Dual Index Autocalls – Facts, Figures, Positioning

January 2014

Background

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§ CLS originated first Dual Index Defensive Autocall in Feb 10

2 year Sterling Swap Rates

Knock-in Put Price (2 year)

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Jan-10 Aug-10 Feb-11 Sep-11 Mar-12 Oct-12 Apr-13 Nov-13

UKX Index-SPX Index

UKX Index-SX5E Index

Background

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§ The pick up in coupon over the period for UK/US has been 1.0-2.5%

1st UKX/SX5E Traded Nov 12 1st UKX/SPX Traded Feb-10

Problems with Dual

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§ Overly complex

§ Tricky to asset allocate

§ Difficult to explain to clients

Are investors just coupon chasing?

Overly Complex

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Remember Tom’s Earlier Slides?

Year DiscountFactor

Prob of autocall

Return CurrentValue of Coupons

Prob of ZCB

return

Current Value of

ZCB

Put Price

Total Price

1 99.36% 45.06% 8.2% 3.67% 45.06% 44.78%

2 98.39% 16.89% 16.4% 2.73% 16.89% 16.62%

3 96.63% 8.16% 24.6% 1.94% 8.16% 7.89%

4 94.12% 5.09% 32.8% 1.57% 5.09% 4.79%

5 91.19% 3.46% 41.0% 1.29% 3.46% 3.16%

6 88.05% 2.59% 49.2% 1.13% 21.33% 18.78%

Total 12.33% 96.01% 9.34% 99.00%

The model gives a 15.33% probability of the put knocking in

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Remember Tom’s Earlier Slides?

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55%

AC yr1 AC yr2 AC yr3 AC yr4 AC yr5 AC yr6 No AC, Cap returned

No AC, Cap eroded

Prob

abili

ty

Anniversary

UKX UKX / SPX UKX / SX5E

§ Data: uses prevailing market data from 1986 to 2013 to compare three theoretical “standard 5% dropper”

Backtest

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80%

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 No autocall, capital

redeemed

No autocall, capital erosion

FTSE only

FTSE / S&P dual index

FTSE / EuroStoxx dual index

Paths of the three autocall

types is similar

None of the backtestedstructures would ever

have lost any capital

§ Data: uses historical data from multi index defensive autocalls that have matured since November 2007.

§ First traded multi index autocalls in November 2007, though Dual Index more typical since 2010

Our Experience

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0%

10%

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60%

70%

80%

autocall year 1

autocall year 2

autocall year 3

autocall year 4

autocall year 5

autocall year 6

year 6, no autocall

Number of Autocallsautocall year 1 32autocall year 2 9autocall year 3 0autocall year 4 0autocall year 5 1autocall year 6 0year 6, no autocall 0

Our Experience

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40

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70%

Volatility comparison

Av.Autocall performance

Av.Index Performance

Av.Historical Vol

Av.Historical Vol (index)

AutocallYear

Av.SharpeRatio

1 1.09

2 1.35

3 -

4 -

5 1.20

6 -

6, no autocall -

A Typical Investors Journey?

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§ Data: single path analysis based using existing structures where reinvestment was into nearest Structure

0%

5%

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16-Feb-11 16-Mar-12 01-Apr-13 18-Nov-13

16-Feb-10 16-Mar-11 30-Mar-12 24-May-13

FTSE /S&Pstructure

average Index price

SocGen 22316-Feb-10 to 16-Feb-11

AC year 1Coupon = 9%

Vol: 10.77

Vol:17.72

Vol: 16.26

Vol: 9.07 Vol:

8.54

Vol: 22.38

Vol: 13.44

Vol: 12.62

HSBC 30316-Mar-11 to 16-Mar-12

AC year 1Coupon = 10%

Credit Suisse 39730-Mar-12 to 01-Apr-13

JPM 49924-May-13 to 18-Nov-13

A Typical Investors Journey?

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137.77%

151.55%

60%

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90%

100%

110%

120%

130%

140%

150%

160%

04/03/2010 20/09/2010 08/04/2011 25/10/2011 12/05/2012 28/11/2012 16/06/2013

Autocall cumulative portfolio performance

average cumulative price performance of FTSE 100 and S&P 500

Average historical volatility: 11.16%

Average historical volatility: 17.29%

Higher Absolute Returns (Lower Relative?)

Dual Index or (Slightly) Wider Credit

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§ Demonstrate that secondary market performance of Dual index autocalls with “tight credit” banks canoutperform similar FTSE only autocalls with “wide credit” banks using two traded structures

Credit Suisse 330 FTSE/SPX Dual Index Autocall (10.55%)

Start date: 20th June 2011

6 year term

60% soft protection

Autocall Barriers: 100, 100, 100, 87, 74, 60

10.55% Snowballing Return

Elders 16a Rollover – FTSE Defensive Autocall 9%

Start date: 24th June 2011

6 year term

60% soft protection

Autocall Barriers: 100, 100, 90, 80, 70, 60

9% Snowballing Return

Merrill’s Raised More Money!

The Investors Journey

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§ FTSE low point for both structures: 86.8% of its initial level, a fall of 13.2%.§ 16a low price: 81.7p.

§ CS 330 low price: 89p.

80%

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95%

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120%

20-Jun-11 28-Sep-11 06-Jan-12 15-Apr-12 24-Jul-12 01-Nov-12 09-Feb-13

16a

330

FTSE

80.00%

85.00%

90.00%

95.00%

100.00%

105.00%

110.00%

115.00%

120.00%

20-Jun-11 28-Sep-11 6-Jan-12 15-Apr-12 24-Jul-12 1-Nov-12 9-Feb-13

S&P

Tricky to Asset Allocate

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How to Allocate

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§ A good question- two answers:

1. Simple: 50 : 502. Dynamic: like AHFM allocate within the fund- measure ongoing delta

HSBC 267 FTSE/S&P Defensive Autocall (11% / -23%)

Delta x% [ UKX / SPX]

Delta 67% [ 37% / 30%]

Delta 45% [ 33% / 12%]

Delta 90% [ 63% / 27%]

Delta 75% [ 63% / 12%]

Difficulty Explaining to Clients

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How We Explain It

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§ Given you’ve probably explained a standard Defensive Autocall before we’d suggest focus on thecomparable terms:

§ A FTSE only version of the above would offer a potential coupon of 5.4%§ Alternatively a FTSE only version with the same coupon would 100,100,100,100,100,95

FTSE/ S&P Defensive Autocall (7.3%)

Underlying: FTSE 100 / S&P 500

Upside: 7.3% snowballing annual coupon, redeems early if both indices are over the annual autocall barrier

AutocallBarriers:

Year 1: 100% barrier 107.3% payoffYear 2: 95% barrier 114.6% payoffYear 3: 90% barrier 121.9% payoffYear 4: 85% barrier 129.2% payoffYear 5: 80% barrier 136.5% payoffYear 6: 75% barrier 143.8% payoff

Downside (60% EKIP)

should the structure not autocall on any of the 6 anniversaries, and at least one index has fallen by more than 40% at maturity the structure will redeem paying the original capital minus 1% for every 1% the Index had fallen below strike level

Current Terms

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Autocalls (60% soft protection) FTSE FTSE/ S&P FTSE/ Euro Stoxx

Flat barriers: 100/100/100/100/100/100 7.8% 11.00% 13.10%

5% dropping barriers: 100/95/90/85/80/75 5.40% 7.30% 8.00%

Large final barrier drop: 100/100/100/100/100/60 5.45% 7.35% 8.10%

The only way to get these away is with some defensive feature

Conclusion

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§ One more input to consider (which happens to be “cheap” wheneverything else is “expensive”)

§Many attractive investments don’t neatly fit into a box (Ruffer, ScottishMortgage, Jupiter European Opps)

§We passionately believe the pick up (higher coupons/more defensivebarriers) is worth it

Appendix

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Looking at what has traded – single index

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0%

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50%

60%

70%

autocall year 1

autocall year 2

autocall year 3

autocall year 4

autocall year 5

autocall year 6

year 6, no autocall

Number of Autocallsautocall year 1 45autocall year 2 15autocall year 3 3autocall year 4 0autocall year 5 1autocall year 6 3year 6, no autocall 7

Looking at what has traded – single index

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autocall year Av.Sharpe Ratio

1 1.09

2 1.35

3 -

4 -

5 1.20

6 -

6, no autocall -

-30

-20

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-30%

-10%

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90%

autocall year 1

autocall year 2

autocall year 3

autocall year 4

autocall year 5

autocall year 6

year 6, no autocall

Av.Autocall performance

Av.Index Performance

Av.Historical Vol

Av.Historical Vol (index)

Remember Tom’s Earlier Slides?

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Structure: FTSE 100 / S&P 500 W.O., 5% dropping barriers, Max 6 year term, Soft Capital Protection @ 60%UKX SPX headline coupon= 8.20%

year DF Probability of maturity PV of ZCB Probability of autocall PV of Contingent coupons1 99.36% 45.06% 44.78% 45.06% 3.67%2 98.39% 16.89% 16.62% 16.89% 2.73%3 96.63% 8.16% 7.89% 8.16% 1.94%4 94.12% 5.09% 4.79% 5.09% 1.57%5 91.19% 3.46% 3.16% 3.46% 1.29%6 88.05% 21.33% 18.78% 2.59% 1.12% probability of knocking-in= 15.33%

100.00% 96.01% 12.33% Put Price= 9.34% Sum of Components = 99.00%

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Structure: FTSE 100 /Euro Stoxx 50 W.O., 5% dropping barriers, Max 6 year term, Soft Capital Protection @ 60%UKX SX5E headline coupon= 9.00%

year DF Probability of maturity PV of ZCB Probability of autocall PV of Contingent coupons1 99.36% 42.63% 42.36% 42.63% 3.81%2 98.39% 15.88% 15.63% 15.88% 2.81%3 96.63% 8.00% 7.73% 8.00% 2.09%4 94.12% 5.52% 5.19% 5.52% 1.87%5 91.19% 3.82% 3.48% 3.82% 1.57%6 88.05% 24.16% 21.27% 2.92% 1.39% probability of knocking-in= 17.18%

100.00% 95.65% 13.54% Put Price= 10.19% Sum of Components = 99.00%

Remember Tom’s Earlier Slides?

Disclaimer

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