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

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

Institutional Structured Products - Background

“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

Bad Press

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

Facts - Complexity

Simple Outcomes Structures are essentially simple! Payoff Summary

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

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

Facts - Liquidity

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..?

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

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!

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

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

Facts – Costs

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!

How We Work With Brewin Dolphin

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

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

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

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

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