Broker Seminar March 2018 Agenda The Structured Investment Journey - - PowerPoint PPT Presentation

Broker Seminar March 2018

Agenda

• The Structured Investment Journey
• The SRP Market from 2014 to 2017
• Comparing Ireland and the rest of Europe
• Its not all about Capital Protection
• How accepting some Capital at Risk allows for creativity in Managing

Risk and Generating Returns

• Things to watch out for
• Some new product innovations/features are good and some are less so
• Our Current Range of Structured Investments
• Reminder of the Key Features of our 3 Core Structured Investments
• Other Upcoming Broker Training & Education
• Closing Summary, Questions & Answers

Structured Investment Journey

Ireland & Europe since 2015

The Structured Investment Journey

• Facts & Figures (2015 to 2017)
• Ireland v Rest of Europe
• Product Trends

• The Irish Structured Investment market averaged €1.1bn

and achieved sales of over €1bn every year in the 15 years from 2000 to 2014

• The market shrank from 2015 when Bank Assurers began to

focus on a “funds only” investment solutions and platforms

• The breakdown of the Irish market is more interesting

Structured Investment sales in Ireland 2015 2016 2017 921,000,000 719,000,000 522,000,000

Facts & Figures – The Irish SRP Market

Breakdown of the Irish SRP Market

2015 Sales Share 2016 Sales Share 2017 Sales Share Capital at Risk 180,000,000 19.54% 304,000,000 42.28% 277,000,000 53.07% Partial Capital Protection 479,000,000 52.01% 359,000,000 49.93% 219,000,000 41.95% 100% Capital Protection 262,000,000 28.45% 54,000,000 7.51% 26,000,000 4.09% > 100% Capital Protection 0% 2,000,000 0.28% 0% Total 921,000,000 719,000,0000 522,000,000

Breakdown of the European SRP Market

2015 Sales Share 2016 Sales Share 2017 Sales Share Capital at Risk 49,560,000,000 52.20% 50,247,000,000 52.35% 48,990,000,000 68.17% Partial Capital Protection 19,639,000,000 20.69% 11,501,000,000 11.98% 7,822,000,000 10.88% 100% Capital Protection 20,709,000,000 21.81% 26,156,000,000 27.25% 10,725,000,000 14.92% > 100% Capital Protection 5,027,000,000 5.30% 8,072,000,000 8.41% 4,328,000,000 6.02% Total 94,935,000,000 95,976,000,000 71,865,000,000

Compare Irish & European SRP Market

2015 2016 2017 Ireland Europe Ireland Europe Ireland Europe Capital at Risk 19.54% 52.20% 42.28% 52.35% 53.07% 68.17% Partial Capital Protection 52.01% 20.69% 49.93% 11.98% 41.95% 10.88% 100% Capital Protection 28.45% 21.81% 7.51% 27.25% 4.98% 14.92% > 100% Capital Protection 0% 5.30% 0.28% 8.41% 0% 6.02%

Irish v European SRP Market Trends

2015 2016 2017

3 Year Change

Ireland Europe Ireland Europe Ireland Europe

Ireland

Europe Capital at Risk 19.54% 52.20% 42.28% 52.35% 53.07% 68.17%

+53.89%

• 1.15%

Partial Capital Protection 52.01% 20.69% 49.93% 11.98% 41.95% 10.88%

• 54.28%
• 60.17%

100% Capital Protection 28.45% 21.81% 7.51% 27.25% 4.98% 14.92%

• 90.08%
• 48.21%

> 100% Capital Protection 0% 5.30% 0.28% 8.41% 0% 6.02%

• 100%
• 13.90%

Not all about Capital Protection

Capital at Risk = Creativity & Innovation

Its not all about Capital Protection

• The relationship between Risk & Return
• How Structured Investments work?
• Capital Protected Bonds
• Capital at Risk Bonds
• Introducing Capital at Risk
• Accepting some Capital at Risk allows for creativity in
• Managing Risk and/or
• Generating Returns
• Our Current Range of Structured Investments include 2 of

the most common Capital at Risk structures

• Auto Callable – Kick Out Bonds for Capital Growth
• Reverse Convertible – Fixed Return Bonds for Income

Relationship between Risk & Return

How Structured Investments work?

• Firstly, Capital Protected Bonds
• Formerly Tracker Bonds
• Now mostly listed Notes/Certificates
• All Capital Protected Bonds have 3 parts:

1. Capital Protection Part: the amount set aside to pay for the Capital Protected Level 2. Investment Upside Part: the amount spent on to generate returns 3. Upfront Fees: amount payable to Broker & Manufacturer

Example 90% Capital Protected cont.

• Example 5 Year Capital Protected Bond:

1. 90% Capital Protection: 86.2% set aside initially will be worth 90% at maturity 2. Investment Upside Part: 9% of the total spend 3. Upfront Fees: 4.8% of the total spend

• Investment Part: What can 9% buy?
• A EuroStoxx 50 call option premium is around 18% = 50% Participation
• A Basket of Low Vol Absolute Return Funds/Bond Funds call option

premium is around 4.5% = 200% Participation

• Our Solactive European Equity Index call option premium is 6% =

150% Participation Note: All figures are for illustrative purposes only

How Structured Investments work?

• Capital Protected Bonds
• Capital at Risk Bonds

1. More than Full Capital at Risk 2. Full Capital at Risk with No Protection 3. Full Capital at Risk with Soft Capital Protection 4. Full Capital at Risk with Conditional Capital Protection 5. Other Derivatives

Introducing Capital at Risk

• Accepting some Capital at Risk allows for creativity in
• Managing risk and/or Generating returns
• Managing Risk
• Soft Capital Protection
• Downside Barrier (above = good, below = potential for loss)
• Generating Returns
• Fixed/Guaranteed Returns
• Returns from Rising, Flat or Falling Markets
• Higher Product Performance than Market Performance
• New Asset Classes/Regions/Sectors/Futures/Options etc.
• Our Current Range of Structured Investments include 2 of

the most common Capital at Risk structures

• Auto Callable – Kick Out Bonds for Capital Growth
• Reverse Convertible – Fixed Return Bonds for Income

Capital at Risk – for Fixed Return/Income

Typical Fixed Return/Income Bond Bond Parts Broker Solutions and Investors The Issuing Bank Down and In Knock In Put Option Benefit Above Barrier Benefit Below Barrier Reason for Trade Annual Coupon Example 3.833% (23% over 6 years) Using Long Positions/Dividends in Equity Indices Corresponding Derivative (Hedge DIKIP) Cap the Return Fee Upfront Fees Execution Fee Total 100% 100%

Capital at Risk – for Capital Growth

Typical Kick Out/Auto Call Bond Bond Parts Broker Solutions and Investors The Issuing Bank Down and In Knock In Put Option Benefit Above Barrier Benefit Below Barrier Reason for Trade Kick Out/Auto Call Example 5% every 6 months if greater than 90% Using Long Positions/Dividends in Underlying Equities Other Derivatives to Hedge exposure to DIKIP & Auto Call Cap the Return Fee Upfront Fees Execution Fee Total 100% 100%

Things to watch for

Not all innovations and features are positive

Things to watch out for….

• Modern Structured Investments facilitate great innovation

and creativity opportunities but beware: The majority of additional features are added to make the product look better rather than actually improve it Most “rinky dinks” make the product cheaper rather than better Rule of Thumb: the simpler the product payoff, the more likely it is that it will work

Things to watch out for: Examples

Usually Positive Product Features Usually Negative Product Features Adding returns to 100% of initial Adding returns to 90% of initial Averaging: For no more than 12 months and monthly Averaging: For more than 12 months, quarterly/6 monthly/annually etc. European Capital at Risk Barriers:

• bserved at maturity only

American Capital at Risk Barriers:

• bserved continuously

Constant Kick Out Barriers Step Down Kick Out Barriers Synthetic Indices with positive & negative features illustrated/marketed with equal prominence Synthetic Indices with negative features not clearly disclosed or without Warning Boxes in relation to negatives Being clear that Underlying Investments with low risk/volatility are likely to give low investment returns Suggesting that Underlying Investments with low risk/volatility can provide high returns or market returns

Example 1 Returns added to 100% or 90%

• 5 Year, 90% Capital Protected Bond
• Option 1: 200% Participation added to 90% Capital Protected Level
• Option 2: 150% Participation added to 100% of Initial Investment

Performance of Underlying Option 1 Product Return Option 2 Product Return

• 15%
• 10%
• 10%
• 10%
• 10%
• 10%
• 5%
• 10%
• 5%

0%

• 10%

0% +5% 0% 7.5% +10% 10% 15% +15% 20% 22.5% +20% 30% 30% +25% 40% 37.5%

Example 1 Returns added to 100% or 90%

• Why add returns to 90% of initial investment amount rather

than 100% of initial investment amount

• Results in Higher Participation: Marketing of product is easier but does

the client benefit?

• You have a strong view that the Underlying Investment is going to

produce high returns (the Higher Participation will accelerate returns)

• Sample Pricing Dynamics for Product launched in February
• Product with Absolute Return Underlying with returns added to 90%

Capital Protected Level gave 225% Participation and 5% Upfront Fees

• Product with same Absolute Return Underlying with returns added to

100% of Initial Investment gave 100% Participation and 2% Upfront Fees

Example 2: Constant v Step Down Barriers

Feature Product Option 1 Product Option 2 Kick Out Barrier 90% of initial After 1 Year and 6 monthly thereafter 100% at end of years 1 & 2 95% at end of year 3 90% at end of year 4 80% at end of year 5 Potential Coupon 10% after year 1 (5% every 6 months thereafter) 12% each year Probability

• f Kick Out

Higher Lower

• Comparing 2 similar Kick Out Bonds

Example 2: Constant v Step Down Barriers

• Why is probability of Kick Out higher in a Bond with

Constant rather than Step Down Kick Out Barrier?

• Back Testing shows that Kick Outs are more likely in the

early years

• You need Barriers to be as low as possible at the start of the

term rather than at the end of the term to maximise the probability of returns

Example Back Test of Kick Out Bond 7

• 2,610 5 year periods from 6 January 2003 to 6 January 2018

Return Term No of times Probability 0% N/A 0% 10% 1 year 574 21.99% 10% to 20% 1.5 to 2 years 1,928 73.87% 20% to 30% 2 to 3 years 58 2.22% 31% to 40% 3.5 to 4 years 11 0.42% 41% to 50% 4.5 to 5 years 18 0.69% Negative 5 years 21 0.80% Minimum Return -49.69% Average Return: 8.37% Maximum Return: 50%

Example Back Test of Kick Out Bond 7

Source: BNP Paribas, January 2018

Current Range of Investments

3 Core Investment Solutions

Our Current Range of Investments

Broker Training & Education

New Online Training with CPD potential

Broker Training & Education

• New Online Training and Education Portal on our website
• Designed to demonstrate compliance with the new training and

knowledge requirements for Financial Brokers and Product Producers under Addendum to CPC and/or MiFID II

• Launching in the Summer 2018
• Online Examinations (on SRPs generally and on each product)
• Pass shows:
• Broker understands our products and
• Product Producer has ensured that Broker understands products
• We will apply for CPD
• Quarterly Investment Seminar Meetings throughout 2018
• 2018 Q1 today with at least 3 more later in the year
• Ad Hoc Online Seminars to discuss topical matters affecting Brokers
• Other supports for individual Broker firms as required

Closing Summary Questions & Answers

Summary – Topics discussed

• 1. The Structured Investment Journey
• 2. Its not all about Capital Protection
• 3. Things to watch out for
• 4. Our Current Range of Structured Investments
• 5. Other Upcoming Broker Training & Education

Questions?

Risk Warning/Disclaimer

This presentation is intended for and is only for use by regulated Financial Broker firms This presentation should not be provided to potential investors All Product Calculation figures are for illustrative purposes

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MMPI Limited trading as Broker Solutions is regulated by the Central Bank of Ireland