The Listed Structured Products Market

Securities Institute October 2006

Tim Bevan – Product Management & Development

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Existing Market

• The structured product market is a constantly evolving and competitive market. During 2004 149 major IFA products were launched taking in a total sales volume of approximately £5 billion

• Over recent years the number of active product providers has increased and so has the corresponding number of products launched onto the market.

• As a result of the higher level of competition, we have seen a dramatic decrease in the size of the average tranche. Currently the average tranche size is between £5 to 10 million and we expect it to remain at this level.  

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Distribution channels, wrappers and tax - 1

 

Wrapper Channel Treatment

Deposit Branches or IFA Income tax

Dublin company IFAsISA or CGT direct

LifeTied sales force or IFA

Basic rate tax paid not recoverable

 

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Distribution channels, wrappers and tax - 2

 

 

Wrapper Channel Treatment

MTN IFAISA or income tax

OEICAsset Managers, Tied sales force or IFA

ISA or CGT treatment

OffshoreAsset Managers, IFA or branches

Taxed when brought onshore

Simple IFA

ISA or CGT if growth earned, income tax otherwise

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Growing Interest

• More interest from wealth managers in LSP's for

(i) market access plays,

(ii) upside exposure with capital protection,

(iii) tailoring return profiles to match specific client

or in- house investment views

• Products already seen in the market linked to a diverse range of underlyers - from FTSE to VIX to House Prices to Commodity Indices to Emerging market equities

* Source: London Stock Exchange, period covered 28th Oct 2002 to 31st July 2005

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Tailoring the risk /return profile

• Structured Products can allow you to take advantage of different views on the same market

• We compare four 5 year products linked to the FTSE 100:

Aggressive: 200% upside participation; or

100% downside participation

ETF: 3.5% assumed dividend yield (constant cash dividends through time)

4.5% interest earned on dividends

Conservative:

100% protection, 133% upside participation

Very Conservative:

Minimum return of 120% of investment; or100% plus 70% upside participation

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Tailoring the risk /return profile

• Different investment strategies outperform in different market return scenarios – your investment choice should be determined by your personal view and investment strategy

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50 75 100 125 150 175 200

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Very ConservativeConservative

ETFAggressive

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Payoff profiles

Tracker Reverse

Accelerated

Asset Price

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Yield Enhancement

• Bonus Trackers

– Currently available on FTSE 100, RTX (Russian index) and GSCI Agriculture Excess Return Index

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Brent Bonus Tracker – Indicative pricing

• Priced off rolling Brent Oil front month futures

• Participate in market moves

• Uncapped upside

• 145% contingent guarantee

• Simple Brent tracker if KO (65% of issue level)

• Capital gains tax only*

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Brent Oil Bonus Tracker

• Holder receives:

• Minimum of 9.7% a year (145% of issue price in 4 years)

or

• 100% of the Brent Oil price increase if this is > 145%

provided

• Brent Oil never trades below 65% of issue level [$35]

otherwise

• Holder receives same return as Brent Oil spot price

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Bonus Trackers

• No worse return than a tracker in all cases• Guaranteed to outperform in a range bound

market(ie where the bonus KO level is never hit)

• Uncapped upside in all cases• No dividends paid to holder

• Do not need to be held to expiry• Product tracks underlying prior to expiry, then

trends to bonus level if still available

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Listed Structured Products

• Accelerated Trackers

– Currently available on FTSE 100 (160% upside), TOPIX (210% upside), Nikkei 225 (250% upside), GSCI Agriculture & Livestock (180% upside)

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Products• Trackers

– Plain trackers

– Accelerated trackers

– Reverse trackers

• Yield enhancement (Semi-protected)

– Bonus trackers

– Discount trackers

– Airbags

• Capital protected

(Product type not limited to these categories)

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UK Listed Structured Product Segment• Market segment (INSD)

• 4 new sectors

• 50 products at present

•Well over £1bn traded since market launch (Oct ’02)

Structured Products

Capital protected

Yield Enhancement

Trackers Off-book

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New Issuer & new Wrapper

• Barclays Capital in conjunction with Barclays Stockbrokers have just launched iNotes

• Utilise MTN wrapper as opposed to Securitised Derivative wrapper

• London Stock Exchange platform now multi-issuer and multi-wrapper

www.stockbrokers.barclays.co.uk/in

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Suitability

• Structured products are not the central theme of the portfolio– No desire for additional operational, administrative,

regulatory risk– Or indeed reputational risk– Time constraint

• London Stock Exchange listing makes it simple– Listed on RIE– Regulatory comfort– Acceptance from trustees, directors, administrators,

investors– Have a SEDOL number - easy to identify

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Ease of Dealing

• Listing, dealing and settlement arrangement the same as for ordinary shares– Use normal broker for execution– T+3 CREST settlement

• Dealt during normal LSE trading hours, with guaranteed liquidity and maximum dealing spreads

• Use TIDM code• Liquidity is good• Can buy and sell at any time within product’s life

– Although often best considered as a hold to maturity• Automatic exercise, with safety net

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Costs and Value

• Costs really matter for structured products– Not like active star fund managers, where

outperformance can outweigh cost differential• No annual management charges

– Comparison with ETFs• No stamp duty• Dealing spreads are reasonable

– Even though these are not trading products• No extra administrative costs - custody fees etc• Comparing value with other products not always

easy– Depends on your own requirements

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Price Transparency

• Continuous two-way pricing at all times• Two price sources - LSE and issuers

– Comparatively easy for valuations– Useful for integration into real-time spreadsheets

for valuation, modelling, record-keeping etc

• Historic information available• Trading volumes available

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Continuous Two-Way Pricing

TIDM Code

Size and Price

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Disadvantages

• Complexity• Adverse price movements• Normally no income - even if underlying asset

pays a dividend• Cannot be sold short• Premium (time value decay)• Limited life - need to incorporate a timeframe into

decisions

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Flexibility• No exchange defined contracts, entirely at the discretion of the

issuer as to the terms of the products listed, the underlying asset and the pricing.

• Time to market from conception to listing can be as little as 48 hours

Bespoke• Issuers will tailor make products to suit client needs in relatively

small size (£500k)

• Investor maintains a bilateral relationship with issuer(s)

What are the best features of the OTC market?

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Centralised• Single platform with 5 competing investment banks issuing directly

comparable product

Ease of access and transparency

• Dedicated platform though part of the domestic market

• All price information distributed over LMIL and displayed by information vendors

• All business printed to the market – reliable statistics (though anonymity of investor preserved)

• Term sheets and literature available for all products

Regulated & supervised• Issuers obligated to price continuously throughout the lifetime of the

product

• Subject to the rules and regulations of the London Stock Exchange

What are the best features of an on-exchange market?

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END

Tim Bevan020 7797 1744tbevan@londonstockexchange.com