Sunday, August 24, 2014

Potentially dangerous Inverse structured note investment on Corn from UBS

UBS has created an interesting structured note to give exposure to overflowing Corn markets. Corn markets are seeing bumper crop yields and prices are trending downwards. For latest corn news on bumper crop yields: http://www.agweb.com/crops/corn/. 

Prospects of bumper harvests sent Chicago futures tumbling into bear markets in July2014, two years after a drought eroded output and sparked the highest prices ever. Cheaper grain is bolstering profit for buyers including Tyson Foods Inc. and Archer-Daniels-Midland Co., encouraging some cattle producers in the Great Plains to expand herds, and eroding income for farmers who say increased output will make up for some of the slump.

Corn is typically traded on futures market. CBOT http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/corn.html.

In anticipation of higher corn crop yields futures have been trending down. 

Investing Opportunity:  Investors in futures market can short the futures to monetize their view on the rising crop yields. Retail investors can get exposure to this market using structured notes. UBS has done exactly the same by creating am inverse structured note that gains when the corn prices fall and vice versa.

Investment problem: Gatick global solutions has analyzed this note using our quantitative metric and found interestingly this note has chances of losing more than 100 percent of your investment.  We wanted to look at whether this is possible and under what situations.


In this investment, returns are structured as follows

Note will be called on each of quarterly observation dates with a 5% return on 1st observation date, 10% return on 2nd observation date, 15% return on 3rd observation date and 20% return on 4th observation date respectively, if corn price is less than initial price of 356.75.

This is a good feature, as investment will mature soon if the corn market behaves as expected and generates more crop and lower price. That is why auto callable feature is an autopilot feature to protect the investment.

if notes are not called and on the maturity if the note is above the initial level, then investor is protected from rise in the corn price up to 23% of the initial level. Above trigger level of 23% onwards, this note will participate 1 to 1 in corn price performance.

Interestingly, here the problem arises, if the corn price rises above 100% on the expiration date then the investor is losing investment of more than 100%. In this note, if the final future price settles above 713 cents then the investment will start loosing above his investment. (In other words he might have to pay the Issuer on the note).



Retail Investors should be cautious and have to understand the inverse risk profile of the note before they invest in the note.

For further details, refer to the structured note investment analyzer.

Sunday, August 17, 2014

Structured Note Issuance Summary – August week 1-2, 2014



During the week of Aug4- Aug15, 2014 structured note issuance has been $18.5 Billion across various issuers and asset classes. Most of the issuance ($1.16 Billion) is driven by Equity Linked notes and $17.27 Billion 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.



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 a good size activity. Notes have been created on variety of underlying. 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 ( Amazon, Apple, Genworth Financial, Market Vector Junior Gold Miners ETF, and so on). There has been significant activity around basket linked notes.

Comparing this week to last week there’s less notes being issued. Among the high notional notes is the $101 million on a Basket of 20 by BMO. Another one by Barclays is on General Electric for $80.8 million. Than GS on the TOPIX index for $19.4 million. JPM issues a note of $50.1 million on a basket of two. The Euro Stoxx 50 Index was used as an underlying by GS for a notional of $15.3 million. Deutsche Bank used a notional of $15.1 million and $14.9 million on SP 500 and MSCI EAFE Index respectively.



Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, GS and a few others are major issuers of these products.

This week we have seen commodity note issuance on Brent Crude Oil by J.P. Morgan, Deutsch Bank used WTI Crude Oil as an underlying for two notes and UBS issued a note on Corn with a notional of $2.1 million. Deutsche Bank issues a hybrid note on WTI Crude Oil and the Market Vectors Gold Miners ETF for $10.1 million.

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



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.



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.







Sunday, August 10, 2014

Structured Note Issuance Summary – August week 1, 2014



During the week of Aug4- Aug8, 2014 structured note issuance has been $8.1 Billion across various issuers and asset classes. Most of the issuance ($543.5 Million) is driven by Equity Linked notes and $7.5 Billion 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.



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 little activity. Notes have been created on variety of underlying. 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 ( Amazon, Apple, Genworth Financial, Market Vector Junior Gold Miners ETF, and so on). There has been significant activity around basket linked notes.

Comparing this week to last week there’s less notes being issued. Among the high notional notes is the $39.3 million on the SP 500 by RBC. Another one by Credit Suisse is on SP 500 for $31.5 million and Wells Fargo on the same index for $29.8 million. Barclays issued a note on Walgreen for $15.5 million. UBS issued a note on a basket of 17 for $16.3 million notional. RBC issued a note on Cypress Semiconductor Corporation for $4.7 million notional. JPM issued a note on Lion Gate Entertainment Corporation for $2.7 million notional.



Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, RBC and few other major issuers of these products.

This week we have seen commodity note issuance tied to Commodity Baskets and Crude Oil by Morgan Stanley..

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



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.



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.







Tuesday, August 5, 2014

Leveraged Capped return Notes on SPX - Should one invest?

HSBC has created a Note with 3 times leverage and maximum profit capped at 10% with a maturity of 14 months. On the down side this note will participate 1 to 1 in down side performance. After reviewing this note with the lens of our Quantitative metrics we think this is note is not for a conservative faint hearted investor. As this note exposes the investor to complete downside performance. One should be careful to invest in this kind of note.


 I gotten interested to analyze this note for few reasons. Firstly, size of the note is 162 Millions. Considering the issuance sizes of various notes, this is note is of relatively large size. Looks like some big institutional client is need of this well crafted exposure to SPX over 14 month period. Alright, second reason for choosing this note is the return profile. This note provides 3 times leverage with return capped at 10%. This means, investor will benefit if SPX rises by 10% only. If SPX rises beyond 10% then note underperforms the underlying index. On the other hand,if SPX Index falls from the initial level investor is exposed to that down performance.

This kind of profile where return is capped with full down side exposure is a very common theme that we have been seeing. We have seen, notes created on single names and indices alike, issuers have created this leverage capped notes with down side exposure.

This type of note cannot be analyzed in isolation to understand the significance of its creation. Rather there are some specific hedging needs that needs to be understood to get the context of the note issuance.

This means not all structured notes are created same. Each one has a unique investment thesis and purpose. One has to understand them to appreciate the creation of the structured Note and before investing.





Sunday, August 3, 2014

Volcker Rule - Some Facts around Quantitative metrics

Volcker Rule is another regulation aimed at restraining banks from engaging proprietary trading. This rule has various components to it. Some aspects deal with compliance program and rules, few other pertains to Quantitative metrics and reporting requirements. I have focused this article on few facts around how trading desks will conduct their quantitative metrics reporting and interpretation.

My observations:

1) Volcker Metrics requirements create huge reporting requirements for the banks at trading desk level
2) Fed examiners will have tough time to interpret some of these metrics as calculation methodologies are highly arcane.
3) Banks will have to build out the Volcker story to provide the details of why and how they can be exempted for market making activity.
4) I strongly think if transparency in reporting the trading activity happens then there will be no need for any kind restraints on market making activity.
5) FED should leverage the SDR data from depositories  to analyze the banks. As it contains all the information pertaining to transactions
6) I definitely like the inventory metrics and they can help understand the desk trading whether it is customer facing or not
7) Volcker rule another requirement of RENTD ( Reasonably estimate near term demand). I think this one will be difficult to estimate.

Lastly, Volcker rule wants to restrain bank trading activity but, trading is like flow of water flow. If you put restraint in one direction then it water will find its next path of flow.

Below is the detailed version facts on Volcker rule.

Structured Note Issuance Summary – July week 1-5, 2014



During the week of July 1-Aug1, 2014 structured note issuance has been 60.9 Bn across various issuers and asset classes. Most of the issuance (4.4 Bn) is driven by Equity Linked notes and 56.3 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.



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 ( Face Book, Amazon, Pulte Group, Apple, Yahoo and so on). There has been significant activity around basket linked notes.

Comparing this week to last week there’s more notes being issued. Among the high notional notes is the $162 million on the SP 500 by HSBC. Another one by HSBC is on KBW Bank Index for $86.5 million and a second one with $30.8 million. Morgan Stanly also issued a note on the same KBS Bank Index for $40.5 million. Bank of America played two different notes on the S&P Oil & Gas Exploration and Production Select Industry Index for $55.9 million and $61.4 million. Bank of America also issued a $54.88 million notional note on the PHLX Housing Sector Index.



Interest rate linked issuance limited to standard, step up callable notes and Fixed rate notes. Activity has been subdued this week.Citigroup, RBC and few other major issuers of these products.

This week we have seen commodity note issuance tied to Commodity Baskets and Crude Oil by Morgan Stanley..

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



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.



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.