Structured Note Issuance Summary-November 18-22,2013

During the week of November 18-22, 2013 structured note issuance has been 6.8 Bn across various issuers and asset classes. Most of the issuance (260 MM) is driven by Equity Linked notes and 6.5 Bn of the issuance is driven by Interest linked products. There has been some activity in commodity linked issuance this week. For Details of the distribution refer to the chart below. Not surprisingly majority of the structured note issuance is linked to Interest rate linked by few issuers. This week, structured notes were issued with variety of flavors and interesting themes. Majority of this issuance comprised of Interest Rate related notes Read on for more details.

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You can click individual asset classes to see how the underlying issuance has happened within each asset type by underlying and Issuer.

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Underlying analysis On the Equity linked notes front there has been strong activity. Notes have been created on variety of underlyings. Index related issuance has been significant. This week issuance included notes created on the indices ( S&P 500, Stoxx 50, Russell 2000) and single names ( Pulte group, Apollo Management, Face Book, Rackspace Hosting, Best Buy and so on). There has been significant activity around Apollo capital management. Looks there is high appetite from institutional investors to conduct their portfolio balancing process. Notable notes this week were tied to Apollo Capital management Stock (6.5 MM) issued by UBS. This note belongs to the class of Yield Enhancement type. UBS created a note 90271R400with a size of 6.5 MM paying Market performance at maturity date (11/24/14). On the downside this note is exposed to one to one downside underlying performance beyond the Trigger level. One reason to participate in this kind of note is you will get a positive returns as long as the underlying is above the trigger level on the downside also. This is a good deal for risk averse investor.

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Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, Wells Fargo are major issuers of these products. AT&T has issued CAD 1 Bn Fixed rate Note to the investors.Interestingly this note is one of the largest notes issued to the investors. This week we have seen commodity note issuance tied to WTI crude oil. There has been a Currency linked note tied to USDMXN peso us issued by Goldman. Size of the note types will tell us an indication of what type structures are popular among the investors and where money is flowing. Below chart shows this theme

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Popular notes have been interest rate linked notes. Now moving on to issuers side and understanding their market penetration or competitor analysis provides some interesting insights. This week UBS, MS, GS and Barclays captured issuance market share.

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Market penetration is driven by the issuer depth in each of the asset classes. Every issuer has presence in Equity linked issuance. Goldman is only issuer to produce Currency related issuance. Morgan Stanley and JPM are active players in the Hybrid related issuance.

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Deconstruction of a Basket Structured Note on Developed Europe and Emerging Markets

Market Linked Step-Up Notes on International Equity Basket priced on 10/24/2013.

           This Market-linked Step up Note was priced by Bank of America for $10.00 totaling a public offering of slightly over $2.92 million. This note is based on an international equity basket with an 80% of the weight is based on MSCI EAFE Index and the rest in MSCI Emerging Market Index. The MSCI EAFE Index is an index made up of companies in developed nations other than the U.S. and Canada, whereas the MSCI Emerging Market Index is based on emerging global markets.

Advantages:
The advantage of this note is that it has three barriers that trigger different returns. Between $100 and $114.9 triggers a return of $11.49 or 14.90%. If the endings share value is above $114.90 than the return is based on the value at maturity by the set value of $100. If the ending is between $100 and $75 the return will be the initial investment of $100 due to the step-up feature. This means that everything below $75 is a loss of initial return.

Deconstruction:
 To replicate the upside investors would first need a long 1 unit of basket digital call set at $100. Second a long 1 unit of basket vanilla call with a strike price of $114.90. For the down side investors would need to short 1 basket down-in put with a stock price of $100 and a strike price of $75. The basket would have 80% of the weight is based on MSCI EAFE Index and the rest in MSCI Emerging Market Index.

Risk ( Market and Credit):
 It is critical to understand market risk is based on the correlated value of MSCI EAFE Index and the MSCI Emerging Market Index, with respect to their weights. The credit risk arises from BoA’s creditworthiness and the market risk arises from the equity basket performance. The step- up feature and upside call is to reward investors for take a 1-to-1 downside exposure is the value of the basket is beyond a 25% decline as well as forgoing interest payments. This indicates that the investors of this note are bullish individuals who believe only a small amount of downside protections is needed. This could be due to the weights associated with the two indexes in the basket and the correlation between the two is closer to 1 at .89 percent. Meaning they move in a similar manner so the returns would look the numbers displayed below.

Ending Value	Redemption Amount per Unit	Total Rate of Return on the Notes
$0.00	$2.50	-75.00%
$50.00	$7.50	-25.00%
$65.00	$9.00	-10.00%
$75.00	$10.00	0%
$80.00	$10.00	0%
$90.00	$10.00	0%
$94.00	$10.00	0%
$97.00	$10.00	0%
$100.00	$11.49	14.90%
$102.00	$11.49	14.90%
$105.00	$11.49	14.90%
$110.00	$11.49	14.90%
$114.90	$11.49	14.90%
$120.00	$12.00	20.00%
$130.00	$13.00	30.00%
$140.00	$14.00	40.00%
$150.00	$15.00	50.00%
$160.00	$16.00	60.00%

Structured Note Issuance Summary- November 11-15, 2013

During the week of November 11-15, 2013 structured note issuance has been 3.5 Bn across various issuers and asset classes. Most of the issuance (340 MM) is driven by Equity Linked notes and 3.17 Bn of the issuance is driven by Interest linked products. There has been some activity in commodity linked issuance this week. For Details of the distribution refer to the chart below. Not surprisingly majority of the structured note issuance is linked to Interest rate linked by single issuer. This week, structured notes were issued with variety of flavors and interesting themes. Majority of this issuance comprised of Interest Rate related notes Read on for more details.

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You can click individual asset classes to see how the underlying issuance has happened within each asset type by underlying and Issuer. Underlying analysis On the Equity linked notes front there has been strong activity. Notes have been created on variety of underlyings. Index related issuance has been significant. This week issuance included notes created on the indices ( S&P 500, Stoxx 50, Russell 2000) and single names ( Pulte group, Gilead Sciences,Tesoro,Aruba, JP Morgan Proprietary index, UBS Commodity index, Pandora and so on). There has been significant activity around Apple Stock. Looks there is high appetite from institutional investors to conduct their portfolio balancing process. Notable notes this week were tied to Apple Stock (36 MM) issued by Barclays. This note belongs to the class of leveraged and Yield Enhancement type. Barclays created a note 312070with a size of 36 MM paying Market performance leveraged at maturity date (11/28/14). On the downside this note is exposed to one to one downside underlying performance beyond the Initial level. One reason to participate in this kind of note is you are 22% return on the note above initial level. Risk to this note is exposure to initial principal. This note would be suitable to some investors who have captured good returns on the note and are willing to forgo some of those returns in exchange for 22% returns.

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Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, Wells Fargo are major issuers of these products. There has been some Range accrual note issuance. This week we have seen commodity note issuance tied to WTI crude oil. There has been a quanto note based Equity index has been issued by Credit Suisse. We will discuss later the details of this note. Size of the note types will tell us an indication of what type structures are popular among the investors and where money is flowing. Below chart shows this theme

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Popular notes have been interest rate linked notes. Now moving on to issuers side and understanding their market penetration or competitor analysis provides some interesting insights. This week UBS, MS, GS and Barclays captured issuance market share.

Learn About Tableau

Market penetration is driven by the issuer depth in each of the asset classes. Every issuer has presence in Equity linked issuance. Goldman is only issuer to produce Currency related issuance. Morgan Stanley and JPM are active players in the Hybrid related issuance.

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Quanto Structured Notehas been issued by Credit Suisse. The notes are designed for investors who seek a return at maturity linked to the performance of the STOXX® Europe 600 Basic Resources Index and the European Union euro relative to the U.S. dollar (the number of U.S. dollars per one European Union euro), as adjusted by the Participation Rate. Investors should be willing to forgo interest and dividend payments and, if the Underlying and the European Union euro relative to the U.S. dollar, declines by more than approximately 0.79365%, be willing to lose some or all of their investment. For additional details please refer to the Issuance summary table.

Deconstruction of Reverse Convertible on Facebook

Structured note markets are replete with stories of being burnt by investing in Reverse Convertibles. SLCG has an article on apple based reverse convertibles Investors are being told clearly understand the risks of investing in the reverse convertibles. Despite so much of hoopla around these notes, we see issuers not stopping from any further issuance of these notes. This vindicates the fact that there is clear appetite for these notes among investors. Below is an analysis of a reverse convertible issued on Facebook. Reverse Convertible Securities on Facebook, Inc. Common Stock due April 1, 2014,

This was priced by the Royal Bank of Canada or RBC on Sept 27, 2013 at $10 per security with a total price to public of $5,169,640. The note is based on Facebook, a worldwide social networking company with a memorable IPO. On the day of pricing for this Reverse Convertible the stock was valued at $51.24 with a market cap of $121.16 Billion. A company that gets average individual investors excited about for its growth. The cause of the potential is the amount of members since it launched in the early parts of 2004 as well the recent spread of internet access through mobile devices for new members. Average investors can replicate this type of security by going, on a time scale of six months, long a bond with better coupon yield than the dividend yield of Facebook shares while shorting a down and in put option and tying those two assets together by investing in a zero coupon bond to discount the cash flows to the present day. All that at $10.00 to replicate a single Reverse Convertible note. Or purchase this security to get the benefits, at a low cost, without the hassle.

 RBC is compensating for the risk by giving a coupon payment. The risk is that there is no guarantee the principal invested will return because of the dependency on the relationship of Facebook shares to the barrier level. Meaning investors could lose the entire investment. Because the credit risk of this security is based on RBC while the market risk belongs to Facebook.

 On the up side the RBC decided to compensate for the risk involved in this security by giving a coupon rate of 13.20% per annum. This turns out to be $0.11 per month or on a 30/360 basis. The payoff is derived by a barrier lever to 80% of the underlying stock value on the note’s pricing date. In this case it would be $40.99 out of $51.24.

The result is if Facebook is valued at equal to or greater than the downside threshold level the stated principle plus the final coupon payment is received. On the other hand if it is below the threshold level than either a number of shares for Facebook are received in exchange or the cash value of the shares is received together with the final coupon payment. The final price on maturity is based on volatility and risk. It is important to notice that any value below the $44.84 mark is correlated with a steep drop in returns. It is also important to notice that any value at or above the same mark will only see a flat return of $10.66.

Hypothetical underlying stock closing price on valuation date	Value of total payment per RevCons	Total return on the RevCons
$0.00	$0.66	-93.40%
$12.81	$3.16	-68.40%
$32.03	$6.91	-30.90%
$40.95	$8.65	-13.50%
$44.84	$10.66	6.60%
$51.24	$10.66	6.60%
$70.46	$10.66	6.60%
$89.67	$10.66	6.60%

Contributed by Karthik Misra at Gatick Financial services

Structured Note Issuance Summary-November 2-8, 2013

During the week of November 2-8, 2013 structured note issuance has been 10.3 Bn across various issuers and asset classes. Most of the issuance (466 MM) is driven by Equity Linked notes and 9.78 Bn of the issuance is driven by Interest linked products. There has been some activity in commodity linked issuance this week. For Details of the distribution refer to the chart below. Not surprisingly majority of the structured note issuance is linked to Interest rate linked by single issuer. This week, structured notes were issued with variety of flavors and interesting themes. Majority of this issuance comprised of Interest Rate related notes.Bank of america issued 13 MM silver price tied note and further interesting market summary details. Read on for more details.

Learn About Tableau

You can click individual asset classes to see how the underlying issuance has happened within each asset type by underlying and Issuer. Underlying analysis On the Equity linked notes front there has been strong activity. Notes have been created on variety of underlyings. Index related issuance has been significant. This week issuance included notes created on the indices ( S&P 500, Stoxx 50, Russell 2000) and single names ( Pulte group, Gilead Sciences,Tesoro,Aruba, JP Morgan Proprietary index, UBS Commodity index, Pandora and so on). Notes based on SPX (123 MM) and Euro Stoxx index (55 MM)have been created. Looks there is high appetite from institutional investors to conduct their portfolio balancing process. Notable notes this week were tied to SPX Index (22 MM) issued by HSBC. This note belongs to the class of leveraged and Yield Enhancement type. HSBC created a note Cusip:40434B206with a size of 22 MM paying Market performance leveraged at maturity date (5/6/19). On the downside this note is exposed to one to one downside underlying performance beyond the barrier level of 65%. One reason to participate in this kind of note is you are getting market performance both upside and downside. Similar type of Dual Directional Trigger plus notes have been analyzed for further understanding around the mechanics of the note.

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Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, Wells Fargo are major issuers of these products. There has been some Range accrual note issuance. This week we have seen commodity note issuance tied to Silver and WTI crude oil. We will discuss later the details of the Silver note. Size of the note types will tell us an indication of what type structures are popular among the investors and where money is flowing. Below chart shows this theme

Learn About Tableau

Popular notes have been interest rate linked notes. Now moving on to issuers side and understanding their market penetration or competitor analysis provides some interesting insights. This week UBS, MS, GS and Barclays captured issuance market share.

Learn About Tableau

Market penetration is driven by the issuer depth in each of the asset classes. Every issuer has presence in Equity linked issuance. Goldman is only issuer to produce Currency related issuance. Morgan Stanley and JPM are active players in the Hybrid related issuance.

Learn About Tableau

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Commodity Note issuance has spiked this week. Bank of america issued a note tied to Silver price.06053G180 This note pays thrice the performance of the silver and capped at 22%. For further analysis contact Gatick Financial Services For additional details please refer to the Issuance summary table.

Model Risk Management- Needs a thoughtout execution strategy

Model Risk Management – Efficient, Effective and Transparent
“Can you imagine risk of nuclear power generation without functions to monitor and control conditions of the reactor?”
An evolving environment
The global financial crisis ushered in a new era of increased regulatory scrutiny. In this new environment, regulators have, and continue to implement a host of new laws and rules to prevent a repeat of the crisis. A number of these regulations, namely, the Dodd-Frank Act, Basel III framework and Solvency Act affect financial institutions around the way they manage a broad range of business services and activities including credit decisions and valuation (e.g., exposures, instruments). To assist in the management and decision making process, banks have been increasingly relying on quantitative models for these activities. However, more recently banks have extended these models into more complex activities such as enterprise wide risk measurement and determining minimum regulatory capital. This reliance on models carries with it a high level of operational risk, and because of the guidance issued by Federal Reserve in SR 11-7  provided guidance for model risk management by broadening the scope of model validation activity to manage model risk like other types of risks.  Now, banks have little option but to invest heavily in implementing effective model risk management in order to prevent incorrect business and financial decisions being made. At a time when institutions are looking at ways to reduce cost and increase efficiency, enforced ring fencing of high cost model risk management has been a pain point for many banks.
Changing the way you do business
Model risk management begins with robust model design, development, and model review & validation deployment, accompanied by sound monitoring process. These aspects form various stages of the model life cycle, and impact senior management, the Board of directors, Internal Audit, model developers, owners, users and model validators. Model governance, an important aspect in model risk management, sets an effective framework with defined roles and responsibilities for clear communication of model limitations and assumptions to improve transparency, as well as the authority to restrict model usage among various stakeholders.

In the implementation of model risk management, the rising costs of implementing various aspects of the model life cycle and the risk of adverse consequences from failure of the models have become clear pain points for senior management. Therefore, Banks have to think how to integrate various aspects of model life cycle within the framework of model risk management by optimizing cost efficiency and model effectiveness. Effective model risk management can help mitigate the impact of these pain points. Effective management of model risk requires an overall risk management framework which must be built on a coherent architecture that includes identification, assessment, and mitigation, monitoring and reporting activities at various stages of model life cycle. This will result in important benefits by ensuring effectiveness of the MRM Communications of model risk assessment to all the stakeholders.

• This way senior management and regulators clearly understand the embedded model risk in the models they are using.

Cost efficiency gains with in model life cycle activities.

• Implementation and ongoing monitoring and validation costs can be controlled by efficiently managing model validation and model development processes with proper model governance function.
• Model validation process should be transformed into a cost effective and efficient process by redesigning to handle large inventory of models with less number of personnel in limited time frames.

Strategy
Currently many institutions have either initiated the work or already in the midst of the implementation of the model risk management. All of these firms are racing towards the deadline of decemeber 2014. They are investing resources and personnel reluctantly. As they consider model risk management is leading to more pressure on their revenues. In a short period of time banks have to validate their, capital planning models, Risk management models, Credit models and other VAR models. for each of these models, examining the inputs, output analysis, bench marking against industry standard models and performing a comprehensive test for theoretical soundness of the model needs skills. Along with the validation of models, ongoing monitoring of the models and periodic validation needs investments. There are many ways one can think to solve the problem of performing a cost efficient model risk management. All of these approaches look at the concept of identify the target, understand the target and execute the plan on the target. I think over the last decade many of the valuation methodologies have matured with newer one's being invented in the wake of financial crisis. Valuation processes and models can be segregated into high to low risk categories and then they can be validated against a battery of tests and document and report the results. Efficient and effective model risk management is the nirvana state regulators are on the look out for. How this will play out only time will answer.

Structured Note Issuance Summary, October 24-31, 2013

During the week of October 28-31, 2013 structured note issuance has been 3.32 Bn across various issuers and asset classes. Most of the issuance (1.52 Bn) is driven by Equity Linked notes and 1.72 Bn of the issuance is driven by Interest linked products. There has been some activity in commodity linked issuance this week. For Details of the distribution refer to the chart below. Not surprisingly majority of the structured note issuance is linked to Interest rate linked by single issuer. This week, structured notes were issued with variety of flavors and interesting themes. Majority of this issuance comprised of Interest Rate related notes.Bank of america issued 15 MM silver price tied note and further interesting market summary details. Read on for more details.

Learn About Tableau

You can click individual asset classes to see how the underlying issuance has happened within each asset type by underlying and Issuer. Underlying analysis On the Equity linked notes front there has been strong activity. Notes have been created on variety of underlyings. Index related issuance has been significant. This week issuance included notes created on the indices ( S&P 500, Stoxx 50, Russell 2000) and single names ( Pulte group, Gilead Sciences,Tesoro,Aruba, JP Morgan Proprietary index, UBS Commodity index, Pandora and so on). Notes based on SPX (383 MM) and Euro Stoxx index (419 MM)have been created. Looks there is high appetite from institutional investors to conduct their portfolio balancing process. Notable notes this week were tied to Euro Stoxx 50 Index (229 MM) issued by Bank of America. This note belongs to the class of leveraged and Yield Enhancement type. Bank of America created a note Cusip:06053F851with a size of 229 MM paying 47% coupon income at maturity date (9/30/16). On the downside this note is exposed to one to one downside underlying performance. One reason to participate in this kind of note is you are getting at least 47% coupon return or higher.

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Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, Wells Fargo are major issuers of these products. There has been some Range accrual note issuance. There has been some issuance activity in Currency segment of the markets. Goldman issued note linked to BRL with protection on losses up to 30% depreciation in the BRL exchange rate and potential to gain 30% if the currency appreciates above 3%. This week we have seen commodity note issuance tied to Silver and WTI crude oil. We will discuss later the details of the Silver note. Size of the note types will tell us an indication of what type structures are popular among the investors and where money is flowing. Below chart shows this theme

Learn About Tableau

Popular notes have been interest rate linked notes. Now moving on to issuers side and understanding their market penetration or competitor analysis provides some interesting insights. This week UBS, MS, GS and Barclays captured issuance market share.

Learn About Tableau

Market penetration is driven by the issuer depth in each of the asset classes. Every issuer has presence in Equity linked issuance. Goldman is only issuer to produce Currency related issuance. Morgan Stanley and JPM are active players in the Hybrid related issuance.

Learn About Tableau

Learn About Tableau

Commodity Note issuance has spiked this week. Bank of america issued a note tied to Silver price.06053F885 This note pays coupon of 11% or 16% or 22% depending on being called at each of the call dates before the maturity of the October 2014. This note is called as Strategic Accelerated Redemption Securities. This structure is monetizing view that Silver will rise slightly but not extremely. For further analysis contact Gatick Financial Services For additional details please refer to the Issuance summary table.