1. Institutional Structured Products
30th October 2013

2. Agenda Who are Catley Lakeman Securities?
What is a Structured Product?
Key Categories of Structured Product
Two case studies
Costs / Liquidity
How we support our clients
Appendix

3. Who are Catley Lakeman Securities?

4. Who are Catley Lakeman Securities?
What We Do
Institutional sales, structuring, pricing, execution, servicing for:
Defined return and market participation structured products
Delta one, ETFs, ETPs, trackers and structured UCITS
Research, analysis, portfolio manager training
Portfolio hedging, options modeling
Legal, tax and regulatory process advice
Highlights
Est. August 2008
Unparalleled experience
Exceptionally qualified team of eight
Leaders in institutional market for securitised product
Growing reputation for hedging advice and execution
£3bn originated and executed since August 2008
£955mn originated and executed in financial year to July 2013
Business Split By Product Type
Summary: Talking to us is like talking to the bank – we are outsourced sales for the structured investments

5. Client Discretionary Portfolios
Where CLS sits…
Institutional Investor
Summary: Talking to us is like talking to the bank – we are outsourced sales for the structured investments
Client Discretionary Portfolios

6. What are Structured Products?

7. What are Structured Products?
A structured product is a defined-return investment based on the performance of an underlying asset
Factors to determine at the outset:
Underlying asset – equity indices, commodities, interest rates, etc
Payoff – depends on your investment view, the risk/ return profile, income vs growth
Counterparty – mark-to-market considerations, diversification of issuers

8. IT’S A BOND WITH DIFFERENT RISK/REWARD PAYOFF
What are Structured Product exactly?
HSBC 6 Year ≈ 3.8%
Issuer: HSBC Bank Plc
Status: Senior unsecured
Ratings: Aa3 (M) / AA- (S) / AA- (F)
Trade Date:
Term: 6 Years
Clearing: CREST
Principle: 100
Coupon: 3.8%
HSBC US Supertracker
Issuer: HSBC Bank Plc
Status: Senior unsecured
Ratings: Aa3 (M) / AA- (S) / AA- (F)
Trade Date:
Term: 6 Years
Clearing: CREST
Principle: 100
Return: Linked to S&P500 Index
Observation Index Level Payout
16th August 2016 >100% % x S&P
16th August 2016 <100% >60% %
16th August 2016 <60% :1
IT’S A BOND WITH DIFFERENT RISK/REWARD PAYOFF

9. So it’s key to understand counterparty risk?
Summary: Talking to us is like talking to the bank – we are outsourced sales for the structured investments
What we really care about is how stable the bond spread is!
Source: Bloomberg, data as at 30-Sep-2013

10. Key categories of Structured Products

11. Categories of Structured Product
USE
TYPE
EXAMPLE
SITS ALONGSIDE
Participation
Uncapped
Accelerator / Supertracker
Large cap / core long only funds and ETFs
Yield Enhancement
Synthetic ZDPs
Range Accrual
ZDPs
Defined Return
Autocalls
Defensive Autocall
Equity income funds and absolute return funds

12. Two Case Studies

13. HSBC 340 US Supertracker (179%)
Case Study 1: HSBC US Supertracker (179%)
HSBC 340 US Supertracker (179%)
Strike:
16-Feb-11 
Counterparty:
HSBC 
Currency:
USD Denominated
Underlying:
S&P 500 ( 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 points) at maturity, the structure will redeem paying the original capital minus 1% for every 1% the Index has fallen below the initial level

14. The Maths → 179% participation
This is how we put the HSBC US Supertracker together in Feb 11
Call Options provide upside above
Share Price at Issue %
HSBC Zero Coupon Bond %
Aggregate Costs %
Premium paid for risking capital %
New Amount to invest %
Price of 1 call option today %
Therefore investor can buy 1.79x call options
→ 179% participation
Call Options $1
Investor’s
Cash $1
ZCB
$0.83
ZCB
Capital at risk if index lower than at maturity

15. Performance of the US Accelerator Series
The calculations above are based on gross reinvestment of proceeds. Average weighted entry/exit levels have been applied based on actual investor flows, we believe this to result in a conservative estimation of cumulative performance Source: Bloomberg, data to 30-Oct-13

16. Where does it fit?
Source: Bloomberg, Financial Express, data to 29-Oct-13

17. Symphony 144 Defensive FTSE Auto-Call 1(12.25% / -5%)
Case Study 2: Citi Defensive FTSE Autocall
Symphony 144 Defensive FTSE Auto-Call 1(12.25% / -5%)
Strike:
11-Jan-08
Counterparty:
Citi - Symphony
Currency:
GBP Denominated
Underlying:
FTSE 100 ( points) 
Maximum Term:
6 years 
Platform:
PCC (subject to CGT under current tax rules)
Upside:
Defensive autocall, 12.25% snowballing annual coupon
Autocall Barriers:
Year 1: % barrier % payoff
Year 2: % barrier % payoff
Year 3: % barrier % payoff
Year 4: % barrier % payoff
Year 5: % barrier % payoff
Year 6: % barrier % payoff
Downside
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
(50% American Knock-In Put):

18. The Defensive Autocall: Step by Step
Lessons Learnt: 1) Capital now at risk at maturity (European) – all the time
2) Lower final autocall barriers – much of the time

19. Where does it fit?

20. Costs & liquidity

21. Full Intra Day Secondary Market Liquidity
Zero Coupon Bond
Option Package
Calls and put options are, logically, derivatives of their underlying risk assets
Therefore, the options market can only become illiquid at some point after the underlying market becomes illiquid
Option package
Providing
Economic
Return £1
5yr zero-
coupon
Bond/
Swap
Cost: 89.84p
Sell 5yr European
Put Option
on the FTSE
Risk At 60% Strike
(‘Knock-In Put’)
Cost: 13.52p
Past Exceptions
Close Brothers & ELDerS- collateralised with British, Irish and some Icelandic banks and building societies.
Retail Structured Product market.

22. FTSE 100 Futures Daily Volume
Trading in the top ten traded UK stocks is 29% of FTSE 100 futures volume
Source: 1 day’s trading volume (average of past week), as at 01-Oct-13

23. FTSE 100 Futures Daily Volume
Full data, developed indices.
Source: 1 day’s trading volume (average of past week), as at 01-Oct-13

24. The Operational Process
Investment Manager checks price with Catley Lakeman (via phone or Catley Lakeman website)
Investment Manager places dealing instruction to Dealer at Stockbroker
Dealer sends request to Catley Lakeman
Catley Lakeman sends to Stockbroker Dealer and Bank Structured Products Desk with price and notional
Dealer confirms
Bank confirms and executes
Note: Stockbroker faces the bank directly, they do not face Catley Lakeman.

25. How we support clients

26. How we support clients Secondary – My CLS
All securities visible on Secondary Focus tab
My CLS section offers Client Service Portal
My Portfolio
My Watchlist
Group Holdings

27. How we support clients Training and Support Monthly Market Colour
Pricing of most popular securities
Factors driving pricing
Supporting Literature
Explaining to my client docs
Technical Research docs
Equity Derivatives training

28. How we support clients Analysis – Mark-to-Market CLS Models Analysis
Pricing Models (licenced)
Price up new structures
Sanity check banks prices
Analysis
Secondary Market pricing
Mark-to-Market Analysis
Scenarios
Stress tests
Comparison vs. Active Funds and Passive vehicles
Credit/Counterparty Risk

29. Appendix

30. Why have Structured Products become popular?
A way of capturing value, that ordinarily, only larger institutional clients can access.
They offer defined returns – you know what you’re getting.
Have performed well over the long term, albeit they do capture short term downside.

31. Capturing value? Question
What do Jeremy Grantham, Warren Buffet and Structured Product investors have in common?

32. 17% ! Capturing value? Answer Question
They all sell longer dated index puts.
Question
What is the probability that the FTSE100 will be below 3,000 points in 6 years time?
17% !
Source: Catley Lakeman research piece “Structured Investments and Value” November 2012

33. Capturing value? Description Premium 6 year ATM call 14.20%
6 year ATM put
21.90%
6 year, 70% Eur KIP
18.33%
6 year, 60% Eur KIP
15.95%
Surprised?

34. DISCLAIMER 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 Catley Lakeman Securities is the trading name of Catley Lakeman LLP. Registered Office: One Eleven Edmund Street, Birmingham. B3 2HJ. Registration Number: OC336585