Brooks Macdonald. Structured Products Fact or Fiction?

Transcription

1 Brooks Macdonald Structured Products Fact or Fiction? 1

2 Agenda Introduction & Background - Fiction Facts Complexity Facts Liquidity Facts Costs How We Work With Brooks Macdonald Appendix 2

3 Introduction & Background - Fiction 3

4 Fictitious Fictions 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 4

5 Poor Reputations 5

6 Bad Press 6

7 Facts - Complexity 7

8 Unlike Shares BP shares traded 20% down at their lowest point the month after the oil spill in the Gulf of Mexico. Which investors sold BP shares the day before that? 8

9 Spot the difference HSBC 6 Year 3.0% Issuer: HSBC Bank Plc Status: Senior unsecured Ratings: Aa3 (M) / AA- (S) / AA- (F) Trade Date: Term: 6 Years Clearing: CREST Principle: 100 Coupon: 3.0% HSBC 336 FTSE/SPX Digital Accrual (8.10%) Issuer: HSBC Bank Plc Status: Senior unsecured Ratings: Aa3 (M) / AA- (S) / AA- (F) Trade Date: 21 st July 2011 Term: 6 Years Clearing: CREST Principle: 100 Return: Linked to FTSE 100/ S&P500 Index Observation Index Level Payout Annually >60% 8.1% accrued annually 13th November 2019 <60% 1:1 original capital IT S A BOND WITH DIFFERENT RISK/REWARD PAYOFF 9

10 Facts - Liquidity 10

11 The most common asset in the UK currently? Property HIGHLY Illiquid 11

12 Liquidity in the Underlying The underlying securities are highly liquid, and therefore, so are the products themselves Trading Volume BIL Weekly Average Daily Volume Trading in the top ten traded UK stocks is 29% of FTSE 100 futures volume Current 1 month ago 1 year ago 1 0 Market data as of October

13 Liquidity in the Underlying 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 6.8bn EUR 5.1bn Current S&P 500 futures volumes are $175.3 BIL Daily! 13

14 How You Buy And Sell a Structured Product Dealer at stockbroker buying Note (structured investment) directly from the bank (via Catley Lakeman trading *) Investment manager places dealing instruction to dealer at stockbroker Any deal placed by Investment manager is being dealt economically directly with the Bank as the sole Issuer 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 14

15 Past Exceptions Close Brothers & ELDerS- collateralised with British, Irish and some Icelandic banks and building societies Retail Structured Product market 15

16 Facts Costs 16

17 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 0.0% 0.0% 1-1.5% 17

18 How We Work With Brooks Macdonald 18

19 Where CLS sits Institutional Investor Client Discretionary Portfolios 19

20 Live Trade Decision Tree *All pricing as at circa Jul-11 20

21 Example Product HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%) Strike: Counterparty: Currency: HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%) 21-Jul-11 HSBC Aa3 (M) / AA- (S) / AA- (F) GBP denominated Underlying: FTSE 100 / S&P 500 Term: Upside: 5 years, 5 days (do not have to hold until maturity) 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%) Downside: Rolled up and paid at maturity. 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 21

22 Example Product HSBC 336 FTSE/S&P Worst-Of Digital Accrual (8.1%) 150% 140% 130% 120% Performance of 336 S&P 500 Total Return FTSE 100 Total Return Realised volatility over the period: FTSE 100 = 16.35% S&P 500 = 17.08% HSBC 336 = 11.09% 110% 100% 90% 80% 22

23 Example Product 336 Would you hold it, or sell it..? 23

24 Appendix 24

25 DISCLAIMER The information in this document is derived from sources believed to be reliable but which have not been independently verified. 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 a LLP registered in England and Wales, Registered Office : One Eleven Edmund Street, Birmingham, B3 2HJ. Registration Number: OC336585, FSA Reference: