Download synthetic zeros - SG Listed Products

December 2014
SYNTHETIC ZEROS
SYNTHETIC ZEROS
A POTENTIAL RETURN, EVEN IF MARKETS FALL
THIS COMMUNICATION IS DIRECTED AT SOPHISTICATED RETAIL CLIENTS IN THE UK
Contents
3. Key Terms you will come across in
this brochure
8.Buying or selling
10. Understanding counterparty risk
4. Introducing Synthetic Zeros
11. Considerations before investing
5. How do they work?
12. A history for innovation
6. An example product
IMPORTANT INFORMATION
„„ Synthetic Zeros are directed at sophisticated retail clients in the UK, who have a good understanding of the underlying market
and characteristics of the products.
„„ Synthetic Zeros are designed to be held until Maturity. If you sell back a Synthetic Zero early you may get back less than your
initial investment.
„„ The information within this brochure does not constitute legal, tax or financial advice. Societe Generale has not given any such
advice.
„„ Synthetic Zeros are securities that are listed on the London Stock Exchange (LSE) and are issued by SG Acceptance via an
Issuing Programme which is approved by the UK Listing Authority. SG Acceptance is a 100% subsidiary of Societe Generale.
„„ Final Terms are published for all Synthetic Zeros detailing their specific characteristics and their pay-off at Maturity, and the
product features given in the Final Terms are prescribed by the approved Base Prospectus. Both documents can be found at
www.sglistedproducts.co.uk
„„ Capital is fully at risk. Synthetic Zeros are not covered by the provisions of the Financial Services Compensation Scheme
(“FSCS”), nor any similar compensation scheme.
„„ Although these products are issued by SG Acceptance they are guaranteed by Societe Generale. If SG Acceptance as the
Issuer, and Societe Generale as the Guarantor were to fail to make payments due, you could lose some or all of your investment.
Investors are ultimately exposed to Counterparty Risk on Societe Generale, in its capacity as Guarantor. See page 10 for more
information on Counterparty Risk.
„„ You should read this document carefully so that you understand what you are buying, and then keep it safe for future reference.
2 14
Key Terms you will
come across in this brochure
Term
Description
EPIC Code
The unique identifier for a product, which is used to identify the product to your broker.
Final Valuation Date
The date that the closing level of the Underlying Asset will be recorded in order to determine the return paid at
Maturity.
Initial Level
The closing level of the Underlying Asset on the Initial Valuation Date. The initial level is used to determine the
Protection Level.
Initial Valuation Date The date that the closing level of the Underlying Asset will be recorded in order to determine the Initial Level.
Investment Term
The fixed term between the launch of the product and its Maturity. The Investment Term is typically between 2
and 5 years.
Issue Price
The price paid per unit of the product at launch.
Final Level
The closing level of the Underlying Asset on the Final Valuation Date. The Final Level is used to determine the
amount paid at Maturity.
Maturity
The date that the product matures.
Protection Level
The level at which the Underlying Asset must close at or above the Final Valuation Date in order for the
Synthetic Level to be paid. If the Underlying Asset closes at a level below the Protection Level, capital is
at risk.
Synthetic Level
The payout that investors will receive at Maturity if the Underlying Asset is at or above the Protection Level on
the Final Valuation Date.
UK Tax Treatment
Returns are intended to be treated as capital gains for UK tax purposes*.
Underlying Asset
The Index or share that the product’s performance is linked to.
*Any statement in relation to tax, where made, is generic and non-exhaustive and is based on our understanding of the laws and practice in force
as of the date of this document and is subject to any changes in law and practice and the interpretation and application thereof, which changes
could be made with retroactive effect. Any such statement must not be construed as tax advice and must not be relied upon. The tax treatment of
investments will, amongst other things, depend on an individual’s circumstances. Investors must consult with an appropriate professional tax adviser
to ascertain for themselves the taxation consequences of acquiring, holding and/or disposing of any investments mentioned in this brochure.
3 14
INTRODUCING SYNTHETIC ZEROS
Synthetic Zeros provide an alternative way to invest. Unlike most investments, where the market
has to rise to create a profit, Synthetic Zeros can pay a fixed return as long as your chosen stock
or index has not fallen below a pre-defined Protection Level at Maturity.
Synthetic Zeros are available on a range of different stocks
and financial indices. They have a fixed investment term of
between two and five years, and offer a variety of returns
depending on the asset chosen, the duration of the
investment, and the Protection Level built into the product.
Investment
Term
2-5 years
Protection Levels are typically set between 10 and 30 percent
below the starting level of the stock or index at the time of
launch. This increases the chance of receiving the fixed return
at Maturity. Importantly though, if your view does not play
out, and your chosen stock or index has fallen below the
Protection Level, capital is at risk at Maturity.
Return
Synthetic Level
at maturity
Synthetic
Underlying
Stock or Index
Zeros
It is not just the investment view that is flexible. Synthetic
Zeros are listed on the London Stock Exchange and trade
like a share through a UK stockbroker. This gives you the
flexibility to buy or sell a product at any point during trading
hours (08.05 – 16.30) at the prevailing price in the market.
Risk
Capital is at risk
below the
Protection Level
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Scenario
Is stock or
index above
Protection Level?
HOW DO THEY WORK?
Synthetic Zeros are fixed term investments that offer a fixed
return on a fixed date depending on the performance of a predefined stock or Index. This level of transparency makes them
very easy to evaluate. You can assess the potential reward by
looking at the ‘Synthetic Level’, and the potential risk by looking
at the ‘Protection Level’. You just need to decide whether you
think that your chosen Underlying Asset is likely to fall by more
than the Protection Level, and whether the Synthetic Level
provides enough of a reward to justify the risk.
The investment process
At the very start of the investment term, on the Initial Valuation
Date, the closing level of the stock or index is recorded. This
level, which is known as the ‘Initial Level’ is used to determine
the Protection Level. Typically the Protection Level is between
10% and 30% below the Initial Level.
At the end of the Investment Term, on the ‘Final Valuation Date’,
the closing level of the stock or index is recorded again. This
level, which is known as the ‘Final Level’ is compared to the
Protection Level. As the diagram below shows, if the Final Level
is at or above the Protection Level you win, if not you lose.
On the final VALUATION DATE
Did the Underlying Asset close below the Protection Level?
Yes
No
CAPITAL AT RISK
Synthetic Level PAID
No Synthetic Level paid
Investors receive the defined payout at Maturity
The negative scenario
The positive scenario
If the Final Level is below the Protection Level, you will not
receive the Synthetic Level and your capital will be at risk. The
amount you receive back at Maturity will depend on how far the
Underlying Asset has fallen below the Initial Level. If for example
the Final Level is 40% below the Initial Level, only 60% of the
Issue Price would be returned at Maturity.
If the Final Level is the same or higher than the Protection Level,
the Synthetic Level is paid at Maturity.
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AN EXAMPLE PRODUCT
The best way to demonstrate how a Synthetic Zero works is to look at an
example. For the sake of illustration, let’s say that Vodafone shares are trading
at £2.30 per share. You do not expect them to rise significantly over the next 3
years but don’t anticipate a dramatic fall either.
Product details
EPIC
SZ01
Underlying Asset
Vodafone
Issue Price
£2.30
Protection Level
£1.80
Synthetic Level
£2.95
Investment Term
3 years
Looking at the range of Synthetic Zeros you select SZ01, A three year product,
which will payout the Synthetic Level of £2.95 at Maturity as long as Vodafone
shares are trading at or above £1.80 on the Final Valuation Date in three years
time. At the time the product is launched, the Issue price was £2.30 per unit.
You decide to buy 1,000 units for a total of £2,300.
INVESTMENT SCENARIOS
The following three scenarios explore what could happen to your investment based on the performance of Vodafone shares.
£3.30
2
Synthetic Level (£2.95)
£2.80
Price
£2.30
£1.80
Initial Level (£2.30)
1
Protection Level (£1.80)
£1.30
£0.80
3
Initial Valuation
Final Valuation
£0.30
Time
Scenario 1: Vodafone shares close at £2.10 at Maturity
In this scenario, although Vodafone shares have fallen by 20
pence, you would receive the Synthetic Level of £2.95 per unit.
The total paid at Maturity would be £2,950. A profit of £650
from the original £2,300 invested.
Scenario 2: Vodafone shares close at £3.30 at Maturity
In this scenario, Vodafone shares have risen by £1.00 over the
investment term. However, because your potential return is
fixed at £2.95 per unit, you would not benefit from the full rise of
the Vodafone shares. You would receive the Synthetic Level of
£2.95 per unit. The total paid at Maturity would be £2,950. This
is still a profit of £650 from the original investment of £2,300.
However, it is less than the £1,000 profit you would have
achieved had you bought the shares outright.
Scenario 3: Vodafone shares close at £1.50 at Maturity
In this scenario, Vodafone shares have fallen by 80 pence over
the investment term, a loss of 34.8%. This means that the £1.80
Protection Level has been breached, and as such, SZ01 would
suffer the full loss. You would receive £1.50 per unit, a total
payout of £1,500. This equates to a 34.8% loss on the Issue
Price of £2.30 per unit, or a loss of £800 on the original £2,300
investment.
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A summary of payout scenarios
from investing in our illustrative product SZ01 in a range of
circumstances; it is not a prediction of the performance of
Vodafone shares nor of the limits of such performance.
The examples below are based on our illustrative investment
of £2,300 made at the Issue Price of £2.30 per unit. They are
designed to show the amount you could receive at Maturity
Profit or loss
from 1,000 Vodafone
shares
Closing Price of
Vodafone shares
Payout at Maturity
Profit or loss
Value of 1,000
from 1,000 SZ01 units from 1,000 SZ01 units Vodafone shares
£3.30
£2950.00
£650.00
£3,300.00
£1,000.00
£3.00
£2950.00
£650.00
£3,000.00
£700.00
£2.70
£2950.00
£650.00
£2,700.00
£400.00
£2.40
£2950.00
£650.00
£2,400.00
£100.00
£2.10
£2950.00
£650.00
£2,100.00
-£200.00
£1.80
£2950.00
£650.00
£1,800.00
-£500.00
£1.50
£1,500.00
-£800.00
£1,500.00
-£800.00
£1.20
£1,200.00
-£1,100.00
£1,200.00
-£1,100.00
£0.90
£900.00
-£1,400.00
£900.00
-£1,400.00
£0.60
£600.00
-£1,700.00
£600.00
-£1,700.00
£0.30
£300.00
-£2,000.00
£300.00
-£2,000.00
£0.00
£0.00
-£2,300.00
£0.00
-£2,300.00
A summary of potential payouts at Maturtity for 1,000 units of SZ01
£3,000.00
£2,500.00
£2,000.00
£1,500.00
£1,000.00
£500.00
£0.00
£3.30
£3.00
£2.70
£2.40
£2.10
£1.80
£1.50
£1.20
£0.90
£0.60
£0.30
£0.00
PLEASE NOTE: THE ABOVE FIGURES ARE EXAMPLES ONLY AND CHANGES IN VODAFONE SHARES HAVE BEEN CHOSEN TO DEMONSTRATE THE POTENTIAL
AMOUNT YOU COULD RECEIVE AT MATURITY ONLY. IF YOU SELL THE PRODUCT BEFORE MATURITY, YOU MIGHT NOT RECEIVE THE FULL AMOUNT YOU
ORIGINALLY INVESTED.
7 14
BUYING OR SELLING
Synthetic Zeros are listed on the LSE and trade like a share via
your stockbroker trading account. In compliance with the rules
of the LSE, a price at which you can buy (ASK) or sell (Bid) will
be provided throughout market hours (08.05 – 16.30). You can
identify any Synthetic Zero by its four figure EPIC code and
purchase or sell it at the quoted market value.
There will be a difference between the Bid / Ask price, which
represents the cost of trading. In addition, your stockbroker will
charge a commission to buy or sell in the same way as when
you purchase a share.
Sell Price
Buy Price
Bid £9.95
Ask £10.00
Spread
TRADING ACCOUNTS
Synthetic Zeros are intended to be eligible for investment within
a regular dealing account or a Self Invested Personal Pension
(SIPP). Outside of a SIPP investment in a Synthetic Zero will be
subject to Capital Gains Tax. However, there is no Stamp Duty
to pay on your investment.*
In order to buy or sell Synthetic Zeros, you need to be a UK
investor aged 18 or above. Additionally, you will be required to
complete a Complex Instruments Appropriateness Assessment
prior to trading.
*Any statement in relation to tax, where made, is generic and non-exhaustive and is based on our understanding of the laws and practice in force
as of the date of this document and is subject to any changes in law and practice and the interpretation and application thereof, which changes
could be made with retroactive effect. Any such statement must not be construed as tax advice and must not be relied upon. The tax treatment of
investments will, amongst other things, depend on an individual’s circumstances. Investors must consult with an appropriate professional tax adviser
to ascertain for themselves the taxation consequences of acquiring, holding and/or disposing of any investments mentioned in this brochure.
8 14
THE PRICE YOU PAY COUNTS
Synthetic Zeros have a fixed price at launch called the Issue
Price. The Issue Price is typically between £1 and £100, or the
equivalent in a different currency. However, in much the same
way as when you buy a bond after it was originally launched, the
price you pay for a Synthetic Zero can be higher or lower than
the original Issue Price of the product. This is because the price
is constantly moving throughout every minute of every trading
day of the investment term.
Trading at a premium or discount
Impact of purchase price on SZ01
In our theoretical example earlier, SZ01 was launched with
an Issue Price of £2.30 which corresponded to the price of
Vodafone shares at that time. However, as soon as SZ01 was
launched the price would begin to move. If you had bought
SZ01 later at an Ask price of £2.40 when Vodafone shares were
trading at £2.40, you would have paid a slight premium above
the Issue Price.
70p
60p
50p
40p
Although you paid 10 pence more, the Protection Level would
still be £1.80, and the Synthetic Level would still be £2.95.
This means that your potential profit per unit is now 55 pence
rather than 65 pence. However, the product is now less risky
because the price of Vodafone can fall 60 pence before hitting
the Protection Level, whereas at launch there was a 50 pence
cushion before the Protection Level.
30p
Potenitial
profit
(65p)
Distance to
Protection
Level
(50p)
Potenitial
profit
(55p)
Distance to
Protection
Level
(60p)
20p
10p
Importantly however, if Vodafone shares did breach the
Protection Level, your potential loss would be greater if you had
paid more than the Issue Price. This is because the amount
repaid to you would be based on the Issue Price and not the
price you paid. If for example Vodafone closed 34.8% below the
Issue Price at £1.50 on the final Valuation Date, SZ30 would pay
back £1.50, which is a 34.8% loss on the Issue Price of £2.30,
but a 37.5% loss on the Ask price of £2.40.
At launch (£2.30)
Later (£2.40)
For illustrative purposes only.
Synthetic Zeros can also trade at a discount where the Ask
price is below the Issue Price. In this case the potential profit
would be higher, but so would the risk as the Underlying Asset
is closer to the Protection Level. However, as the capital repaid
is based on the Issue Price, the potential loss in the case of a
breach of the Protection Level is lower.
Societe Generale is the only market maker
Societe Generale is the only market maker and therefore the
only party providing prices for Societe Generale Synthetic Zeros.
Societe Generale will refresh the prices throughout the trading
day according to LSE rules. The pricing offered is monitored
by the LSE monitoring team, both in terms of spreads and
sizes. Cases in which there is no guarantee that liquidity will be
available on the secondary market, and therefore normal market
conditions may not prevail, include where:
„„the underlying asset is suspended or not tradable;
„„there is a failure in the LSE or Societe Generale systems;
„„there are abnormal trading situations e.g. sudden and sharp
volatility increase or lack of liquidity in the underlying asset.
9 14
UNDERSTANDING COUNTERPARTY RISK
Synthetic Zeros are issued by SG Acceptance, a 100% subsidiary
of Societe Generale. Insofar as payments are due by Societe
Generale in its capacity as Guarantor, investors are ultimately
exposed to Counterparty Risk on Societe Generale. This means
that receiving your capital back and any return owed to you are
dependent on Societe Generale paying back the amounts due
under its obligations on the product. This is called Counterparty
Risk or Credit Risk.
If Societe Generale is unable to make payments due under the
product, you may lose all or part of your investment. You will
have no claim for compensation from the Financial Services
Compensation Scheme or any similar scheme. Credit ratings can
provide a way for you to assess the risk of a particular product
Issuer such as Societe Generale becoming insolvent.
Credit ratings are assigned by independent ratings agencies
such as Standard & Poors and Moody’s. Standard & Poor’s
rate companies from AAA (Most Secure/Best) to D (Most Risky/
Worst) and Moody’s rate companies from Aaa (Most Secure/
Best) to C (Most Risky/ Worst). These credit ratings are reviewed
on a regular basis and are subject to change by these agencies.
The credit rating is not a recommendation to purchase, sell, or
hold a financial obligation, as it does not comment on market
price or suitability for a particular investor. It also does not provide
assurance that the institution cannot fail.
CURRENT Credit Ratings
Banks
Moody’s
Credit Rating
Standard & Poor’s
Credit Rating
HSBC Holdings Plc
Aa3
AA-
BNP Paribas
A1
A+
Societe Generale
A2
A
UBS AG
A2
A
Credit Agricole S.A.
A2
A
Barclays Bank Plc
A2
A
Credit Suisse AG
A2
A-
Deutsche Bank AG
A3
A
JPM Chase & Co
A3
A
GS Group Inc.
Baa1
A-
The Royal Bank
of Scotland Plc
Baa1
A-
Citigroup Inc.
Baa2
A-
BoA Corp
Baa2
A-
Morgan Stanley
Baa2
A-
Ratings are displayed in order of the Moody’s Credit Rating.
These ratings are correct as of October 23rd, 2014, however,
they are subject to change at any time.
10 14
Considerations before investing
To help you decide if Synthetic Zeros are right for you, here is a summary of some key points to consider before investing. You
should study the Final Terms for your chosen product prior to investing. If you are unsure whether that product is suitable for you,
you should seek advice from an independent professional adviser before making an investment decision.
Key benefits
Fixed return. Potential to receive a fixed return based on
the performance of a stock or index.
Key risks
Capped returns. Your maximum return is capped at the Synthetic
Level. If the Underlying Asset closes above this level at Maturity, the
product will under-perform the Underlying Asset. You will not receive
any dividend payments if you invest in a Synthetic Zero.
Inflation risk. If the return generated by the product is less than the
rate of inflation, the value of your capital will be reduced in real terms.
Defensive structure. The Protection Level is set below the
Initial Level in order to increase the chance of receiving
the Synthetic Level at Maturity.
Capital is at risk. If the Underlying Asset closes below the
Protection Level on the Final Valuation Date, part or all of your initial
investment will be lost. You will be exposed to the performance of
the Underlying Asset from its Initial Level with every 1% fall in the
Underlying Asset resulting in a loss of 1% of the Issue Price of the
product. If you paid more than the Issue Price your loss will be
greater as repayment of capital is calculated on the Issue Price. See
page 8 for more information.
Underlying risk. The price of the Underlying Asset can be volatile and
may fall significantly below the Protection Level.
Exchange Traded. Synthetic Zeros are listed on the LSE
and can be traded at any point during the trading day
under normal market conditions with no early redemption
charges. See page 8 for more information regarding
buying and selling Synthetic Zeros.
Early sale risk. You can sell a Synthetic Zero before the end of
the Investment Term but may get back less than you invested
irrespective of the performance of the Underlying Asset.
Counterparty Risk. Any failure by Societe Generale to make
payments due under the product may result in the loss of all or part
of your investment. As of December 2014, Societe Generale has
an A credit rating from Standard & Poors and an A2 rating from
Moody’s. For an explanation of what these ratings mean see the
Counterparty Risk section on page 10.
Intended Eligibility. Eligible for investment into a SIPP
Dealing Account. Investments made outside of a SIPP
may be subject to Capital Gains Tax*.
Liquidity risk. Societe Generale is the only market maker and
therefore the only party providing prices for Synthetic Zeros. Trading
prices will only be available in normal market conditions. For more
information regarding trading, please see the ‘Secondary Market’
section on page 8.
*Any statement in relation to tax, where made, is generic and non-exhaustive and is based on our understanding of the laws and practice in force
as of the date of this document and is subject to any changes in law and practice and the interpretation and application thereof, which changes
could be made with retroactive effect. Any such statement must not be construed as tax advice and must not be relied upon. The tax treatment of
investments will, amongst other things, depend on an individual’s circumstances. Investors must consult with an appropriate professional tax adviser
to ascertain for themselves the taxation consequences of acquiring, holding and/or disposing of any investments mentioned in this brochure.
11 14
A HISTORY FOR INNOVATION
Societe Generale has a 25 year track record for providing an
outstanding trading service. Today, Societe Generale’s Exchange
Traded Products are actively traded by retail, professional and
institutional investors on the stock exchanges of Paris, Brussels,
Madrid, Milan, London, Frankfurt, Helsinki, Hong Kong, Tokyo,
Sweden and Singapore.
The huge diversity of our product range means that investors
of all types, ages and objectives can access the investment
markets at a level of risk that suits them. Whether you are
looking to leverage a short-term market trend, capture a specific
growth or income opportunity, or build a low cost and efficient
investment portfolio, Societe Generale’s range of Covered
Warrants, Structured Products or Tracking Products can help.
A GLOBAL BANKING GROUP
With a history spanning more than 150 years, Societe Generale
is one of Europe’s largest financial services groups. Based on
a diversified universal banking model, Societe Generale offers
advice and services to individual, corporate and institutional
customers in three core businesses; retail banking, international
retail banking and corporate and investment banking.
More than 148,300 Societe Generale employees serve over
32 million customers in 76 countries each day. Commitment,
responsibility, team spirit and innovation are the core values
shared by all employees of the Group. These values are central
to our vision of a responsible bank committed to serving its
customers.
A LEADING INVESTMENT BANK
Societe Generale’s Global Banking and Investor Solutions arm
(GBIS) is one of the key pillars of the Societe Generale Group,
employing over 10,000 people in 34 countries*. Present on all
major financial markets, SG CIB has been a well known leader
in global equity derivatives since 1989. It is the same expertise,
trading systems and experience developed over the last 25
years, which enable us to deliver first class investment products
for retail investors in the UK.
*As of March, 2014.
12 14
13 14
THIS COMMUNICATION IS FOR SOPHISTICATED RETAIL CLIENTS IN THE UK
This document is issued in the U.K. by the London Branch of Societe Generale. Societe Generale is a French credit institution (bank)
authorised by the Autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control and Resolution Authority) and the
Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority.
Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct
Authority are available from us on request.
The products described in this document are not suitable for everyone. Investors’ capital is at risk. You should not deal in these products
unless you understand their nature and the extent of their exposure to risk. The value of the product can go down as well as up and can be
subject to volatility due to a range of factors which include price changes in the underlying instrument and interest rates.
Prior to any investment in these products, you should make your own appraisal of the risks from a financial, legal and tax perspective,
without relying exclusively on the information provided by us, both in this document and the Final Terms of the products available on the
website www.sglistedproducts.co.uk. We recommend that you consult your own independent professional adviser before investing.
You should note that holdings in these products will not be covered by the provisions of the Financial Services Compensation Scheme, or
by any similar compensation scheme.
The securities can be neither offered in nor transferred to the United States.
Any statement in relation to tax, where made, is generic and non-exhaustive and is based on our understanding of the laws and practice
in force as of the date of this document and is subject to any changes in law and practice and the interpretation and application thereof,
which changes could be made with retroactive effect. Any such statement must not be construed as tax advice and must not be relied
upon. The tax treatment of investments will, amongst other things, depend on an individual’s circumstances. Investors must consult with
an appropriate professional tax adviser to ascertain for themselves the taxation consequences of acquiring, holding and/or disposing of any
investments mentioned in this brochure.
Societe Generale listed Products
Call: 0800 328 1199
Website: www.sglistedproducts.co.uk
Telephone calls may be recorded and/or monitored for training and quality purposes.