1. Institutional Structured Products – Fact or Fiction?
Bristol – 29th January 2015

2. Agenda Background Facts – Complexity Facts – Liquidity Facts – Costs
How We Work With Brewin Dolphin
Appendix

3. Institutional Structured Products - Background

4. “Spread bets on steroids”
Fiction
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

5. Bad Press

6. Evolution of Market
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

7. Facts - Complexity

8. Simple Outcomes
Structures are essentially simple!
Payoff Summary

9. 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

10. Spot the Difference IT’S A BOND WITH DIFFERENT RISK/REWARD PAYOFF
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

11. Facts - Liquidity

12. 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..?

13. Liquidity at Major Index Level
The underlying securities are highly liquid, and therefore so are the products themselves
Trading in the top ten traded UK stocks is 29% of FTSE 100 futures volume
Market data as of October 2013

14. Futures - Weekly Average Daily Volumes
Liquidity at Major Index Level
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 5.1bn
Current S&P 500 futures volumes are $175.3 BIL Daily!

15. How You Buy And Sell a Structured Product
Dealer at stockbroker buying Note (structured investment) directly from the bank (via Catley Lakeman trading *)
Any deal placed by Investment manager is being dealt economically directly with the Bank as the sole Issuer
Investment manager places dealing instruction to dealer at stockbroker
Desk at the bank arranges with the Risk Book to provide the exposure required by the Note payoff (Structured Investment)
Desk at the bank wires money to the Issuer/Treasury

16. Past Exceptions
Close Brothers & ELDerS - collateralised with British, Irish and some Icelandic banks and building societies. Different to modern structures.
Retail Structured Product market

17. Facts – Costs

18. Cost Comparison Comparing Structured Products to Other Investments
Actively Managed Fund
ETF
Structured Product
Total expense ratio
1.0%
0.5%
0.0%
Other costs including upfront fees
1-1.5%
For the example, it is assumed that structured products are typically closed-ended investments with an investment term of five years;
and that it is bought via a structured product platform that does not charge clients for its platform services. We have ignored adviser
commissions and charges on all investments.
This is also an example dedicated to the Retail Market. Our costs as institutional investors would run closer to 0.2% per annum (with a duration of 6 years), as our upfront creation fees lie somewhere between 1.0 and 1.5%. Our products’ TER is less over 6 years than the average actively managed fund’s TER per annum!
Expensive? I’m not so sure!

19. How We Work With Brewin Dolphin

20. Institutional Investor
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

21. Live Trade Decision Tree
*All pricing as at circa Jul-11

22. HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%)
Example Product –
HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%)
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

23. Example Product –
HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%)

24. 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.
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