September 2014

NOT FOR US & ASIAN DISTRIBUTION

CONFIDENTIAL

Global Equity Flow

STRUCTURED PRODUCTS & THEIR IMPACT

ON MARKETS: WHAT YOU NEED TO KNOW
Delphine Leblond-Limpalar, CFA
Director, SG Global Engineering and Advisory
delphine.leblond-limpalaer@sgcib.com

+44 207 762 5771

This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/CE Directive on markets in financial
instruments acting for their own account and categorized as eligible counterparties or professional clients. Use of this communication with or by any other
party is prohibited.

P. 1

AGENDA

1. Structured products : where means what

2. Impact analysis on parameters

Volatility
Skew
Repo
Dividends

P. 2

STRUCTURED PRODUCTS :
WHERE MEANS WHAT

P. 3

LESS ISSUANCE BUT MORE REGULATION

Basel II publication on
trading books: July
2005

Announcement of AQR :
October 2013

Basel II
release:
June 2004
MIFID : Nov
2007

Basel III framework :

Dec 2010

P. 4

WHERE MEANS WHAT

Autocallable/worst-off on
KOSPI & HSCEI and also
NKY, SPX, SX5E

Variable
Annuities

Uridashis

Autocallables

Variable
annuities

Capital
guaranteed
products

P. 5

WHY IS THERE MORE IMPACT IN ASIA? BALANCE IS KEY

Average yearly vega issued via SP vs total vega traded for options >1Y maturity (m)
(SG estimates)
1200

1000

800

600

400

200

SPX

SX5E

NKY

HSCEI

KOSPI2

Source: Bloomberg, SG CIB Cross Asset Research, SG CIB

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER
TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

alphaspirit - Fotolia.com / Sashkin - Fotolia.com

P. 6

VOLATILITY/SKEW

P. 7

VOLATILITY THE NIKKEI CASE

Fear is the path to the dark side

Yoda
The path is the fear of the trader
SocGen
17000

Spot price

27
26

16000

25

15000

24

14000

23
13000

22
12000
21
11000

20
1Y ATM IV (rhs)

10000
9000
8000
May 11

19
18

Aug 11

Nov 11

Feb 12 May 12 Aug 12

Nov 12

Feb 13 May 13 Aug 13

Nov 13

17
Feb 14 May 14 Aug 14

Source: SG CIB Cross Asset Research/Derivatives, www.starwars.com

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A
RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 8

THE POWER OF BALANCED FLOW

Spot/Vol correlation

EuroSTOXX 50

NIKKEI
0.6

0.6

1Y 100% IV

0.4

0.4

0.2

0.2

0
Jul 10

Jan 11

Jul 11

Jan 12

Jul 12

Jan 13

Jul 13

Jan 14

-0.2
-0.4

Jul 14

0
Aug 10

-0.2

5Y 100% IV

Feb 11

Aug 11

Feb 12

Aug 12

Feb 13

Aug 13

Feb 14

1Y 70% IV

-0.4

-0.6
-0.6

5Y 70% IV

-0.8
-0.8

-1
-1
Source: Bloomberg, SG CIB Cross Asset Research/Derivatives, SG CIB Trading

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST
PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 9

THE SKEW CONUNDRUM

Nikkei 12M Skew & Spot

17000

spot

16000

15000

14000
4
13000
3
12000
2
11000
1

10000

9000

90%/110% skew (rhs)

8000
Aug 09

Aug 10

Aug 11

Aug 12

Aug 13

-1
Aug 14

Source: SG CIB Cross Asset Research/Derivatives, Bloomberg

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS
AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 10

VEGA AMOUNT IN THE MARKET - ESTIMATES

HSCEI Vega vs Spot Profile

NKY Vega vs Spot Profile

60

70
60

50

Banks are buyers of vega in

a bull market, and sell vega
in a bear market

40

Banks are buyers of vega in

a bull market, and sell vega
in a bear market

50
40

30
30

20

20
10

0
5000

Vega

Vega

10

7000

8000
Spot

9000

9800

11000

13000

10900

0
7000

9000

11000

13000

15000

17000

19000

Spot

12000

KOSPI2 Vega vs Spot Profile

90
80

Banks are buyers of vega in

a bull market, and sell vega
in a bear market

70
60
50
40
30
20

Vega

10

Source : SG CIB Trading

0
100

150

200

250

300

350

Spot

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS
AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 11

WHAT TO DO WITH THESE ESTIMATES ON A VOL PERSPECTIVE?

HSCEI example : way, path and skew
13500

12000 : Estimated recall level

12500

11500

10500

9500

9800 : Estimated Peak of vega position in the market

8500

8000 : Majority of vega disappearing

7500

6500
Jan-13

Mar-13

May-13

Jul-13

Sep-13

Nov-13

Jan-14

Mar-14

May-14

Jul-14

Source: Bloomberg, SG CIB Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES
REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

Scenario :
- skew is high, I expect the market to go up strongly in the coming weeks : buy #1 : a 12000 call
- skew is low, vol is low I expect the market to go up in the coming weeks : buy

#2 : a 9800 put

- market will go down quickly : I sell #2 and I buy several times #3

- I expect the market to be rangy : expect hedge pile up - sell #2 and buy #1 sell the skew

P. 12

US : THE INSURANCE FLOW IS DISTORTING THE TERM STRUCTURE

Term structure

8.0

(Varswap spread 5Y -1Y)

S&P
6.0

4.0

2.0

EuroSTOXX 50
0.0
Aug 10

Aug 11

Aug 12

Aug 13

Aug 14

-2.0

-4.0

-6.0

Source: SG CIB Cross Asset Research/Derivatives

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER
TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 13

REPO

P. 14

THE REPO : THE WRIGGLE FACTOR

Forward price = Spot * e((rate div - repo)t)

?
Rates
Dividends

Repo

P. 15

EUROSTOXX 50 REPO : AN OPPORTUNITY?

EuroSTOXX 50 repo (1y-5y)

0.0%
Aug-08

Jan-09

Jun-09

Nov-09

Apr-10

Sep-10

Feb-11

Jul-11

Dec-11

May-12

Oct-12

Mar-13

Aug-13

Jan-14

Jun-14

1Y - 5Y

-0.2%

-0.4%

-0.6%

-0.8%

-1.0%

-1.2%

-1.4%

Source : SG CIB Trading

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS
AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 16

NIKKEI REPO : THE MIRROR OF AN EVOLUTION IN STRUCTURED PRODUCT FLOW

NIKKEI repo 4y in 1y (bps)

Jan 08

18000
Jul 08

Jan 09

Jul 09

Jan 10

Jul 10

Jan 11

Jul 11

-20

Jul 12

Jan 13

Jul 13

Jan 14

Jul 14

16000

FWD 4 yrs in 1yr

-40

Jan 12

Nikkei
14000

-60

12000
-80

10000
-100

8000
-120

6000
-140

-160

4000

-180

2000

-200

Source: SG CIB Trading

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PA ST PERIODS
AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 17

DIVIDENDS

P. 18

DESPITE HIGHER LIQUIDITY LONG TERM DIVIDENDS IN EUROPE ARE STILL VULNERABLE TO
FLOW

EuroSTOXX 50 dividend vs. spot

5000

Nikkei dividend term structure

40

4500

100

18000

80

16000

30

4000

price

20

3500
10

14000

NIKKEI Spot

60

12000

3000

40

-10

20

2500

10000

2000

8000
-20

1500

0
Jun 10

-30

1000

Dec 10

Jun 11

Dec 11

Jun 12

Dec 12

Jun 13

Dec 13

Jun 14

5y - 2y term structure

-20

dividend futures term structure (Y+5) - (Y+1) (rhs)

-40

500

-40

6000
4000
2000

Source: Bloomberg

-50

Dec 04

Dec 05

Dec 06

Dec 07

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

-60

Source: Bloomberg, SG CIB Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST
PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

Source : The Economist

P. 19

WHICH GIVES A TAIL HEDGE OPPORTUNITY

Dividend future vs. index implied volatility

22

21

20

EuroSTOXX 50 Dec 17 ATM IV

19

18

17

16

Dec 18 dividend future ATM IV

15

Dec 17 dividend future ATM IV

14
Jan-13

Apr-13

Jul-13

Oct-13

Jan-14

Apr-14

Jul-14

Source: SG CIB Trading

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST
PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

P. 20

CONCLUSION

Differences across regions is driven by product, liquidity, balance of

flows
Asia : all about volatility and skew
Europe : dividends and repo
USA : too big to be impacted

OPPORTUNITIES : in all cases the slope is key! A lot of opportunities

for those who know the flow

P. 21

DISCLAIMER

This communication is exclusively directed and available to Institutional Investors as defined by the 2004/39/CE Directive on markets in financial instruments
acting for their own account and categorized as eligible counterparties or professional clients. Use of this communication with or by any other party is
prohibited.
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P. 22