This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN

BRIEF
strUCtUrEd NotEs WAtCh

Structured Notes
By AlAstAir MArsh
SPV sales (percent)

08.16.12

www.bloombergbriefs.com

APPLe IS MoST PoPuLAR u.S. undeRLyInG foR ReveRSe ConveRTIBLeS. the company rose from No. 7 last year as its stock has surged and grown more volatile. Page 2.

SPVs Boost Market Share on Bank Risk Concerns

SPVs Grab Note Market Share as Bank Risk Rises special purpose 400 18 All figures through vehicles, the off-balAug. 15 of each year. 16 SPV Sales (as % of global) 350 ance-sheet entities Bank of America, 5-yr. CDS average 14 at the center of the 300 Deutsche Bank, 5-yr. CDS average financial crisis, ac12 250 count for the largest 10 share of structured 200 8 note sales in five 150 6 years as investors 100 seek alternatives to 4 bank credit risk. 50 2 sPVs have sold 0 0 $5.83 billion of 2008 2009 2010 2011 2012 notes outside the Source: Bloomberg LP U.s. this year, or 12.2 percent of the $47 billion market, compared with 8.4 percent over the year-earlier pe.8 riod, according to data compiled by Bloomberg that excludes securities where the amount of principal returned can vary. thats the biggest share of issuance since 19.1 percent over the same period of 2007 even as the overall market has shrunk, Bloomberg data show. , investors in sPV-issued notes benefit by being largely protected from a bank default because they would typically escape bankruptcy proceedings and collateral backs the securities, unlike with ordinary notes, which are unsecured debt. risk has risen on banks in the past five years, with five-year credit default swaps for Bank of America Corp., the second-biggest underwriter for sPV-led issuance this year, surging by almost five times, to 233.4 basis points. some investors, who are now more aware of the credit risk of lenders, prefer to buy notes from a special purpose entity to be exposed to the underlying assets rather than a bank, said Thomas Imhasly, head of structured products at Credit Suisse AGs private banking division in Zurich. Eight of the 10 biggest issuers of structured notes outside the U.s. have been downgraded this year, Bloomberg data show. Moodys Investors Service cut ratings on 15 of the worlds biggest banks and securities firms on June 21, citing their significant exposure to the volatility and risk of outsized losses inherent to capital markets activities. A bank can set up bankruptcy-remote special purpose vehicles, often in tax-favored jurisdictions such as the Cayman islands, ireland and luxembourg, to issue structured notes. typically the sPV will use the money raised from selling the securities to purchase collateral, which can be highly rated government bonds, as well as bonds of investmentgrade European or U.s. banks. investors generally pay greater costs when buying notes from sPVs rather than banks, such as for administrative and custodian fees, said Joseph Suh, a partner at the U.s. law firm Schulte Roth & Zabel LLP in New york. still, they should be insulated from the worst of the fallout if the sponsoring bank defaults, as long as the sPV is set up so it doesnt become part of the lenders bankruptcy estate, suh said. there would be losses incurred from ending derivatives contracts that the sPV has arranged with the bank, according to suh. investors in structured notes issued by Lehman Brothers Holdings Inc., which filed
continued on next page

InveSToRS BeT on PeSo GAInS. UBs sold more than $170 million of notes that profit if the Mexican currency rises against the U.s. dollar. Page 3. IndIAn noTe SALeS PLunGe on dISCLoSuRe RuLeS. New regulations that try to limit risk in the market, and falling stocks, have depressed sales. Page 3. deConSTRuCTInG THe deAL. We break down an hsBC leveraged note into its parts and work out its changing value since issuance. Page 5. InTeRvIew. Bradley Berman of Morrison & Foerster talks about trends in exchangetraded notes, such as growing complexity. Page 7.

VoluMeS
u.S. StRuCtuRed NoteS aS of 1 yeaR ago VoluMeS* aug. 10 $307.5 million $1.23 billion Last Week (Aug. 6-10) First Quarter Second Quarter Year To Date YTD Equity YTD Rates YTD Commodities gloBal Rate liNked NoteS** Last Week (Aug. 9-15) First Quarter Second Quarter Year To Date YTD Interest Rate Linked YTD Credit Linked YTD Inflation Linked $11.3 billion $9.8 billion $24.1 billion $15 billion $3.69 billion $1.57 billion aS of aug. 15 $637 million $23.5 billion $17.2 billion $48 billion $19.2 billion $25.2 billion $1.17 billion $14.8 billion $10.6 billion $29.9 billion $14 billion $5.49 billion $2.92 billion 1 yeaR ago $29.8 billion $1.51 billion

$76.5 billion $36.3 billion $6.74 billion $26.8 billion

$34.5 billion

* According to data compiled by Bloomberg from SEC filings. ** Based on data submitted to Bloomberg by banks. Excludes variable-principal redemption, reverse and synthetic convertibles. Global includes Euromarket issues from all nations and domestic European notes. Excludes SEC registered issues.

3 4

10

CDS (basis points)

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

NewS
Banks Sell Notes tied to apple as Stock, Volatility Rise
By MAtt roBiNsoN

Credit Ratings of Top Issuers

gloBal iSSueR DZ Bank LBBW Deutsche Bank UBS Societe Generale Barclays* UniCredit* u.S. iSSueR Bank of America JPMorgan Morgan Stanley Goldman Sachs Citigroup General Electric* Royal Bank of Canada S&P AANA A+ A A A+ A S&P AA AAAAA+ AAMoody'S A1 A3 A2 A2 A2 A2 A3 Moody'S Baa2 A2 Baa1 A3 Baa2 A1 Aa3

Apple Inc. has become the most commonly linked company for reverse convertibles as a soaring share price and rising expected volatility have boosted demand for the notes while making the terms more attractive. Banks have sold $149.4 million of the securities tied to the worlds largest company by market value this year, more than three times the total for freeport-McMoRan Copper & Gold Inc., the second-most used stock, according to data compiled by Bloomberg. Apple was the seventh-most common underlying asset for the securities during the year-earlier period. the largest maker of tablet computers has risen 56 percent this year, after gaining 26 percent last year. higher volatility on Apple has helped increase coupons on reverse convertibles, high-yielding bank bonds that convert into stock if a companys share price plummets, according to John Tessar, senior vice president at JvB financial Group LLC in Boca raton, Florida. that, along with the companys name recognition, has bolstered sales, he said. Anytime you can get a name like Apple out there, its an easier sell, tessar said in a telephone interview. implied volatility, which indicates expected price swings, averaged 33.7 in 2012 for 12-month options closest to Apples shares, up from 31.8 in the year-earlier period, Bloomberg data show. reverse convertibles tied to Apple this year had an average maturity of about 11 months. increased volatility boosts the value of derivatives embedded in the securities, allowing issuers to create more attractive notes. U.s. sales of reverse convertibles declined to $173.5 million last month, their lowest level since at least the beginning of 2010, Bloomberg data show. issuance has dropped since the Financial industry regulatory Authority, the industry-backed regulator, released an investor alert in July 2011, advising buyers to be wary of advertising suggesting the products are safe and suitable for investors seeking high yields. overall sales have fallen even as increased volatility allowed issuers to offer higheryielding notes. the ViX, as the Chicago Board options Exchange Volatility index is known, averaged 18.9 in the first seven months this year, compared with 18.2 last year. the gauge measures the cost of options to protect against declines in the standard & Poors 500 index.

* Rating is for the finance unit that issues most structured notes.

Career Moves? Promotions? Send announcements to rbedard2@bloomberg.net

Bloomberg Brief Structured notes newsletter Ted Merz executive editor tmerz@bloomberg.net 212-617-2309 Bloomberg news Robert Burgess Managing editor bburgess@bloomberg.net 212-617-2945 Structured notes Richard Bedard newsletter editor rbedard2@bloomberg.net 212-617-8761 Reporters Matt Robinson mrobinson55@bloomberg.net 212-617-5409 Alastair Marsh amarsh25@bloomberg.net +44-203-525-8767 Kevin Dugan kdugan4@bloomberg.net 212-617-2035 newsletter Nick Ferris Business Manager nferris2@bloomberg.net 212-617-6975 Advertising bbrief@bloomberg.net 212-617-6975 Reprints & Lori Husted Permissions lori.husted@theygsgroup.com 717-505-9701 To subscribe via the Bloomberg Terminal type BRIEF <GO> or on the web at www.bloombergbriefs.com. 2012 Bloomberg LP. All rights reserved. This newsletter and its contents may not be forwarded or redistributed without the prior consent of Bloomberg. Please contact our reprints and permissions group listed above for more information.

spvs boost...

continued from previous page

the biggest bankruptcy in U.s. history in september 2008, will receive only 20 cents on the dollar, according to estimates from Chris vernon, founding partner of Naples, Florida-based law firm vernon Healy. deutsche Bank AG is the leading underwriter of notes sold by sPVs this year, arranging $1.68 billion of deals, Bloomberg data show. the largest security it distributed was a 163 million euro ($200 million) offering by luxembourg-incorporated Global Bond Series XIv SA, a vehicle created to issue as much as 400 million euros of secured notes tied to constant maturity swap rates and an italian sovereign bond, according to an offering document. Bank of America underwrote $1.61 billion of notes, 75 percent of which were issued by Cayman islands-incorporated Azusa Ltd., Bloomberg data show. the special purpose entity issued $1.04 billion of credit-linked notes tied to the debt of Japanese companies such as Sharp Corp. and Hitachi Ltd. frank Hartmann, a deutsche Bank spokesman in london, and Andrew Todd, a Bank of America spokesman, declined to comment. Amsterdam-incorporated eLM Bv, an sPV affiliated with uBS AG, sold a $785.6 million credit-linked note on Jan. 23 that was the largest issued by an sPV this year. Jenna ward, a spokeswoman for the bank in london, declined to comment. Global sales of structured notes in July fell to the lowest level since december, totaling $4.76 billion in Asia and Europe, Bloomberg data show.

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

RouNduP
Investors Buy notes That Bet on Mexican Peso to Beat dollar
uBS AG sold 94 structured notes since the beginning of July that profit should the Mexican peso appreciate against the dollar over a three-month period. the swiss bank raised more than $170 million from the securities in the past six weeks, said Andre Meyer, managing director of the lenders foreign exchange and precious metals structured solutions unit in Zurich. investors in Europe, the U.s. and latin America seeking to beat returns from money market funds bought the notes to benefit from a rebound in the peso, according to Meyer. the currency gained 10 percent against the greenback since hitting a three-year low at the beginning of June. the majority of UBss notes are socalled reverse convertibles, which are securities that redeem in either dollars or pesos depending on the performance of the currencies. For notes denominated in the U.s. currency, a dollar amount will be paid at maturity if the peso appreciates, while a peso amount will be paid if it doesnt. the notes pay coupons as high as 10 percent annually, or 2.5 percent for those with three-month tenors, according to data compiled by Bloomberg. that compares with a 0.22 percent average one-year return available from euro government money market funds, data from the institutional Money Market Funds Association published on July 13 show. the peso weakened to its lowest since March 2009 on June 1, dropping to 14.5997 per dollar, as concern mounted that Greece would abandon the euro and that growth in the U.s., the destination for about 80 percent of Mexicos exports, was slowing. the weakening illustrates the pesos higher volatility compared with peers rather than a worsening of Mexicos economy, said Alejandro Cuadrado, head of latin American foreign exchange strategy at Banco Bilbao vizcaya Argentaria SA in New york. the peso has one of the highest correlations to global market risk among emerging market currencies, making it very desirable when markets move more risk on, Cuadrado said. the currency benefited from a recent rally in risk assets after European Central Bank President Mario draghis promise on July 26 to do whatever it takes to preserve the euro. the exchange rate was as low as 13.1467 today. Credit Agricole Corporate & Investment Bank, deutsche Bank AG, HSBC Holdings Plc and Societe Generale SA also sold notes this year tied to the currency pair, Bloomberg data show. dollars of losses from derivatives trading during the financial crisis. With more than 90 percent of the securities in india linked to equities, wealthy people who are the biggest buyers of the products also shunned the market after the benchmark BsE india sensitive index of stocks slipped 16 percent from its peak in 2010. the securities and Exchange Board of india on Nov. 1 began requiring sellers to publish daily valuations of the notes through independent agencies and make investors aware that their bets may not be hedged and the principal not always protected. issuers including the indian units of Morgan Stanley and Credit Suisse Group AG have published valuations that are available on the website of Crisil Ltd., which handles about 95 percent of structured-note valuations. the initial phase was quite challenging as no agency had the wherewithal to value these structures, and issuers spent several months working out models, said Prateek Pant, director of products and services in Mumbai at RBS Private Banking. theres been a significant break in the momentum in the structured product market. it may be in the interest of investors to keep non-principal protected products out of reach of all but the most sophisticated investors, n. Hariharan, a spokesman at the market regulator, said by e-mail. the number of issuance and outstanding value of structured notes has gone down on account of stringent regulatory requirements. As much as 95 percent of the structured notes sold in india are linked to equities, according to Amit Gupta, director of institutional sales at Barclays Capital in Mumbai. Because the equity market in the last two to four years hasnt done very well, investor appetite for equity-linked structured notes has come down quite drastically, said Amitabh Mohanty, head of fixed income at Reliance Capital Ltd.
continued on next page

Alastair Marsh

India note Sales drop 73% on disclosure Rules

structured note sales in india dropped at more than twice the global pace in the first half after issuers balked at new regulations aimed at limiting risk and investors avoided securities linked to falling stocks. offerings declined 73 percent to 5.88 billion rupees ($106 million) from the first half of last year, the lowest in at least two years, according to the most recent figures from the securities and Exchange Board of india. Worldwide sales of the notes fell 31 percent to $61.8 billion in the same period, according to data compiled by Bloomberg. issuance has slowed down because issuers were grappling with the new requirements, said Rajesh Iyer, Mumbaibased head of products and research at Kotak wealth Management, which provides financial advice for 30 percent of indias 100 richest families, according to its website. Private banks and intermediaries that have budgeted for structured notes will feel the pressure. sales were slightly better in July and August, he said. india introduced rules for structured notes in November, joining regulators globally in increasing scrutiny of complex investments after billions of

Follow Richard Bedard on Twitter for regular updates and additional insights @rnbedard

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

Roundup...

continued from previous page

high net-worth individuals, who typically have $1 million or more of investable assets, buy at least 60 percent of indias structured notes, according to Mohanty. the number of millionaire households in india rose to 162,000 last year from 134,000 in 2010, the sixth-highest in Asia, according to The Boston Consulting Groups 2012 Global Wealth report. the country also has 278 households with more than $100 million, or ultra-high net-worth individuals, up from 241 in 2010, according to the report. there is certainly a lot of latent demand for structured products from mostly high net-worth clients, said rBss Pant. the products in india can offer investors as much as 350 basis points more than bonds, he said. india introduced the new rules three years after Lehman Brothers Holdings Inc.s collapse caused multi-billion dollar losses globally. Citigroup Inc.s indian unit has begun compensating investors after an employee in its wealth-management division allegedly defrauded them of 3 billion rupees invested over 15 months, the U.s. bank said in January 2011. there is an overhang of losses in investors minds from aggressively sold relatively exotic structured products during the bull run up to 2007, Swapnil Pawar, chief investment officer at Karvy Private wealth, an adviser to high networth clients in india, said by e-mail. the attitude of regulators is cautious.

has increased after more than $1.3 trillion has been added to American share values since the s&P 500 reached a five-month low on June 1. Equity volume reached the lowest level since 2008 excluding holidays this week as vacationing traders awaited U.s. Federal reserve Chairman Ben S. Bernankes speech at the Kansas City conference in Jackson hole, Wyoming, and the European Central Bank meeting next month. We are certainly in the summer doldrums both volume and volatility have been extremely low, Andrew Greeley, a senior managing director at stamford, Connecticut-based Acorn derivatives Management Corp., which manages more than $500 million in volatility assets, said. Many of the macro risks are still with us. We suspect that volatility will move back up. shares outstanding for Barclays Plcs iPath s&P 500 ViX short-term Futures EtN, the most traded of the securities tied to volatility, jumped sixfold this year to 142 million Aug. 14, data compiled

by Bloomberg show. the number of Proshares Ultra ViX short-term Futures shares increased to almost 50 million from 100,000 at the end of december, and the Velocityshares daily 2x ViX short term EtN soared to 80 million from 5.1 million. ViX futures show traders are betting volatility wont stay this low. the sixmonth contracts reached their highest level since March versus the volatility index on Aug. 13, data compiled by Bloomberg show. At the same time, the number of outstanding ViX calls to buy the gauge versus puts to sell jumped to 2.08-to-1 on Aug. 10 after touching 2.2 on July 30, a one-year high, according to the data. its summer and nobody wants to own volatility, Peter Cecchini, global head of institutional equity derivatives at New york-based Cantor fitzgerald LP, said. the macroeconomic backdrop is completely divergent from the ViX and that disconnect is likely to revert.

Nikolaj Gammeltoft and Cecile Vannucci

etN intelligence
Equity-Tied and Volatility Notes Are Fastest-Growing
8
7
6.69

7.16 6.21
A Barclays ETN tied to lead lost 77% of its market cap, the worst commodity performer.

Market cap, Dec. 31 Market cap, Aug. 13

The "Dogs of the Dow" ETN was the cat's meow for Deutsche Bank: it more than tripled in size, leading all equities.

Billions of dollars

Jun Yang and Ruth David

6
5

5.28

volatility Bets Rise to Record as vIX falls to five-year Low

investors are piling into securities that gain should equity volatility increase, a bearish bet on stocks that was last popular when the standard & Poors 500 index climbed above 1,400 in March. outstanding shares jumped to a record for the three most-used exchange-traded securities that profit from volatility gains in U.s. stocks, according to data compiled by Bloomberg. the Chicago Board options Exchange Volatility index, known as the ViX, rebounded 8.4 percent to 14.85 Aug. 14 after touching its lowest level since June 2007. demand for protection against losses

4
3

2.63 1.94

2
1
0.32 0.20
0.35 0.45

0.17 0.25

0 Commodity Source: Bloomberg LP

the market capitalization of U.s. exchange-traded notes has grown 15 percent this year. the equity asset class is among the fastest-growing, surging 36 percent to $7.16 billion from $5.28 billion. deutsche Bank AGs dogs of the dow led the gainers in this category, jumping to $18.8 million in size from $5.7 million. Commodity-linked EtNs dipped 7.2 percent, to $6.21 billion from $6.69 billion. the biggest losers in this class included EtNs tied to aluminum, palladium and lead.

Currency

Equity

Rates

Volatility

Other

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

deCoNStRuCtiNg tHe deal

ANAlysis By ChANdrA KhANdriKA, dEriVAtiVEs PriCiNG sPECiAlist

HSBC uses leverage and Cap for Note tied to the S&P 500
yield enhancement notes provide investors exposure to the gains of an equity Payout Profile of HSBC Note index, sometimes using leverage, with re60 turns capped and losses buffered. in a low 12.5% cap limits returns. interest rate environment, these securities 2x leverage 10% buffer 40 boosts gains. protects on often look attractive. For technical breakdown of losses. on April 2, HSBC Holdings Plc priced note, click into circles, 20 $103,000 of so-called Buffered Accelerated starting here: Market Participation securities (AMPs). 0 investors receive twice the gains in the 567 767 967 1,167 1,367 1,567 1,767 1,967 standard & Poors 500 index, up to a cap of 12.5 percent. if the index rises 20 per-20 cent, the return is only 12.5 percent. on the downside, the note protects against losses -40 of up to 10 percent. if the s&P 500 drops Underlying (S&P 500) 60 percent, the loss is 50 percent. Interactive features -60 this notes payoff can be replicated usnot viewable on IOS Note ing three European-style options on the devices. -80 underlying (for more details, see chart). Level of S&P 500 on the upside: Source: Bloomberg LP long on two call options at the initial level of the s&P 500 and short on two call principal could be lost. intended to be held until maturity, so the options at the level of the cap. (2) Credit (issuer default): the note is secondary market is small. in more than on the downside: unsecured debt. Credit risk is implied from three months since its issuance, this note short on one put option at the level the value of the issuers corporate bonds has traded once on June 14, based on where the buffers protection ceases. using z-spreads over data from the Financial industry regulainvestors in the THe noTe risk-free rates. the ztory Authoritys trace system. note are exposed to Bloomberg id: rd0650138 spread for 18-month the actual value of each $1,000 note, three different risks. Asset class: Equity debt for hsBC holdat issuance and on end-of-month dates (1) Market (unPrincipal protected: No ings was 157 basis since then, is broken down in the table derlying asset): issuer: hsBC UsA inc. (a unit of hsBC points on the pricing below, using Bloomberg analytics. Value Performance of the holdings Plc) date. Z-spreads for of derivatives indicates the fair market note depends on the Underlying: s&P 500 (sPX) similar-maturity debt value of the embedded derivatives. Model s&P 500s returns Maturity: 18 months for other issuers price reflects the value of the derivaand volatility. on the Upside participation: 200% (12.5% cap) downside participation: 100% (10% buffer) ranged from 31.3 tives, and credit-adjusted model price upside, the perfortrade date: April 2, 2012 basis points for Royal adds credit risk. External levels are prices mance resembles a Bank of Canada to provided by other sources, in this case bullish call spread 210.3 for Bank of America Corp. higher Financial times interactive data. strategy. on the downside, investor z-spreads imply higher risk of issuer default participation beyond a 10 percent drop Chandra Khandrika does valuations of structured and lower the market value of the note. simulates a short naked put option. this notes for Bloomberg clients. He can be reached at ckhandrika1@bloomberg.net. (3) liquidity: structured products are is dangerous; a significant portion of the

value of the note

date Spot Price (S&P 500) Embedded Derivative Value Model Price Credit Adjusted Discount Factor Model Price (Credit Adjusted) External Price source (FTID) 4/2/12 1,419.04 -$6.92 $993.08 0.9661 $959.41 4/30/12 1,397.91 -$15.43 $984.57 0.9706 $955.60 $973.70 5/31/12 1,310.33 -$54.22 $945.78 0.9771 $924.09 $925.90 6/29/12 1,362.16 -$25.02 $974.98 0.9806 $956.03 $952.10 7/31/12 1,379.32 -$16.04 $983.96 0.9844 $968.61 $963.00

Return (%)

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

NoteS Sold
SeC-RegiSteRed NoteS

Goldman Sachs Group Inc. sold $80 million of 10-year, callable step-up notes on Aug. 9, the banks largest ratetied offering this year, according to data compiled by Bloomberg. the bonds yield 3 percent for the first three years before rising to 4 percent, then increase three more times to 7.5 percent if not called, according to a prospectus filed with the U.s. securities and Exchange Commission. the New york-based bank and incapital inc. distributed the notes for a 2.69 percent fee. BBG id EJ3101353 Royal Bank of Canada sold $40.1 million of one-year, auto-callable notes tied to Apple Inc. on Aug. 10, the largest offering from the bank since April 26, Bloomberg data show. Each quarter the securities

will pay a 12.75 annualized coupon if the worlds largest company by market value doesnt decline by more than 20 percent, and will be automatically called if the shares exceed their initial level, according to a prospectus filed with the sEC. the Montreal-based company distributed the notes for a 1.5 percent commission. BBG id rd2370529

Bank of nova Scotia issued $14.6 million of 19-month notes tied to the MSCI eAfe Index on Aug. 7, the largest offering for the bank since June 18, Bloomberg data show. the notes yield any gains of the index, which tracks international equities, capped at 10 percent, with investors at risk of losing their principal, according to a prospectus filed with the sEC. the toronto-based bank distributed the notes for a 0.25 percent commission. BBG id rd2397217

Goldman Sachs Group Inc. sold $13.9 million of 13-month notes tied to the S&P 500 Index on Aug. 6, Bloomberg data show. the securities yield 7 percent if the index doesnt fall by more than 15 percent, with investors at risk of losing their principal if it drops further, according to a prospectus filed with the sEC. the New york-based bank distributed the notes for a 0.85 percent commission. BBG id EJ3197054 Bank of nova Scotia sold $11.1 million of 18-month notes tied to the MSCI eAfe Index on Aug. 6. the securities yield one and a half times the gains in the gauge tied to international equities, with a cap of 21.8 percent, according to a prospectus filed with the sEC. the bank distributed the notes for a 0.25 percent commission. BBG id rd2398116

featuRed Note
general electric Sells its largest Note Since december
By MAtt roBiNsoN

General electric Co. sold $125 million of fixed-to-floating rate securities this month, its biggest U.s. structured note sale since returning to the market in december. the worlds largest jet-engine maker, which started 2012 with more corporate debt due than any U.s. company, has issued $675 million of U.s. structured notes since then, according to data compiled by Bloomberg. People like the name and are comfortable with it, Tom Balcom of 1650 Wealth Management in Boca raton, Florida, said in a telephone interview. Because of all the headline risk around banks, it makes a lot of sense. Moodys Investors Service downgraded 15 of the worlds biggest banks and securities firms on June 21, including the 11 largest issuers of U.s. structured notes, citing their significant exposure to the volatility and risk of outsized losses inherent to capital markets activities. standard & Poors rates GE as the top U.s. issuer of the securities at AA+, the second-highest grade. Moodys ranking is Aa3, the fourth-highest, after lowering GE one level in April follow-

ing a revision to the rating companys grading methodology. As part of our diversified funding strategy, we issue different types of notes, Russell wilkerson, a spokesman for GE, said in an e-mail statement. to meet investor demand, we have offered structured notes this year. GEs offerings account for about 3 percent of the $23.5 billion in U.s. structured note sales in 2012, which are at their lowest level since at least the beginning of 2010, Bloomberg data show. Ge Capital Corp., the finance arm of the Fairfield, Connecticutbased company, issued the three-year, fixed-to-floating rate notes on Aug. 2. the bonds yield 1.125 percent for the first year, then switch to the three-month london interbank offered rate plus 0.525 percent with a minimum coupon of 0.875 percent, according to a prospectus filed with the U.s. securities and Exchange Commission. Barclays Plc distributed the securities for a 0.70 percent commission. the company has also sold six so-called step-up callable offerings in the U.s. since december, Bloomberg data show. the securities pay higher interest rates if they arent called after a set period.

Bloomberg Brief publishes 17 groundbreaking daily and weekly newsletters.

BRIEF

For the full list of titles visit www.bloombergbriefs.com or BRIEF <GO> on your Bloomberg terminal

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

VoiCeS
Berman of Morrison & foerster on the growing Complexity of etNs
Bradley Berman, of counsel for Morrison & foerster in New york, talks about when exchange-traded notes are suitable for individual investors and product trends. he was interviewed in New york by telephone and e-mail by Kevin dugan.

one would buy and place in a safe deposit box for 30 years. Purchasers of volatility EtNs are mainly hedge fund managers who hold them for a day or two. Q: Has it become harder to make sure that eTn structures fit within regulatory requirements, now that they are more complex? A: Not with respect to the NysE Arca listing rules, which are straightforward. the structure either falls within the NysE Arca rules or it doesnt. it gets a bit more complex when trying to imagine what the sEC might think of a new EtN feature, as compared to the features of the original iPath EtNs that were reviewed by the sEC. Q: exactly how have they become more complex? A: instead of an EtNs return being based on the difference between the initial level of the underlying asset at the trade date and the final level of the underlying asset at the date of redemption or at maturity, EtNs that use leverage, daily or monthly resets and compounding dont have a straight-line return formula. Newer EtNs also charge a redemption fee. Q: Has the SeC ever initially rejected an eTn youve been involved in? A: No. ive never worked on an EtN that would be considered novel and unique, which would require sEC review. Q: Could you talk about structures that would probably be rejected?

A: one client suggested an EtN linked to a proposed index of futures on equity securities. other than the ViX index, the NysE Arca rules do not allow an EtN to be linked to an index of equity futures. Q: what is appropriate for the retail investor? A: some simple notes where the payout formula does not use leverage and resets, and that are linked to an index or asset that they can understand. Q: what are some regulatory rules regarding eTns that need improvement? A: the U.s. securities and Exchange Commission is looking into the recent tViX price fluctuations, and im very interested to hear the sECs response. Q: what are some trends youve seen in eTns? A: the general trend is they have followed EtFs. When EtNs came out, they were very simple. As EtFs developed leverage and reset features, issuers saw that these were popular and said, Why dont we do that? the trend is from simple to complicated. Q: do you think eTn structures will become more complex, even with structured notes sales in general falling? A: the clients who i work with are very creative and ingenious; they are always innovating.

Q: How did you get involved in exchange-traded notes? A: i was previously at sullivan & Cromwell, where i worked on structured products for two frequent issuers. For one bank, i advised on all of their EtNs from 2008 to 2012. Q: what is it that you found attractive about eTns? A: its fascinating how issuers are constantly coming up with new structures. When i started with EtNs, they were relatively simple, with no leverage or reset features. EtN structures are much more complex now. i have to make sure that any particular structure is within the relevant regulatory requirements, including the NysE listing requirements and regulation M relief granted in the 2006 iPath sEC no-action letter [the no-action letter said that Barclayss iPath exchange-traded notes, which were the first EtNs offered in the U.s. market, didnt violate sEC rules]. Q: The financial Industry Regulatory Authority recently released a note saying that most eTns are designed for institutional investors, not for the retail market. do you agree with this assessment? A: i think yes, because there are so many complex ones. in your most recent EtN intelligence chart, EtNs tied to the ViX were the most heavily traded. theres no way mom and pop should be buying a volatility note. i think that retail investors may be taking too much comfort from the fact that EtNs are listed on the New york stock Exchange. these are not the kind of securities that

Experience: Cahill Gordon & Reindel LLP, Sidley Austin LLP, Sullivan & Cromwell LLP. Education: Rochester Institute of Technology, bachelors degree in photography; Fordham University School of Law, J.D. Family: Married to Barbara for 27 years, with two sons, 22 and 24, and a daughter, 19. Hobbies: Swimming, hiking, bicycling, gardening. Former professional photographer. Just read the latest installment of Robert Caros biography of Lyndon Johnson.

>>

Find Warrants and Certificates with our new

CERT

3 4

10

<GO>

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

RaNkiNgS By aSSet ClaSS

All Asset Classes
SeC-RegiSteRed StRuCtuRed Note iSSueRS* Bank of America Goldman Sachs Barclays HSBC JPMorgan UBS Morgan Stanley RBC Deutsche Bank Credit Suisse Citigroup General Electric SEK Wells Fargo Scotiabank BMO Lloyds SunTrust Westpac Toyota RBS total (Jan. 1 to aug. 10, 2012) 2012 yeaR-to-date RaNk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 MaRket SHaRe 14.0% 12.0% 11.1% 10.9% 10.3% 9.9% 7.3% 6.2% 4.8% 3.6% 2.8% 2.2% 1.4% 1.4% 0.7% 0.7% 0.4% 0.2% 0.2% 0.1% 0.0% 100.0% VoluMe uSd (MlN) 3,362.3 2,875.3 2,659.3 2,630.1 2,468.8 2,371.2 1,750.2 1,500.1 1,156.4 858.0 662.5 525.0 348.1 334.7 178.4 160.7 90.0 51.0 41.5 30.0 1.9 24,055.6 deal CouNt 172 307 443 373 592 1,558 226 463 211 213 86 5 17 57 26 249 6 5 2 2 3 5,016

Interest Rate-Linked
SeC-RegiSteRed StRuCtuRed Note iSSueRS* Bank of America Goldman Sachs General Electric Barclays Morgan Stanley Citigroup RBC JPMorgan Wells Fargo Lloyds HSBC SunTrust UBS Westpac Toyota Scotiabank Deutsche Bank BMO total (Jan. 1 to aug. 10, 2012) 2012 yeaR-to-date RaNk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 MaRket SHaRe 20.1% 14.9% 14.2% 13.6% 11.5% 5.5% 4.6% 4.3% 2.6% 2.0% 1.8% 1.4% 1.2% 1.1% 0.8% 0.2% 0.0% 0.0% 100.0% VoluMe uSd (MlN) 740.7 550.4 525.0 502.6 425.6 204.3 168.9 157.2 96.7 74.0 66.8 51.0 45.0 41.5 30.0 8.0 1.6 0.5 3,689.8 deal CouNt 44 18 5 49 38 21 25 12 8 4 13 5 13 2 2 2 2 2 265

Reverse Convertibles
SeC-RegiSteRed StRuCtuRed Note iSSueRS* RBC UBS JPMorgan HSBC Barclays Deutsche Bank BMO Citigroup Credit Suisse Bank of America Morgan Stanley total (Jan. 1 to aug. 10, 2012) 2012 yeaR-to-date RaNk 1 2 3 4 5 6 7 8 9 10 11 MaRket SHaRe 25.8% 20.6% 12.9% 11.5% 10.9% 6.9% 4.0% 3.0% 2.2% 1.9% 0.3% 100.0% VoluMe uSd (MlN) 408.2 325.5 204.1 181.8 171.6 109.6 63.2 46.9 34.9 30.0 5.0 1,580.8 deal CouNt 271 744 179 30 133 41 221 6 19 1 1 1,646

Commodity-Linked
SeC-RegiSteRed StRuCtuRed Note iSSueRS* Barclays Bank of America SEK Deutsche Bank Goldman Sachs UBS HSBC Morgan Stanley JPMorgan RBC Credit Suisse Wells Fargo Citigroup BMO total (Jan. 1 to aug. 10, 2012) 2012 yeaR-to-date RaNk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 MaRket SHaRe 20.0% 18.8% 13.4% 11.9% 10.3% 8.7% 8.3% 4.4% 1.2% 1.1% 1.1% 0.5% 0.1% 0.0% 100.0% VoluMe uSd (MlN) 315.0 295.1 210.1 187.3 162.2 137.0 130.9 69.6 19.1 17.8 16.7 8.1 2.0 0.5 1,571.4 deal CouNt 55 26 11 17 13 25 8 19 6 3 2 3 1 1 190

* According to data compiled by Bloomberg from SEC filings.

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

aSSet ClaSS BReakdowN

SeC-RegiSteRed NoteS*
Last Week
FX, 1.3%
Commodity, 3.1%

RaNkiNgS
Global underwriters**
gloBal RateS-BaSed StRuCtuRed Note uNdeRwRiteRS** DZ Bank AG UBS Deutsche Bank AG Barclays Bank of America Merrill Lynch LBBW Societe Generale Credit Suisse Goldman Sachs Citigroup UniCredit ING Groep NV Banco Popolare SC BNP Paribas Group Credit Agricole CIB JPMorgan Commerzbank AG Standard Chartered PLC HSBC Bank PLC HSH Nordbank AG total 2012 yeaR-to-date RaNk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 78 MaRket SHaRe 20.3% 9% 8.9% 5.4% 4.5% 4.4% 4.2% 3.5% 3.1% 3% 2.6% 2.6% 2.1% 2% 1.9% 1.6% 1.6% 1.5% 1.4% 1.4% 100% VoluMe uSd (MlN) 9,720.48 4,316.65 4,259.68 2,596.28 2,136.23 2,092.22 1,995.48 1,682.26 1,486.89 1,447.05 1,253.96 1,246.82 1,026.87 969.43 919.66 776.11 755.56 699.87 683.91 681.87 47,998.89 deal CouNt 172 436 127 202 144 35 93 55 36 111 27 116 2 46 78 61 38 87 64 43 2,487

Reverse Convertible, 9.8%

Equity, 58.8%

Rates, 27.0%

investors bought $181 million of equity-linked notes last week. Eight of the nine largest offerings overall were in this category, including three with the s&P 500 index as the underlying. Royal Bank of Canada sold the biggest of the notes, $40.1 million of one-year securities Year to Date tied to Apple Inc. the Other, 3.9% largest note overall was FX, 2.9% linked to rates: GoldCommodity, man Sachs Group 6.5% Inc. issued $80 million Reverse of callable step-up seEquity, Convertible, 62.3% curities. reverse con6.6% vertibles accounted for Rates, 15.3% $30.1 million of sales. uBS AG issued the largest, $7.28 million of Hybrid, 2.4% notes tied to ChesaSource: Bloomberg LP peake energy Corp.

u.S. underwriters*
u.S. RegiSteRed StRuCtuRed Note uNdeRwRiteRS** Bank of America JPMorgan UBS Goldman Sachs Morgan Stanley Barclays Incapital 2012 yeaR-to-date RaNk 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 MaRket SHaRe 23.3% 22.1% 14.3% 8.3% 7.6% 6.2% 3.3% 2.9% 2.9% 2.6% 1.9% 1.7% 1.6% 0.7% 0.6% 0.2% 0.0% 0.0% 100.0% VoluMe uSd (MlN) 5,607.9 5,317.5 3,440.4 1,985.5 1,822.1 1,485.8 786.9 697.7 697.2 627.8 461.6 397.7 375.7 160.7 137.2 51.0 1.9 0.8 24,055.6 deal CouNt 258 830 1,893 270 210 338 15 216 317 79 84 169 61 249 18 5 3 1 5,016

iSSuaNCe SPotligHt
Proprietary Index
160 140 Millions of Dollars 120 100 80 60 40 20 0 8/11 9/11 10/11 11/11 12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 Source: Bloomberg LP 10.8 36.7 30.4 107.3 73.4 42.5 44.1 49.5 41.1 144.5 126.1 94.6 Sales of U.S. SECregistered notes

HSBC RBC Citigroup Wells Fargo Credit Suisse Deutsche Bank BMO Scotiabank SunTrust RBS Lloyds total (Jan. 1 to aug. 10, 2012)

* According to data compiled by Bloomberg from SEC filings. ** Based on data submitted to Bloomberg by banks. Excludes variable-principal redemption, reverse- and synthetic-convertibles. Global includes Euromarket issues from all nations and domestic European notes. Excludes SEC registered issues.

3 4

10

This document is being provided for the exclusive use of CHANDRA KHANDRIKA at BLOOMBERG/ 731 LEXIN
08.16.12 www.bloombergbriefs.com Bloomberg Brief | Structured Notes

10

u.S. SeC-RegiSteRed NoteS

iSSueR Goldman Sachs RBC Scotiabank Goldman Sachs Scotiabank Bank of America Barclays Goldman Sachs JPMorgan UBS Goldman Sachs HSBC Goldman Sachs JPMorgan Bank of America Goldman Sachs Scotiabank Goldman Sachs UBS UBS Credit Suisse Credit Suisse RBC JPMorgan UBS RBC JPMorgan UBS Goldman Sachs Credit Suisse Goldman Sachs UBS Goldman Sachs JPMorgan JPMorgan JPMorgan JPMorgan HSBC Barclays JPMorgan UBS UBS JPMorgan RBC Barclays Barclays BBgid BBG0038K6KT8 BBG0038MWCC1 BBG0038PRL30 BBG003905T40 BBG0038PW3Y0 BBG00384RN88 BBG00393SLC7 BBG00393ZJT6 BBG003818N58 BBG00394B3B4 BBG0038W1LP9 BBG0038PSQM7 BBG0038W1MB2 BBG0038V39J3 BBG003926JW6 BBG0038W1LJ6 BBG0038PT4N4 BBG003923P91 BBG00394B3L3 BBG003921Z28 BBG0038W54H2 BBG0038W54K8 BBG00381PMT5 BBG0038ZYNM5 BBG0038VKRQ6 BBG0038QDMG7 BBG0038V3CM2 BBG00394B3G9 BBG00393XGQ7 BBG0038S3PS4 BBG0038W1NX6 BBG00394B3Q8 BBG00393XJF3 BBG0038V3BD4 BBG0038S26S7 BBG0038J4482 BBG0038W3ZT2 BBG00391XK55 BBG0037R9PV7 BBG0038S2616 BBG0039283R5 BBG00394B3J6 BBG0038ZYPV0 BBG0038SRZG9 BBG0038MJ443 BBG0038W45K6 tRade date 9-Aug-12 10-Aug-12 7-Aug-12 6-Aug-12 6-Aug-12 8-Aug-12 10-Aug-12 10-Aug-12 6-Aug-12 9-Aug-12 10-Aug-12 10-Aug-12 10-Aug-12 9-Aug-12 10-Aug-12 10-Aug-12 6-Aug-12 7-Aug-12 9-Aug-12 10-Aug-12 9-Aug-12 9-Aug-12 10-Aug-12 9-Aug-12 8-Aug-12 6-Aug-12 9-Aug-12 9-Aug-12 10-Aug-12 6-Aug-12 10-Aug-12 10-Aug-12 10-Aug-12 9-Aug-12 10-Aug-12 8-Aug-12 8-Aug-12 10-Aug-12 7-Aug-12 10-Aug-12 10-Aug-12 9-Aug-12 9-Aug-12 9-Aug-12 7-Aug-12 8-Aug-12 aMouNt iN MlNS $80.0 $40.1 $14.6 $13.9 $11.1 $10.0 $8.4 $8.3 $8.3 $7.3 $6.5 $6.4 $5.2 $4.6 $4.0 $3.9 $3.7 $3.7 $3.6 $3.0 $3.0 $3.0 $3.0 $2.6 $2.5 $2.3 $2.3 $2.2 $2.1 $2.0 $1.8 $1.8 $1.8 $1.5 $1.5 $1.3 $1.3 $1.3 $1.3 $1.2 $1.2 $1.1 $1.1 $1.1 $1.1 $1.0

Notes of $1 million or more sold the week of Aug. 6, 2012.

uNdeRwRiteR Incapital RBC Scotiabank Goldman Sachs Scotiabank Bank of America JPMorgan Goldman Sachs JPMorgan UBS JPMorgan HSBC JPMorgan UBS Bank of America JPMorgan Scotiabank Goldman Sachs UBS JPMorgan JPMorgan JPMorgan RBC UBS JPMorgan Goldman Sachs UBS UBS JPMorgan JPMorgan JPMorgan UBS JPMorgan UBS JPMorgan JPMorgan JPMorgan JPMorgan Barclays JPMorgan UBS UBS UBS UBS Barclays Barclays

tyPe Rates Equity-Linked Equity-Linked Equity-Linked Equity-Linked Equity-Linked Equity-Linked Equity-Linked Equity-Linked RevCon Equity-Linked Equity-Linked Equity-Linked Equity-Linked Commodity Equity-Linked Equity-Linked Equity-Linked RevCon Commodity Equity-Linked Equity-Linked Rates Equity-Linked Commodity Equity-Linked Equity-Linked RevCon FX Equity-Linked Equity-Linked Equity-Linked FX Equity-Linked Equity-Linked RevCon RevCon Equity-Linked Equity-Linked RevCon Equity-Linked RevCon Equity-Linked RevCon RevCon RevCon

teRM iN MoNtHS 120 12 19 13 18 180 18 18 13 6 18 60 12 12 12 12 18 19 6 12 18 18 150 12 12 18 12 6 24 42 12 60 0 12 12 12 12 12 24 12 12 6 12 24 12 12

CallaBle Yes Yes No No No Yes No No No No No No No Yes Yes No No No No No No No Yes Yes No No Yes No No No No Yes No Yes Yes No No No No No Yes No Yes No 0 No

uNdeRlyiNg callable stepup aapl mxea spx mxea spx sx5e spx basket chk spx basket spx apc djubstr spx mxea spx ms goldlnpm spx iyr callable stepup s paa mxea GG cmi cny/usd indu spx sx5e mxn/usd hot hal aapl aapl aapl, coh, goog, mjn, myl, lvs, sbux, hot, tif, wynn, yum eem c cmi PAY HIG csx cat cmi

3 4

10