Institutional Structured Products 30th October 2013

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

Who are Catley Lakeman Securities?

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

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

What are Structured Products?

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

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% 179% x S&P 16th August 2016 <100% >60% 100% 16th August 2016 <60% 1:1 IT’S A BOND WITH DIFFERENT RISK/REWARD PAYOFF

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

Key categories of Structured Products

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

Two Case Studies

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 (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

The Maths → 179% participation This is how we put the HSBC US Supertracker together in Feb 11 Call Options provide upside above 1336.32 Share Price at Issue 100% HSBC Zero Coupon Bond 83% Aggregate Costs 1.25% Premium paid for risking capital 13% New Amount to invest 28.75% Price of 1 call option today 16% 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 801.79 at maturity

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

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

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 (6202.00 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: 100% barrier 112.25% payoff Year 2: 95% barrier 124.50% payoff Year 3: 90% barrier 136.75% payoff Year 4: 85% barrier 149.00% payoff Year 5: 80% barrier 161.25% payoff Year 6: 75% barrier 173.50% 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):

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

Where does it fit?

Costs & liquidity

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.

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

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

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 email 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.

How we support clients

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

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

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

Appendix

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.

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

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

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?

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. 484826. Catley Lakeman Securities is the trading name of Catley Lakeman LLP. Registered Office: One Eleven Edmund Street, Birmingham. B3 2HJ. Registration Number: OC336585