Sunday, July 22, 2018

Structured Products Are Back Baby!

Back in the day (2005 - 2008) structured products were all the rage in many areas of finance and one we posted on quite a few times was the structured carbon trading biz.
Mainly because the plain vanilla instruments just weren't opaque—read profitable for the marketeers—enough there was some really creative packages being put together.

Top-tick of those halcyon days can be pinpointed as December 3-15, 2007 when, of the 4483 Non-Governmental Organisation (NGO) delegates to the U.N. climate conference in Bali, the largest single contingent was from the International Emissions Trading Association (IETA), 336 strong and fully 7.5% of all the accredited delegates. (a total of 10,000 attendees flew in from around the world because Bali climate)
Good times.

Anyway, that stroll down Memory Lane was triggered by a piece Dan McCrum wrote last week.
From FT Alphaville:

RBC, through the FANG barrier 
Our attention is drawn to a peculiar corner of financial markets where investors can earn an annual income of more than 10 per cent a year. How?

The answer is by lending money to Royal Bank of Canada, with a few additional side bets.
Take for instance the ACCCBNLLP4ES, a structured product more formally known as the Auto-Callable Contingent Coupon Barrier Notes Linked to the Lesser Performing of Four Equity Securities, Due July 1, 2021.

For additional glamour, those four equity securities are the FANGs: Facebook, Amazon, Netflix and Google.

Auto-callable notes are a minor part of the structured products industry. Typically they require a low minimum investment of $1,000. They pay an above market interest rate, but can be automatically called, or redeemed, if some reference security is above a preset price, on certain dates in the future.
Reference securities might normally be a stock or commodity, an index or a foreign currency. Income from the notes are contingent, in that coupons are only paid if the reference security is above a certain, lower point, the barrier.

The risk is that the notes have a cliff edge quality to them, if things don't go well. (We're ignoring the risk of being a senior unsecured creditor to RBC, which declined to comment.)

For the FANG note, for instance, the barrier price for each of the four stocks is 50 per cent of their price at the time of issue, and the payment at maturity on July 1, 2021 is based on the worst performer. So the hypothetical payout at maturity looks like this:...MUCH MORE
"Auto-Callable Contingent Coupon Barrier Notes Linked to the Lesser Performing of Four Equity Securities, Due July 1, 2021."
How can anyone look on this and not weep tears of joy?

That my friends is the highest expression of the marketeers art and makes our former favorite pale in comparison.
As seen last April:

"Machine Learning’s ‘Amazing’ Ability to Predict Chaos"

When you have one complex-chaotic system, say an ag or energy derivatives market overlaid on another complex-chaotic system, say, for example, weather; the ability to foretell the progression from the initial condition of one, or better yet both, systems would have some pecuniary advantage*
Researchers have used machine learning to predict the chaotic evolution of a model flame front.

"Hey, I've made that bet!"
It's called:
"The ol' just light large-denomination banknotes on fire to avoid the hassle of feigning any type of skill or expertise in  weird instruments you don't understand trade."**

**Tama Churchouse describes his introduction to derivatives sales and the first product he put together and marketed:
"...No matter. I persevered, and three months later, in November I structured and sold my first structured note.
I remember drafting the product term sheet.  
I christened it a “Bermudan Callable Three Times Leveraged Inverse HIBOR in-arrears Resettable Step-up Snowball Note.
No, I’m not kidding…The notional value of the note was HKD100mn (around US$13mn), and we booked around EUR100k of profit...."
One last memory.
In 2007 we posted "Solar: Leveraged Lease Structured Financing" which had one of our earliest mentions of snowball notes, now a nice bookend to Mr. McCrum's piece that got this all started:
And from FT Alphaville, the intersection of finance and unreality:
Chemical Finance? Snowball Notes
Us innocent types on FT Alphaville thought a snowball was a slightly naff cocktail, an Advocaat-based drink from the 70s. Either that, or a little white pill popped occasionally on a Saturday night....MORE