structured products & their impact on markets.pdf

STRUCTURED PRODUCTS & THEIR IMPACT ON MARKETS: WHAT YOU NEED TO KNOW

NOT FOR US & ASIAN DISTRIBUTION

Delphine Leblond-Limpalaër, CFA

Director, SG Global Engineering and Advisory

[email protected]

+44 207 762 5771

P. 1

CONFIDENTIAL September 2014

Global Equity Flow

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. 2

AGENDA

1.Structured products : “where” means “what”

2. Impact analysis on parameters

Volatility

Skew

Repo

Dividends

STRUCTURED PRODUCTS : “WHERE” MEANS “WHAT”

P. 3

LESS ISSUANCE BUT MORE REGULATION

P. 4

Basel II

release: June 2004

MIFID : Nov

2007

Basel III framework :

Dec 2010

Announcement of AQR :

October 2013

Basel II publication on

trading books: July 2005

“WHERE” MEANS “WHAT”

Autocallables

Capital

guaranteed

products

Variable

Annuities

Uridashis

Variable

annuities

Autocallable/worst-off on

KOSPI & HSCEI and also

NKY, SPX, SX5E

P. 5

WHY IS THERE MORE IMPACT IN ASIA? BALANCE IS KEY

P. 6

© alphaspirit - Fotolia.com / © Sashkin - Fotolia.com

0

200

400

600

800

1000

1200

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.

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

VOLATILITY/SKEW

P. 7

VOLATILITY – THE NIKKEI CASE

P. 8

“Fear is the path to the dark side”

“The path is the fear of the trader”

Yoda

SocGen

17

18

19

20

21

22

23

24

25

26

27

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

May 11 Aug 11 Nov 11 Feb 12 May 12 Aug 12 Nov 12 Feb 13 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14

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


1Y ATM IV (rhs)

Spot price

THE POWER OF BALANCED FLOW

P. 9

Spot/Vol correlation

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

Aug 10 Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14

1Y 70% IV

5Y 70% IV

-1

-0.8

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

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

1Y 100% IV

5Y 100% IV

NIKKEI EuroSTOXX 50

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.

THE SKEW CONUNDRUM

P. 10

-1

0

1

2

3

4

5

6

7

8000

9000

10000

11000

12000

13000

14000

15000

16000

17000

Aug 09 Aug 10 Aug 11 Aug 12 Aug 13 Aug 14

Nikkei 12M Skew & Spot

Source: SG CIB Cross Asset Research/Derivatives, Bloomberg

90%/110% skew (rhs)

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.

VEGA AMOUNT IN THE MARKET - ESTIMATES

P. 11

0

10

20

30

40

50

60

70

7000 9000 11000 13000 15000 17000 19000

Ve

ga

Spot

NKY Vega vs Spot Profile

Banks are buyers of vega in a bull market, and sell vega

in a bear market

0

10

20

30

40

50

60

5000 7000 9000 11000 13000

Ve

ga

Spot

HSCEI Vega vs Spot Profile


in a bear market

0

10

20

30

40

50

60

70

80

90

100 150 200 250 300 350

Ve

ga

Spot

KOSPI2 Vega vs Spot Profile


in a bear market

Source : SG CIB Trading

9800 10900 12000 8000



WHAT TO DO WITH THESE ESTIMATES ON A VOL PERSPECTIVE?

P. 12

HSCEI example : way, path and skew

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

6500

7500

8500

9500

10500

11500

12500

13500

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


8000 : Majority of vega disappearing

9800 : Estimated Peak of vega position in the market

12000 : Estimated recall level

US : THE INSURANCE FLOW IS DISTORTING THE TERM STRUCTURE

P. 13

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Aug 10 Aug 11 Aug 12 Aug 13 Aug 14

Term structure (Varswap spread 5Y -1Y)

Source: SG CIB Cross Asset Research/Derivatives

S&P

EuroSTOXX 50

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.

REPO

P. 14

THE REPO : THE WRIGGLE FACTOR

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

P. 15

Rates Dividends

Repo

?

EUROSTOXX 50 REPO : AN OPPORTUNITY?

P. 16

-1.4%

-1.2%

-1.0%

-0.8%

-0.6%

-0.4%

-0.2%

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

Source : SG CIB Trading

EuroSTOXX 50 repo (1y-5y)



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

P. 17

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

-200

-180

-160

-140

-120

-100

-80

-60

-40

-20

-Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14

FWD 4 yrs in 1yr Nikkei

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.

NIKKEI repo 4y in 1y (bps)

DIVIDENDS

P. 18

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

P. 19

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.

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

-60

-40

-20

0

20

40

60

80

100

Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14

Nikkei dividend term structure

Source: Bloomberg

NIKKEI Spot

5y - 2y term structure

-50

-40

-30

-20

-10

0

10

20

30

40

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Dec 04 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13

Source: Bloomberg, SG CIB Global Engineering & Strategy

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

price

EuroSTOXX 50 dividend vs. spot

Source : The Economist

…WHICH GIVES A TAIL HEDGE OPPORTUNITY

P. 20

14

15

16

17

18

19

20

21

22

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14

Source: SG CIB Trading


Dec 17 dividend future ATM IV

Dec 18 dividend future ATM IV

EuroSTOXX 50 Dec 17 ATM IV

Dividend future vs. index implied volatility

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.

In relation to European MIF directive, this publication could not be characterised as investment research and should be treated as a marketing material. The present document is of a commercial and not of a regulatory nature. Although this publication includes investment recommendations issued from Societe Generale’s investment Research department, it is prepared by Societe Generale’s GEF Engineering and Strategy Team. In accordance with the European Market in Financial Instruments Directive (“MiFID”), this publication should be treated as a marketing communication providing general investment recommendations and should not be treated as a research report issued by Societe Generale’s Research Department. This document has not been prepared in accordance with regulatory provisions designed to promote the independence of investment research, and Societe Generale, as investment services provider, is not subject to any prohibition on dealing in the financial instrument or instruments ahead of the dissemination of this publication.

This publication includes investment recommendations issued from Societe Generale’s investment Research department which has set, in accordance with applicable regulation, effective administrative and organizational arrangements, including information barriers to prevent and avoid conflicts of interest with respect to the investment recommendations contained in this publication. Research publications supporting this document were issued on their stated publication date and may have already been acted upon by clients of Societe Generale.

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structured products & their impact on markets.pdf

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