S&P points
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DISCLAIMER
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