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Institutional Structured Products
25th February 2014
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
2
Who are Catley Lakeman Securities?
3
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
Business Split By Product Type
6%
Autocallable 37%
8%
Synthetic 8%
37%
12%
Income 6%
5%
51%
32%
Defined Return 51%
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
Option Hedging 32%
Market Participation 12%
Delta One 5%
(Data to Q4 2013)
4
Where CLS sits…
Institutional Investor
Client Discretionary Portfolios
5
So it’s key to understand counterparty risk?
Credit Default Swap (CDS) levels [basis points over LIBOR per annum]
Credit Spreads since June-2008 - Trading Ranges
700
maximum 1360
high
600
current
Series4
500
low
400
300
200
100
0
What we really care about is how stable the bond spread is!
Source: Bloomberg, data as at 25-Feb-2014
6
How are Structured Products Put Together?
7
FIRST STEP
Buy Zero Coupon Bond from Bank

First step: buy Zero Coupon Bond from bank, it sits as Senior Unsecured Debt on the bank’s main
Balance Sheet
5 years
£1
to invest
£1
5yr zerocoupon
Bond/
Swap
ZCB now
worth £1*
Cost:
88.31p

Net Amount Remaining to Invest: 11.69p

Note: the 11.69p could be spent on a guaranteed coupon stream, what would this be called?
→ A bank corporate bond
*The ZCB is discounted at the respective interest swap rate for the term, plus the bank’s funding level, to return 100p at maturity
8
SECOND STEP
Sell Knock-In Put

The next step is to sell a knock-in put on an index the investor is looking for exposure to
5 years
£1
to invest
£1
5yr zerocoupon
Bond/
Swap
Cost:
88.31p
Sell 5yr
European
Put Option
on the FTSE
Risk At 60%
Strike
(‘Knock-In Put’)
ZCB now
worth £1
Cost: 11.69p
Knock-In Put:
Has the FTSE
fallen by more
than 40%?

Net Amount Remaining to Invest: 23.38p

Note: all puts are expensive due to a skewed demand for downside protection in the derivative
markets
EG: how probable do models think it is that the FTSE will fall below 3000 points in 6 years?
→ 17% chance >>> Source: Structured Investments and Value – November 2012 for illustrative purposes
9
THIRD STEP
Choose Upside Package

The final step is to choose your upside package- for consistency we will stay with FTSE
£1
to invest
£1
5yr zerocoupon
Bond/
Swap
Cost:
88.31p
Option package
Providing
Economic
Return
5 years
Sell 5yr
European
Put Option
on the FTSE
Risk At 60%
Strike
(‘Knock-In Put’)
Option package
Providing
Economic
Return
ZCB now
worth £1
Cost: 11.69p

Fee of 1 – 1.5%

Net Amount Remaining to spend on Upside Package: 21.88 – 22.38p

Bullish? → Accelerator: geared participation in rising markets

Bearish? → Synthetic/ Autocall: both provide a positive return in flat to falling markets*

Somewhere in between? → Booster
Knock-In Put:
Has the FTSE
fallen by more
than 40%?
*so long as markets haven’t fallen by more than the put, ie 40% down
10
Upside Package: Accelerators
11
UPSIDE PACKAGE
Accelerators
22.88p
left to5.5
spend
• HSBC
year
Fixed Rate Bond

Price of 1 FTSE call option today: 12.11p

Therefore the investor can afford: 22.88/ 12.11p
→ 1.88 call options
In other words: 188% participation in the FTSE over 5 years
How do Accelerators fit into portfolios?

These have been very popular this year, with clients bullish beginning of year view

Not usually held for more than 1 to 2 years
USE
Gearing / Participation
TYPE
Uncapped
EXAMPLE
Accelerator / Supertracker
SITS ALONGSIDE
Large cap / core long only
funds and ETFs
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Eg: HSBC 603 US Accelerator 9 (167%)
HSBC 603 US Accelerator (167%)
Strike:
31-Jan-2014
Counterparty:
HSBC
Currency:
USD Denominated
Underlying:
S&P 500 (1782 points)
Maximum Term:
6 years
Platform:
EIS (subject to CGT under current tax rules)
Upside:
167% 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 1069 points) at maturity, the structure will redeem
paying the original capital minus 1% for every 1% the Index has
fallen below the initial level
13
Performance of the US Accelerator Series
(cumulative +58%)
US Equity "Defined Return Security" cumulative
Decision: How
Bullish on US
Equities?
160%
S&P 500 PR
Cumulative Performance
150%
140%
(2) sold US Supertracker
2 for 118.41 cents
Bought US Accelerator 5
with proceeds reinvested
@ 100 cents
S&P 500 TR
(1) US Supertracker 2:
bought 16-Feb-11
130%
120%
110%
100%
Feb-11
Sep-11
Mar-12
90%
Oct-12
Apr-13
Nov-13
(3) US Accelerator 5: current bid price of 133.8
cents >> overall cumulative performance of +58%
versus a passive S&P TR investment return of
+45%
80%
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 25-Feb-14
14
Where does it fit?
USD Denominated
Performance (TR)
HSBC 476 6yr US
Accelerator 5 (200%) EIS
Neptune Investment Funds
US Opps
Legg Mason Funds US Equity
JPMorgan American
Investment Trust
UBS US Equity Investment
Funds
Threadneedle Investment
Funds American Select
ISHARES S&P 500
S&P 500
Schroder QEP US Core Fund
JPM US Equity Income
Findlay Park American Fund
M&G Investment Funds
American
Brown Advisory US Equity
Growth Fund
HSBC 533 US Accelerator 6
(159.5%) EIS
Bloomberg Ticker
3 month
1 month
Since Launch
(22-Nov-2013)
(23-Jan-2014)
(22-Feb-2013)
B92SVS9
4.04%
1.13%
34.38%
CFNUSAA LN Equity
6.52%
1.37%
33.33%
LMUSEAA LN Equity
3.54%
-0.54%
28.35%
JAM LN Equity
3.24%
1.30%
27.95%
UBSUEAA LN Equity
4.94%
-0.17%
27.91%
TDNASGA LN Equity
4.88%
-0.28%
27.68%
SACC LN Equity
3.50%
1.62%
24.93%
SPX Index
2.80%
1.24%
23.98%
SCHRAMA LN Equity
1.64%
-0.50%
23.33%
HLIEX US Equity
1.01%
1.01%
22.99%
FINDLPI ID
2.07%
-0.96%
20.34%
MGAMDAA LN Equity
2.63%
-0.60%
20.15%
BRAUSEB ID Equity
2.45%
-0.74%
19.80%
BCZM0S2
3.47%
1.11%
n/a
Source: Bloomberg, Financial Express, data to 25-Feb-14
15
Upside Package: Synthetics
16
UPSIDE PACKAGE
Synthetics
22.18p
left to5.5
spend
• HSBC
year
Fixed Rate Bond

Guaranteed coupons: Reverse Convertible

Coupons contingent on an index being over a certain level: Digital

Coupon contingent on an index being between a range: Range Trade / Range Accrual

Note: all of the above can be structured to pay income
How do Synthetics fit into portfolios?

The other success story over the last year, beyond autocalls

With the backdrop of falling rates, falling vol and tightening credit, in most cases these structures have
outperformed the market
USE
Yield Enhancement
Defined Return
Selling Volatilty
TYPE
Synthetics
EXAMPLE
Range Accrual
SITS ALONGSIDE
ZDPs
17
UPSIDE PACKAGE
Synthetics
This shows the evolution of a live trade:
HOW TO GET
HIGHER YIELD
MANAGER CONSIDERATIONS & DECISIONS
RESULTING STRUCTURE
HSBC 6y Fixed Rate Bond
Yield : circa 2.9%
Which underlying should the structure be linked to? FTSE
Put capital risk
HSBC 6y FTSE Reverse Convertible
To what extent is the manager prepared to put capital at risk?
Yield : circa 4.9%
Soft protection at maturity at 4100 points.
Put coupon at risk
(via lower barrier)
At what level should the lower barrier be?
Coupon paid annually as long as the FTSE is over 4100 points.
HSBC 6y FTSE Digital
Yield : circa 5.5%
At what level should the upper barrier be?
7% annual, accrued daily for every day the FTSE closes within the
range of 3500 to 7500 points.
Put coupon at risk
(add upper barrier)
Any additional considerations?
HSBC 440 6y FTSE Range Accrual
Yield : circa 7.00%
In this instance the investors wanted semi-annual income, so the
structure pas up to 3.5% semi-annually.
*All pricing as at circa Feb-2014
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HSBC 440 FTSE Daily Range Accrual (7.0%)
8500
8000
7500
Upper Barrier: 7500 points
7000
FTSE 100
6500
6000
Strike: 5800 points
5500
5000
4500
4000
Lower Barrier: 3500 points
3500
3000
+0 years
Soft Protection at Maturity:
3500 points
+1 year
+2 years
+3 years
+4 years
+5 years
+6 years
Coupon
Payments
8%
6%
Potential
Coupon: 7%
4%
HSBC Bond
Coupon: 3.0%
2%
0%
+0 years
+1 year
7% coupon paid as
FTSE stayed
between barriers for
whole year
+2 years
+3 years
+4 years
+5 years
+6 years
1.75% coupon paid
as FTSE exceeded the
upper barrier for 75% of
the year
7% coupon paid as
FTSE stayed
between barriers for
whole year
3% coupon paid
as FTSE fell below the
lower barrier for 50% of
the year
2.3% coupon paid
as FTSE fell below the
lower barrier for 33% of
the year
7% coupon paid as
S&P 500 stayed
between barriers for
whole year
*All pricing as at circa early Nov-12
19
Eg: HSBC 363 FTSE Daily Range Accrual (8.0%)
HSBC 363 FTSE Daily Range Accrual (8.0%)
Strike:
9-Jan-11
Counterparty:
HSBC
Currency:
GBP Denominated
Underlying:
FTSE 100 (5460.38 points)
Maximum Term:
6 years
Platform:
EIS (subject to CGT under current tax rules)
Upside:
8% annual coupon accrued daily, for every day the FTSE closes
between 55% and 150% of the initial level ( 3003.21 to 8190.57
points)
Downside
(55% European Knock-In
Put):
if at maturity the FTSE has fallen by more than 45% of the initial
level (below 3003.21 points) , the structure will redeem paying
the original capital minus 1% for every 1% the Index has fallen
below the initial level
20
Mark-to-Market
135.00%
FTSE 100 Index Performance [Price]
125.00%
HSBC 363 Performance
115.00%
Total return of index = 135.27%
(dividend reinvestment assuming
Net of Corporate Tax rate 20%)
105.00%
95.00%
Structure performance to date: 27.02%
FTSE TR performance to date: 35.27%
Structure annualised volatility: 5.31%
85.00%
FTSE 100 annualised volatility: 13.54%
75.00%
Nov-11
Feb-12
Jun-12
Sep-12
Dec-12
Apr-13
Jul-13
Oct-13
Source: Bloomberg, data as at 25-Feb-14
Jan-14
21
Sterling Interest Rates
Sterling Interest Rates
Grinding lower, 10% autocall coupon equates to 15% in 2007 (ceteris paribus)
GBP Swap Rates
6.00
5.00
Swap Rate (%)
4.00
3.00
5 year currently 1.97%
2.00
1.00
2 year currently 0.98%
0.00
Nov-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Sep-13
Jan-14
Source: Bloomberg (25-Feb-2014)
22
Upside Package: Autocalls
23
UPSIDE PACKAGE
Autocalls
22.18p
left to5.5
spend
• HSBC
year
Fixed Rate Bond

Snowballing annual coupon which can redeem early if the index is over a certain level

These barriers typically fall each year

Note: Synthetics have a tenor of 6 years, Autocalls have an expected life of roughly 2 years.
→ Rates concern?
How do Autocalls fit into portfolios?

Performance of Defensive Autocalls is predictable and defined

Bull market: Underperform

Bear market: Likely to outperform

Flattish market: Outperform significantly
USE
Yield Enhancement
Defined Return
Selling Volatilty
TYPE
Autocalls
EXAMPLE
Defensive Autocall
SITS ALONGSIDE
Equity income finds and
absolute return funds
24
100%
1st anniversary
Autocall
observation
coupon of
8%
100%
Autocall
continues to
2nd
anniversary
60%
2nd anniversary
Autocall
observation
coupon of
16%
95%
Autocall
continues to
3rd
anniversary
3rd anniversary
4th anniversary
5th anniversary
6th anniversary
Autocall
observation
coupon of
24%
Autocall
observation
coupon of
32%
Autocall
observation
coupon of
40%
Autocall
observation
coupon of
48%
90%
Autocall
continues to
4th
anniversary
85%
Autocall
continues to
5th
anniversary
80%
Autocall
continues to
6th
anniversary
75%
Autocall
redeems at
100p
Capital
protection
barrier
triggered
Capital Loss
Level of Index
Capital Protected
Payoff Example
0%
25
Current Yields
9
8
YIeld %
7
6
5
4
3
2
1
0
Defensive (5% High yield bond FTSE 12 month UK Gov't bonds 2 2 year Sterling
dropper) Dual
ETF (Bank of
Dividend Yield
year (£ Gilts)
Swaps
Autocall A+
America Merrill
issuer(FTSE /
Lynch Global
S&P) (simple per High Yield BB-B)
annum)
High Grade UK Gov't bonds 6 6 year Sterling
credit (£ Nonyear (£ Gilts)
Swaps
Gilts AAA 3-5)
RWANDA 10
Year (6 ⅝
05/02/23)
COSTA RICA 12
Year (COSTAR 4
⅜ 04/30/25 )
Source: Data as at 5-Feb-14
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Eg: HSBC 260 FTSE Defensive Autocall (10%)
HSBC 260 FTSE Defensive Autocall (10%) EIS
Strike:
Counterparty:
Currency:
Underlying:
Maximum Term:
Platform:
Upside:
Autocall Barriers:
Downside
(50% American Knock-In
Put):
7-Oct-10
HSBC
GBP Denominated
FTSE 100 (5662.13 points)
6 years
EIS (subject to CGT under current tax rules)
Defensive autocall, 10% snowballing annual coupon
Year 1:
100% barrier
110% payoff
Year 2:
100% barrier
120% payoff
Year 3:
100% barrier
130% payoff
Year 4:
95% barrier
140% payoff
Year 5:
90% barrier
150% payoff
Year 6:
85% barrier
160% payoff
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
27
Mark-to-Market
25
20
15
FTSE 100 Total Return
Annualised Volatility over the life of the trade:
Structure outperformance to date: 9.77%
HSBC 260: 14.51%
FTSE 100:
19.93%
Structure
annualised
volatility: 14.51%
HSBC 260 FTSE Defensive
FTSE
100 annualised
volatility:
19.93% 9.77%
Outperformance
over
the Underlying:
10
5
0
Oct-10
Feb-11
May-11
Aug-11
Dec-11
Mar-12
Jun-12
Sep-12
-5
-10
Total return of index = +10.23% (dividend reinvestment assuming Net of Corporate Tax rate 20%)
-15
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Performance
• Called in Year 2 (8th October 2012), with the FTSE at 5841.74 points
• Over the two years since launch, the structure doubled the return of the market with
less volatility
Period Range:
7-Oct-10 to 8-Oct-12
Total Return
Performance
360 Day Volatility
Structure (HSBC 260 Def Ac)
20.00%
14.51%
BlackRock UK Special Situations
16.70%
19.92%
Threadneedle UK Equity Income
15.79%
17.49%
Underlying (FTSE 100)
10.23%
19.93%
M&G Recovery
11.14%
22.56%
Standard Life Investment GARS
7.62%
4.72%
Jupiter Absolute Return
4.51%
5.51%
Source: A selection of popular UK funds, all rated AAA/AA by Citywire
29
Overview
30
Categories of Structured Products
AUTOCALLS
Autocalls
Defensive Autocalls
Worst-Of Autocalls
Sit alongside: Equity income funds and
absolute return funds
SYNTHETICS
Synthetic Zeros
Digitals
Range Trades
Range Accruals
Sit alongside: ZDPs
Reverse Convertibles
Digitals
Range Trades
High Income
Range Accruals
Inflation Plus
Sit alongside: Income funds
SELLING
VOLATILITY
DEFINED RETURN
YIELD
ENHANCEMENT
INCOME
UNCAPPED
Accelerators
Supertrackers
PARTICIPATION
CAPPED
ACCESS TO A
PARTICULAR
UNDERLYING
Sit alongside: Large cap / core long only
funds and ETFs
Call Spreads
Usually participation in the form
of an Accelerator, (but not
always)
Sit alongside: Other vehicles accessing the
same underlying asset
31
Appendix
32
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
A notional swap from the
bank’s Treasury
Department

This is cancellable at any
point

They are ultimately
notional- do not need to be
sold, hedged or replaced.
£1
5yr zerocoupon
Bond/
Swap
Cost:
89.84p
Option package
Providing
Economic
Return
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.
33
FTSE 100 Futures Daily Volume
7
6
Trading Volume £ BIL
5
4
3
Trading in the
top ten traded
UK stocks is
29% of FTSE
100 futures
volume
Current
1 month ago
2
1 year ago
1
0
Source: Weekly average data, as at 01-Oct-13
34
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.
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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
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