Institutional Structured Products

Institutional Structured Products31st March 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


3

4


What We DoInstitutional 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

37%

8%

6%

Autocallable 37%

Synthetic 8%

Income 6%

51%

32%

12%5%

Defined Return 51%

Option Hedging 32%

Market Participation 12%

Delta One 5%

Business Split By Product Type

(Data to Q4 2013)

5

Where CLS sits…

Client Discretionary Portfolios

Institutional Investor

6

So it’s key to understand counterparty risk?

Source: Bloomberg, data as at 27-Mar-2014

What we really care about is how stable the bond spread is!

Royal

Bank o

f Can

ada

JP M

orga

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Rabob

ank

Credit

Suis

se BoA

HSBC

Lloyd

s TSB

Citigro

upBNP

ING

Deutsc

he B

ank

Soc G

en

Goldm

an

Credit

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icole

Nomur

a

Barcla

ys

Mor

gan S

tanley

Comm

erzb

ank

RBS

Banco

San

tande

r

0

100

200

300

400

500

600

700

Credit Spreads since June-2008 - Trading Ranges

Cre

dit

Def

ault

Sw

ap (

CD

S)

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ls [

bas

is p

oin

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ver

LIB

OR

per

an

nu

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high

low

maximum 1360

current

How are Structured Products Put Together?

7

FIRST STEPBuy Zero Coupon Bond from Bank

8

First step: buy Zero Coupon Bond from bank, it sits as Senior Unsecured Debt on the bank’s main

Balance Sheet

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

£15yr zero-couponBond/Swap

Cost: 87.76p

£1to invest

ZCB now worth £1*

5 years

*The ZCB is discounted at the respective interest swap rate for the term, plus the bank’s funding level, to return 100p at maturity

9

The next step is to sell a knock-in put on an index the investor is looking for exposure to

Net Amount Remaining to Invest: 23.17p

Note: all puts are expensive due to a skewed demand for downside protection in the derivative

markets

EG: how probable do the 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


Cost: 87.76p

£1to invest

5 years

Sell 5yr European

Put Option on the FTSE Risk At 60%

Strike (‘Knock-In Put’)

Cost: 10.93p

ZCB now worth £1

Knock-In Put:

Has the FTSE fallen by more

than 40%?

SECOND STEPSell Knock-In Put

10

The final step is to choose your upside package- for consistency we will stay with FTSE

Fee of 1 – 1.5%

Net Amount Remaining to spend on Upside Package: 21.67– 22.17p

Bullish? → Accelerator: geared participation in rising markets

Bearish? → Synthetic/ Autocall: both provide a positive return in flat to falling markets*

Somewhere in between? → Booster


Cost: 87.76p

£1to invest

5 years

Sell 5yr European



Cost: 10.93p

ZCB now worth £1

Knock-In Put:

Has the FTSE fallen by more

than 40%?

THIRD STEPChoose Upside Package

Option packageProvidingEconomic

Return


Return

*so long as markets haven’t fallen by more than the put, ie 40% down

Upside Package: Accelerators

11

UPSIDE PACKAGEAccelerators

12

• HSBC 5.5 year Fixed Rate Bond Price of 1 FTSE call option today: 10.47p

Therefore the investor can afford: 22.17/ 10.47p

→ 2.11 call options

22.17p left to spend

In other words: 211% participation in the FTSE over 5 years

USE TYPE EXAMPLE SITS ALONGSIDE

Gearing / Participation Uncapped Accelerator / Supertracker Large cap / core long only funds and ETFs

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

Eg: HSBC 603 US Accelerator 9 (167%)

13

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

Performance of the US Accelerator Series

14The 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 28-Mar-14

Feb-11 Sep-11 Mar-12 Oct-12 Apr-13 Nov-13

80%

90%

100%

110%

120%

130%

140%

150%

160%US Equity "Defined Return Security" cumulative

S&P 500 PR

S&P 500 TR

Cu

mu

lati

ve

Pe

rfo

rma

nc

e

(cumulative +59.31%)

(1) US Supertracker 2: bought 16-Feb-11

(2) sold US Supertracker 2 for 118.41 centsBought US Accelerator 5 with proceeds reinvested @ 100 cents

(3) Sold US Accelerator 5 at bid price of 128.77cents >> Invested into US Accelerator 9 with proceeds reinvested @ 100 cents

Decision: How Bullish on US

Equities?

(4) US Accelerator 9 : current bid price of 104.62 cents >> overall cumulative performance of +59.31% versus a passive S&P TR investment re-turn of +46.72%

Where does it fit?

15Source: Bloomberg, Financial Express, data to 31-Mar-14

USD Denominated Performance (TR)

Bloomberg Ticker 1 year 3 month 1 month Since Launch

(26-Mar-2013) (27-Dec-2013) (27-Feb-2014) (16-Feb-2011)

HSBC US Supertracker Series 2 / 3 / 4

B3Z2023 36.39% 1.53% 0.32% 63.21%

JPM US Equity Income HLIEX US Equity 20.96% 2.04% 1.70% 56.27%

S&P 500 SPX Index 20.81% 1.29% 0.29% 46.72%

ISHARES S&P 500 SACC LN Equity 21.42% 1.61% 0.84% 46.17%

Threadneedle Investment Funds American Select

TDNASGA LN Equity 21.90% 0.35% -2.56% 45.54%

Schroder QEP US Core Fund SCHRAMA LN Equity 21.35% 0.77% 1.00% 45.19%

Findlay Park American Fund FINDLPI ID 16.94% 0.13% 0.25% 42.10%

JPMorgan American Investment Trust

JAM LN Equity 23.00% 0.89% 0.47% 41.46%

UBS US Equity Investment Funds

UBSUEAA LN Equity 22.72% 1.98% -0.80% 37.87%

Legg Mason Funds US Equity LMUSEAA LN Equity 26.03% 3.25% 1.45% 36.81%

Brown Advisory US Equity Growth Fund

BRAUSEB ID Equity 17.27% -0.25% -1.63% 34.86%

Neptune Investment Funds US Opps

CFNUSAA LN Equity 23.75% -1.32% -5.55% 32.94%

M&G Investment Funds American

MGAMDAA LN Equity 16.13% -0.66% -1.07% 28.92%

HSBC 476 US Supertracker Series 5

B92SVS9 31.62 1.82% 2.36% -

HSBC 603 US Accelerator 9 (167%) EIS

BJS8YT5 - - 0.60% -

Upside Package: Synthetics

16

UPSIDE PACKAGESynthetics

17

• HSBC 5.5 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


Yield Enhancement Defined Return Selling Volatilty

Synthetics Range Accrual ZDPs

RESULTING STRUCTUREMANAGER CONSIDERATIONS & DECISIONSHOW TO GET

HIGHER YIELD

Yield : circa 2.9%

HSBC 6y Fixed Rate Bond

*All pricing as at circa Mar-2014

Yield : circa 4.8%

Yield : circa 5.55%

Yield : circa 5.78%

Simple return per annum, structure

accrues max 6*5.78 p.a.

Put capital risk

Put coupon at risk

(via lower barrier)

Put coupon at risk

(add upper barrier)

Which underlying should the structure be linked to? FTSE

At what level should the lower barrier be?

Coupon paid annually as long as the FTSE is over 3980 points.

To what extent is the manager prepared to put capital at risk?

Soft protection at maturity at 3980 points.

At what level should the upper barrier be?

5.78% annual, accrued daily for every day the FTSE closes within

the range of 3980 to 8623 points.

HSBC 6y FTSE Reverse Convertible

HSBC 6y FTSE Digital

HSBC 6y FTSE Range Accrual

18

UPSIDE PACKAGESynthetics

This shows the evolution of a live trade:

HSBC 440 FTSE Daily Range Accrual (7.0%)

19*Example structure first traded Oct-12

3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500

+0 years +1 year +2 years +3 years +4 years +5 years +6 years

FT

SE

100

Upper Barrier: 7500 points

Strike: 5800 points

7% coupon paid as FTSE stayed

between barriers for whole year

1.75% coupon paid as FTSE exceeded theupper barrier for 75% of

the year

3% coupon paid as FTSE fell below the lower barrier for 50% of

the year

2.3% coupon paid as FTSE fell below thelower barrier for 33% of

the year

7% coupon paid as S&P 500 stayed


7% coupon paid as FTSE stayed


0%

2%

4%

6%

8%

+0 years +1 year +2 years +3 years +4 years +5 years +6 years

Co

up

on

P

aym

en

ts

Lower Barrier: 3500 points

Soft Protection at Maturity: 3500 points

Potential Coupon: 7%

HSBC Bond Coupon: 3.0%

Traded example, semi-annual, HSBC 440 FTSE Income (3.5% s.a. Daily Range Accrual) Note

20

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)



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

21

Mark-to-Market

Source: Bloomberg, data as at 28-Mar-14

Nov-11 Feb-12 Jun-12 Sep-12 Dec-12 Apr-13 Jul-13 Oct-13 Jan-1475.00%

85.00%

95.00%

105.00%

115.00%

125.00%

135.00%

FTSE 100 Index Performance [Price]

HSBC 363 Performance

Total return of index = 124.28% (dividend reinvestment assuming Net of Corporate Tax rate 20%)

Sterling Interest Rates

22

Sterling Interest Rates

Grinding lower, 10% autocall coupon equates to 15% in 2007 (ceteris paribus)

Source: Bloomberg (27-Mar-2014)

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

0.00

1.00

2.00

3.00

4.00

5.00

6.00

2 year currently 1.04%

5 year currently 2.00%

GBP Swap Rates

Sw

ap R

ate

(%)

Upside Package: Autocalls

23

UPSIDE PACKAGEAutocalls

24

• HSBC 5.5 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


Yield Enhancement Defined Return Selling Volatilty

Autocalls Defensive Autocall Equity income finds and absolute return funds

25

Payoff Example

Level of Index 1st anniversary 2nd anniversary 3rd anniversary 4th anniversary 5th anniversary

100%

60%

0%

6th anniversary

Autocall observation coupon of 32%




Autocall continues to 2nd anniversary

Autocall continues to 3rd anniversary

Autocall continues to 4th anniversary



Capital protection barrier triggered

Ca

pit

al

Pro

tec

ted

Ca

pit

al

Lo

ss



100%95%

90%85%

80%75%

Autocall redeems at 100p

26

Current Yields

Source: Data as at 27-Mar-14Def

ensiv

e (5

% d

ropp

er) D

ual A

utoc

all A

+ iss

ue...

High y

ield

bond

ETF (B

ank

of A

mer

ica M

errill

...

FTSE 12

mon

th D

ivide

nd Y

ield

UK Gov

't bon

ds 2

yea

r (£

Gilts

)

2 ye

ar S

terlin

g Swap

s

High G

rade

cre

dit (£

Non

-Gilts

AAA ..

.

UK Gov

't bon

ds 6

yea

r (£

Gilts

)

6 ye

ar S

terlin

g Swap

s

RWANDA 1

0 Yea

r (6

⅝ 0

5/02

/23)

COSTA R

ICA 1

2 Yea

r (CO

STAR 4 ⅜

0...

0

1

2

3

4

5

6

7

8

YIe

ld %

27

Eg: HSBC 260 FTSE Defensive Autocall (10%)

HSBC 260 FTSE Defensive Autocall (10%) EIS

Strike: 7-Oct-10

Counterparty: HSBC

Currency: GBP Denominated

Underlying: FTSE 100 (5662.13 points)



Upside: Defensive autocall, 10% snowballing annual coupon

Autocall Barriers:

Year 1: 100% barrier 110% payoffYear 2: 100% barrier 120% payoffYear 3: 100% barrier 130% payoffYear 4: 95% barrier 140% payoffYear 5: 90% barrier 150% payoffYear 6: 85% barrier 160% payoff

Downside (50% American Knock-In Put):

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

28

Oct-10 Feb-11 May-11 Aug-11 Dec-11 Mar-12 Jun-12 Sep-12

-15

-10

-5

0

5

10

15

20

25FTSE 100 Total Return

HSBC 260 FTSE DefensiveAnnualised Volatility over the life of the trade: HSBC 260: 14.51% FTSE 100: 19.93%

Outperformance over the Underlying: 9.77%

Total return of index = +10.23% (dividend reinvestment assuming Net of Corporate Tax rate 20%)

Mark-to-Market

Structure outperformance to date: 9.77%

Structure annualised volatility: 14.51%

FTSE 100 annualised volatility: 19.93%

Source: A selection of popular UK funds, all rated AAA/AA by Citywire 29

• 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%

Performance

Overview

30

Categories of Structured Products

CAPPED

UNCAPPED

ACCESS TO A PARTICULAR UNDERLYING

PARTICIPATION

SELLING VOLATILITY

DEFINED RETURN

YIELD ENHANCEMENT

AUTOCALLS

SYNTHETICS

INCOME Sit alongside: Income funds

Sit alongside: ZDPs

Sit alongside: Equity income funds and absolute return funds

Sit alongside: Large cap / core long only funds and ETFs

Sit alongside: Other vehicles accessing the same underlying asset

AcceleratorsSupertrackers Call Spreads

Usually participation in the form of an Accelerator, (but not always)

Autocalls Defensive Autocalls Worst-Of Autocalls

Synthetic ZerosDigitalsRange TradesRange Accruals

Reverse Convertibles DigitalsRange Trades High Income Range AccrualsInflation Plus

31

Appendix

32

Full Intra Day Secondary Market Liquidity

33


Cost: 89.84p

Sell 5yr European



Cost: 13.52p


Return

Zero Coupon Bond

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.

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

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

34Source: Weekly average data, as at 01-Oct-13

FTSE 100

Fut

ures

TOP T

EN TRADED U

K LIS

TED STO

CKS

VODAFO

NE GRO

UP PLC

LLO

YDS BANKIN

G G

ROUP P

LC

GLA

XOSM

ITHKLI

NE PL

BHP BIL

LITO

N PLC

RIO T

INTO

PLC

BRITIS

H AM

ERICAN T

OBACCO

DIAG

EO P

LC

ROYAL

DUTCH SHELL

PLC

HSBC HO

LDIN

GS P

LC

BARCLAYS P

LC

ROYAL

MAIL

PLC

0

1

2

3

4

5

6

7

Current

1 month ago

1 year ago

Tra

din

g V

olu

me

£ B

IL

Trading in the top ten traded UK stocks is 29% of FTSE 100 futures

volume

The Operational Process

35

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.

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

DISCLAIMER

36

Institutional Structured Products

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