Derivatives Week-Feb2013 PDF

VOL. XXII, NO.
5 / February 4, 2013
Exclusive Insight for Derivatives Buyers, Sellers and Structurers
Derivatives Week
The weekly issue from Derivatives Intelligence
www.derivativesintelligence.com
Credit | 3
Rates | 5
FX | 6
Equity | 8
Regulation | 10
Novel Collateralized Floating-Rate Structure Surfaces

UBS is marketing unique collateralized floating-rate notes linked to threemonth USD Libor and the credit risk of the Swiss Confederationthe first
of their kind to be offered publically in Switzerland.
The solution linked to Swiss Confederation is the first launch to a
broader UBS Wealth Management audience in Switzerland, Roland
Schetter, head of fixed income structured products at UBS Wealth
Management Europe in Zurich, told DI. However, we believe that the
concept of collateralized solutions, be it as repack as in this case or in
the form of secured funding, is going to come more in the future also
since many financial issuers have limited funding appetite. In addition and
with this concept, we are able to provide investment solutions which are
Market
100$
2
Collateral
100$
Investor
1
Initial
Cash
Flows
Collateral
VIS Finance S.A.

Credit Support
3
Swap Agreement
Security issued by
VIS Finance S.A.
Principal and returns

matching the security
issued by VIS Finance S.A.
(continued on page 16)
Collateral interest and

principal payments
UBS AG, London
Source: UBS
Q&A: UBS Andrew Kaufmann
Trough Of The Cycle
BBVA Expands Equity Biz
Investors are moving away from three-to-five year 100%

principal protected trades, and shifting into shorter tenors
with less protection due to changes in interest rates, Andrew
Kaufmann, global head of fx structuring at UBS in London, told
DI in an interview.
Over the past few years weve seen declining interest rates
and also in the past few months weve seen declining bank credit
spreads, said Kaufmann. What that means is that the amount
of interest that could have been earned, and which would be
used to purchase that performance, has declined, so were
seeing clients accept lower than 100% principal protection.
Banco Bilbao
Vizcaya Argentaria
has expanded its
equity derivatives
flow and structured
products capabilities
in Europe to grow
its distribution in the
U.K., Switzerland, the
Nordics and France.
Regulatory Alert
People DataBank
Check out our interactive database

of new and pending regulatory
proposals and directives that relate
to derivatives collected from global
regulatory agencies.
Weve tallied up the staffer

comings and goings for January,
with equities still the hardest hit
asset class. Morgan Stanley has
seen the most departures over the
month, followed by UBS.
Visit the data section of

Collateral
(charged assets)
See page 11
Arrivals & Departures by Asset Class

3
20
15
10
1
5
Credit
Equity Commodities FX
Interest
Rates
Equity
Interest
Rates
FX
Fixed
Income
Credit
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DerivativesWeek
IN THIS ISSUE
Derivatives Intelligence
CREDIT
EQUITY
3 | Risk Reversal Opportunity

Seen In iTraxx
8 | EFG FP Expands White Labeling

Structured Products
EDITORIAL
PUBLISHING
Steve Murray
Editor
Anna Lee
3 | Cyprus Poses Systemic Ripple Risk
8 | Deutsche Bank Flow Chief Exits
Tom Lamont
General Editor
4 | Cairn Readies CLO With Novel

Equity Holding
9 | UBS NY Equity Sales Chief Leaves
Peter Thompson
INTEREST RATES
5 | Barclays Touts Bear Flatteners
On Rates Hike
Marketing Director
(212) 224-3175
Laura Pagliaro
Executive Editor [Chicago]

(773) 439-1090
Robert McGlinchey
REGULATION & CLEARING
Managing Editor [London]

(44-20) 7303-1789
10 | LCH Breaks USD500 Bln NDF

Clearing Mark
Daniel OLeary
10 | SEC Initial Margin Proposals

To Hit Hedging
Beth Shah
Senior Reporter &

Hong Kong Bureau Chief
(852) 2912-8056
Reporter [London]
(44-20) 7303-1798
Venilia Batista Amorim
FX
6 | UBS Launches Gold Vs. Dollar
Kick-Out Note
7 | Capula Hires ex-Citi EM Fx Trader
7 | U.S. Fx Volumes Continue Slide
7 | Citi Adds Ex-DB Fx Trader
DEPARTMENTS
11 | People Data Bank
12 | Learning Curve: Bermudan
Swaption Pricing Under
MultipleCurves
London Bureau Chief

(44-20) 7303-1718
Stanley Wilson
Washington Bureau Chief
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This weeks stories and analysis can be found on the following pages:
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Design Director
6 | Japanese Tap Long-Dated Fx Structures

Japanese retail investors are buying long-dated structured fx products, such as power
reverse dual currency notes, that benefit when the yen weakens against the Australian
dollar or, in some cases, the U.S. dollar.
ADVERTISING
Patricia Bertucci
Associate Publisher
(212) 224-3890
8 | Nomura Preps Japan ETN Program

Nomura Securities plans to issue four exchange-traded notes from a new platform.
9 | Stock, Index Structures Take Off In Tokyo

Knock-in, knock-out structured products linked to the Nikkei and single Japanese stocks
are being snapped up as Japans equity market rebounds sharply.
9 | Asia Investors Tap Vol Via Upside Calls

Investors in Asia are buying volatility via upside calls on U.S. and Chinese stocks as sentiment improves in the U.S. and Asian markets.
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9 | MS Adds HK Index Trader

Morgan Stanley has hired Yuichi Yamashita, an ex-v.p. and index arbitrage trader at
Socit Gnrale in Hong Kong.
10 | HKEx Lays Out Extended Futures Trading Plans

The Hong Kong Exchange has presented its plans for after hours futures trading to the
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Derivatives Week 2013
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Institutional Investor, LLC 2013
VOL. XXII, NO. 5 / February 4, 2013
Derivatives Week
Credit
new collateralized loan obligation is set to launch. Cairn Capital is pitching the deal
and will hold the 5% skin-in-the-game portion via a managed structured credit fund.
Elsewhere, Socit Gnrale has identified the opportunity to sell a risk reversal on the
back of the recent widening in the iTraxx Main.
Widening iTraxx Opens Risk Reversal Opportunity
P&L (k )
strategist in Paris. Based on these signals we have adopted a

The recent widening of the iTraxx Main has opened up the opportunity
bullish trade for people via a risk reversal, which would benefit
to take a bullish position on the index by selling a risk reversal.
The trade, which is being recommended by Socit Gnrale, from a spread tightening.
The firm is recommending that
is based on the firms internal modelling
March 110/130 Risk Reversal P&L Profile
investors buy an iTraxx Main EUR100
platform, which shows that the iTraxx
million March receiver at 110bp and sell a
Main is 14 basis points too wide. We
2,000
EUR100 million March payer at 130bp for
have a cross-asset model that shows
1,500
Current P&L
zero cost. The current steep volatility smile
equity volatility and government bond
1,000
Expiry P&L
in the iTraxx Main also gives value to the
yields, which identifies that credit
500
short out-of-the-money payer option.
spreads are significantly too wide,
0
70
90
110
130
150
170
190
What is good with this type of strategy
since credit indices have widened quite
-500
Index Spread (bp)
is, if there is a spread widening that is
a bit over the last week. This widening
-1,000
moderate before March, we will not have
of spreads has occurred when equity
-1,500
-2,000
additional losses. We will only have losses if
has performed better, while there are
-2,500
spreads widen above 130bp which gives us
still low volatilities and government
-3,000
a large cushion of 15-20bps with spreads at
bond yields have only increased
Source: Socit Gnrale 112bps right now, added Dando.
slightly, said Raphael Dando, a credit
Cyprus Poses Systemic Ripple Risk

By Gavan Nolan, credit analyst, Markit
Sovereign credit has started the year in a docile mood, with
peripheral countries selling bonds effortlessly and spreads rangebound at fairly low levels.
There is little sign that sentiment will shift in the coming weeks,
not least because the European Central Bank stands ready to
unleash the OMT bond buying program as soon as a country
requests a bailout.
However, one country that has requested help from its European
partners threatens to upset the status quo. Cypruss economic size
is insignificant in the context of the eurozoneits GDP is less than
1% of the total in the currency bloc. But, it is in a dire predicament
and the problems surrounding its rescue have implications for the
rest of the eurozone.
The Cypriot economy is worth about EUR18 billion, the third
smallest in the eurozone. However, the country needs around
EUR17.5 billion if it is to avoid collapsing, with the majority going
towards recapitalizing its bloated banking sector.
Cypruss European neighbors could find the sum with little
difficulty. But the bailout has been met with considerable
opposition in some countries, particularly Germany. Cypruss
banks are largely funded with foreign deposits, with a large amount
coming from Russia. Allegations of money laundering have been
thrown at Cyprus, and the prospect of using

taxpayer funds to bailout potentially criminal
depositors is unpopular.
However, eurozone governments are more
than aware that, despite Cypruss small size, it
Gavan Nolan
has the potential to relight systemic risk in the
eurozone. That is why a bailout is the least painful and most likely
way forward. What form it takes is more difficult to say.
If it is bailed out to the tune of EUR17.5 billion, Cypruss net debt
to GDP ratio could spiral as high as 150% of GDPa level that is
surely unsustainable. This means that debt restructuring and a
downsizing of the banking sector are all but inevitable. Holders of
subordinated bank bonds will probably have to share the burden of
the bailout, though it appears at this stage that senior bondholders
will be protected. If the latter outcome did occur, this could cause
shockwaves across the eurozone banking sector and lead to
spread widening.
Cypruss CDS spreads were around 1100bps last Friday, or
33 points upfront, making it the worst credit that is currently
trading in the eurozone. Bailout negotiations should gain
momentum when the results of the presidential elections on
Feb. 17 are known.
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DerivativesWeek
Derivatives Week
The
Intelligence

Theweekly
weeklyissue
issuefrom
fromDerivatives
Derivatives
Intelligence
Credit
Cairn Readies CLO With Novel Equity Holding
Cairn Capital is pitching a collateralized loan obligation which will
hold the 5% skin-in-the-game portion via a managed structured
credit fund of the London-based asset manager. The fund will also
act as counterparty to the total return swap with the deals Credit
Suisse warehouse facility.
The risk retention portion will be in the form of a 5% tranche of the
EUR60 million (EUR81.4 million) subordinated first loss equity piece,
which will be split into two classes. It is understood the M1 tranche
has already been privately placed through reverse enquiry with a
third party investor, while the M2which represents the 5% skininthe game portionwill be held indefinitely by the Cairn Special
Opportunities Credit Fund. The credit fund, which has two pension
funds as its majority investors, according to market officials with
inside knowledge of the deal, will hold till maturity the 5% equity M2
tranche of the CLO. A spokeswoman at Cairn declined to comment.
Some buysiders said Cairns move to place the risk retention
portion of the equity tranche with the fund, and not bring it on balance
sheet, represented a greater risk for the funds investors, since it is
their money that would be used to purchase of the M2 class. After the
deal is done, that lump of equity is going to be stuck in that fund, one
fund manager with knowledge of the deal told DI. But [Cairns] also
going to be earning 50 [basis points per annum] of management fees
on the CLO, which Credit Suisse is arranging for them. So its slightly
odd that theyre doing this entire deal out of one of their funds.
Credit Suisse is arranging the 12-year Cairn CLO III deal and is
also providing the total return swap warehouse facility, which is used
to finance the seed portfolio being used as collateral for the EUR300.5
million (USD407.5 million) CLO, according to marketing material
seen by DI. If successfully placed, Cairns deal will represent the third
European CLO issued in the primary market since 2008. Cairn initially
launched its fund as the Structured Credit Fund, which invests in credit
default swaps, options and asset-backed securities, in late 2007. At
launch, the minimum investment required was USD1.5 million.
One senior credit investor with knowledge of the deal at a rival
London-based CLO manager said the fund is taking more risk
in acting as the counterparty for the total return swap with Credit
Suisses warehouse, as opposed to Cairn acting as the counterparty.
He noted, however, that investors in the fund could be enticed by the
possible yield the structure could bring. On the back of the envelope-unless they print at stupid levels--I think the equity will struggle to
make 10% [downside] on reasonable default assumptions, he said.
But, if the European economy improves and loans start performing,
the equity tranche could return almost 20%, he added.
Mohammed Jamal, London-based founder of investment
advisoryMolton Street Capital LLP, noted some investors may be
disappointed Cairn was not taking enough risk in the transaction. But
Cairn has a strong track record as a premier European CLO manager,
he added. I also think the deal is not as leveraged deals issued back
in the days, which brings more comfort to the investor base.
A spokesman at Credit Suisse declined to comment
News Roundup
Five-year credit default swaps on Chesapeake Energy narrowed
by 72.5 basis points to 391.9 bps after the Oklahoma City-based
firm announced that Aubrey McClendon will step down as ceo.
(Bloomberg, 1/30)
Global sovereign credit default swaps prices narrowed 16% in

the fourth quarter, according to CMAs Global Sovereign Debt
Credit Risk Report. CMA reported that Ireland showed the greatest
improvement, tightening 31%. (CMA, 1/25)
Jon Mawby and Steve Roth, managers of GLGs Strategic Bond
Credit default swap spreads on Japanese corporate bonds

narrowed 5 basis points to 134.5 bps, their lowest level since
August 2011. (Bloomberg, 1/25)
Fund, have boosted allocations to credit default swaps and floating

rate notes, saying they are shifting away from exposures sensitive
to duration to maintain an attractive yield. (Citywire, 1/30)
Credit default swaps on sovereign bonds have tightened to their

lowest level in two years. Central banks have made securities safer
by collectively pouring more than USD5 trillion since 2009 into the
instruments, which helped raise ratings, according to data from
Bloomberg and Bianco Research. (Bloomberg, 1/28)
A forthcoming directive from the U.S. Securities and Exchange
Commission that would require structured-product issuers to
unbundle the fixed-income pricing element from the derivatives
component, could drive consolidation of the market due to pricing
pressures, according to buyers and attorneys. (International
Financing Review, 1/30)
4
The U.S. Commodity Futures Trading Commission is

scheduled to hold a public roundtable Feb. 5 to discuss its
proposed rule-making on enhancing protections for customers
and customer funds held by futures commission merchants and
derivatives clearing organizations. (CFTC, 1/29)
Some of JPMorgan Chases own traders may have speculated
against the derivatives trades that the banks chief investment office
had made, which ultimately resulted in more than USD6.2 billion in
losses. (Reuters, 1/30)
Bank of America has begun transferring more than USD50

billion of its Dublin-based derivatives business to its U.K. unit.
(Financial Times, 1/28)
Derivatives Week
Interest Rates
oncerns over an unexpected hike in U.S. interest rates are growing since the Federal
Reserve announced the numerical thresholds at the Federal Open Markets Committee
meeting in December. Debt ceiling fears have been allayed for the time being as the House
Republicans have approved a debt limit increase. Theres no slowing down in structured product
innovation as UBS markets a unique collateralized floating rate note linked to three-month USD
Libor and the credit risk of the Swiss Confederation.
Bear Flatteners Touted On Rates Hike Expectations

Front-end bear flatteners to position for U.S. interest rate hike
expectations are being recommended by Barclays. According
tothe firms strategists, the trade would earn carry and is
attractive at present on the back of recent demand for mid-expiry
short tail options.
The firm is recommending investors go long USD490
million the 2y1y with an at-the-money payer and
go short USD100 million the 2y5y with an at-themoney payer. The view is that the trade would carry
positively due to the steeper forwards and obtain
a significant premium because of the attractive
volatilitydifferential.
Piyush Goyal, interest rates
strategist in New York, told
DI that the recommendation
comes as concerns for
an unexpected increase
in hike expectations have
grown since the U.S.
Piyush Goyal
Federal Reserve announced
the numerical thresholds at the Federal Open
Markets Committee meeting in December. Since the numerical
thresholds were introduced by the Fed at the December FOMC
meeting, you can see, for example, two-year options on two-year
rates have gone up, one-year options on three-year rates have
gone up, but one-year options on 30y rates have not gained at
all. So while clients are worried about higher vol in the belly of the
yield curve, in the recent selloff the market has reacted blindly in
a long-duration manner that has caused this distortion in the yield
curve, said Goyal. So, if you wanted to position for higher rates
a month and a half ago, you could have done that in seven-year
and 10-year rates, and now that the selloff has happened and as
the dust settles, people will start focusing on what part of the yield
The worlds number one sales and marketing tool for investment managers
curve is the most vulnerable. What I am saying is that, with the Fed
numerical thresholds in place, if the Fed acknowledges this strong
data then we could see a hike in 2015, meaning that the 2y1y rate
that will get destroyed a lot more than the
4y1y ratesso people will start
focusing on these trades now
since the broad macro selloff
has happened already.
According to the firms
analysis, the options
strategy would expire
worthless and keep
the premium intake
should the first hike in
rates occur in two years.
Should hike expectations
be brought forward, then
the trade could potentially gain
97115 basis points.
The two-year forward, one-year rate,
which is basically the market expectations of fed
hikes in 2015, has gone up roughly 10 basis points in the last 10
days. Whereas the 4y1y rate, which is the market expectation of
fed hikes in 2017, has gone up by 20 basis points. So that part of
the yield curve has steepenedso levels are better for putting on
a flattener now, said Goyal. Also, because of a larger move in
rates, delivered vol is higher, meaning implied vol goes higher. So
vol on 4y1y rates is very high relative to vol on 2y1y rates by about
60-80%. So when you put on a bear flattenerpositioning that the
market will start worrying about the Fed hiking sooner rather than
later, meaning you want to buy a put option on 2y1y rates, funded
by a put option on 4y1y ratesyou are going to put on a flattener at
better levels because the option on 2y1y is cheaper.
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Derivatives Week
FX
raders spent much of the week focused on non-farm payrolls that were due for release
Friday. Strategists were forecasting a continuation in the euros strength as the region
benefits from renewed capital inflows on the back of an increase in risk appetite. The yen is
still receiving the bulk of market attention with some traders noting that the U.S. dollar/yen would
have to significantly rise in order to achieve the Bank of Japans ambitious 2% inflation target.
Gold Vs. Dollar Kick-Out Note Surfaces

UBS has launched a one-year kick-out note with a rebate that
enables investors to benefit from the moderate appreciation of gold
versus the U.S. dollar.
The Kick-Out Leverage PERLES Plus with Rebate offers 130%
participation up to the kick-out barrier, and is not capital
protected; therefore, the profit potential is limited
by the kick-out but the investor can also lose
all of its invested capital.
[The product] is mainly targeted at
clients who are holding goldgiving them
an opportunity to switch into a goldlinked solutionwith a buffer against
pricecorrections on the downside,
Maresa Schmolka, product specialist
at UBS Wealth Management in
Zurich, told DI. The structureon the one
handoptimizes thepayoutinmoderately
bullishmarkets,meaning you have ahigher
participationcompared to a direct investment as long
as the kick-out on the upside isnot triggered.If the kick-out above
2000 USD/ozis triggered,however,you lose the possibility to
participateon the upside.
Schmolka added that on the downside there is a security

buffer down to a lower level of 1520USD/oz, meaning that
as long as the price trades above this level on expiry, the
investor will receive conditional capital protection. The rebate
isacompensationpaymentwhich you receive if you have a
barrier event on the upside; its 2% for one-year.
Schmolka noted that UBS has issued the
PERLES Plus due to a demand for gold from
clients. We have seen a very bullish market
from 2008, but in 2012 we saw it trade
sideways in a very, very wide range. We
thought theres a need to deal with this kind
of market--while still keeping the upside
open because we see trends higher from
time to time--but giving some buffer and
cushion on the downside.
The structure begins trading Feb. 19 and
matures Feb. 19, 2014. It will be marketed only to UBS
clients in Switzerland as redemption would be in gold if the
structure expires below the lower level; therefore, investors must
have a UBS metals account. Schmolka added that the firm intends
to launch the same product against the euro in the coming weeks.
Japanese Tap Long-Dated Fx Structures

Japanese retail investors are buying long-dated structured fx
products, such as power reverse dual currency notes, that benefit
when the yen weakens against the Australian dollar or, in some
cases, the U.S. dollar.
PRDC notes pay a coupon that increases as the yen
depreciates. The notes have embedded fx options that go long the
referenced or carry currency and short JPY. In addition, the notes
are typically structured with a floor on the coupon either at zero or a
few basis points, and can be structured without principal protection
in order to enhance the potential return. They often have an early
redemption mechanism, which is either structured as an optional
issuer call or a knockout trigger.
Existing products, which are typically structured with tenors of
between 10-and-30 years, are seeing gains from the recent downward
movement of yen against the U.S. and Australian dollars. New deals
are mostly being structured referencing the Australian dollar.
6
Now that the yen is weakening, weve seen quite a lot of PRDC
trades knocking out or being early called, so this is generating
some interest in these products, said Filippo Olivetti, managing
director and co-head of markets structuring for Asia Pacific at the
Royal Bank of Scotland in Tokyo. Investors of PRDC notes in
previous years have been suffering quite a lot, because theyve
been taking the view that yen will not strengthen. Thats definitely
not what was happening until a couple of months ago.
Olivetti noted investors had been concentrating on AUD in new
PRDC trades due to the rates differential compared to JPY. The
difference in the long-dated [AUD] rate and yen rate is much higher
compared to U.S. and yen, he said. And the payout tends to mimic
what a carry trade would do. So the bigger differential between the
two currencies, the more attractive the trade will look.
The yen has been depreciating as the Bank of Japan and Prime
Minister Shinzo Abe seek to stimulate the economy and fight inflation.
DerivativesWeek
Derivatives
Week
FX
U.S. Fx Volumes Fall Again
Average daily volume total for over-the-counter fx instruments in
the U.S. has decreased by 7.7% since April 2012.
A survey of North American fx volume conducted by the
U.S. Federal Reserve Foreign Exchange Committee, put fx
spot, forwards, swaps and options at USD794 billion in October,
compared with USD860 billion in April.
The decline was primarily driven by a 48% drop in spot, which
had its lowest turnover since April 2007. The committee added
that the decrease partly reflects the impact of Hurricane Sandy.
The decline was mainly in euro against U.S. dollar transactions,
accounting for around two-thirds
Regional Average
of the overall decrease.
Daily Volumes
The total of average daily
U.S. USD794 billion
fx transactions volumes was
USD793,543 million in October,
U.K. USD1,919 billion
against USD859,845 million
Singapore USD361 billion
in April. Average daily options
Japan USD300.5billion
volumes also decreased
Canada USD54.3 billion
to USD27,398 million from
USD33,419 million.
Australia USD186 billion
However, the total of
average monthly fx transactions volumes marginally increased

from USD18,056,630 million in April to USD18,251,448 million in
October. Although, averagely monthly options decreased from
USD701,771 million in April to USD630,144 million.
Capula Pockets EM Fx Trader

Capula Investment Management, the USD13 billion fixed income
and currency focused hedge fund, has hired Gagandeep Singh, an
emerging markets fx options trader.
Singh left Citigroup in London in December. He will be
replaced internally, according to a Citi spokesman. Capula
declined to comment.
Ex-DB Fx Trader Joins Citi

Prashant Puniya, ex-electronic trading fx options trader at
Deutsche Bank in New York, has joined Citigroup as a G10 fx
options trader. He is based in London.
Puniya reports to Chirag Patel, head of Central and Eastern
Europe, Middle East and Africa and G10 fx options trading. Puniya
will also help in expanding the firms e-trading options offering,
according to a spokesman.
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An interactive, proprietary
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and directives that relate to
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Derivatives Week
Equity
here was increased option activity in emerging market exchange-traded funds last week.
According to BNP Paribas, one investor sold 18k of June iShares Brazil USD56-strike puts so
to buy June iShares Mexico USD73-strike puts at 14k with the view that Mexican equities will
outperform those in Brazil. Elsewhere, investors in Asia are buying volatility via upside calls on U.S.
and Chinese stocks.
EFG FP Plots White-Labeling Push

EFG Financial Products is to expand its white-labeling structured
products business this year. The move is on the back of its initial
public offering in Q4 that saw EFG International reduce its stake
in the investor products provider from around 58% to around 25%,
setting the structured products provider as a more standalone
operation from its global private banking parent. EFG FP was
launched in 2007 by EFG International and became a subsidiary
financial products issuer prior to the IPO.
We look at ourselves as a platform for structured investment
products and services. EFG Financial
Products is vertically integrated, covering
the entire value chain from structuring to
pricing, documentation, issuance, listing,
settlement, risk management, market-making,
life-cycle management and distribution,
Jan Schoch, ceo of EFG FP in Zurich, told
Jan Schoch
DI. Under our white-labeling strategy, we
are also offering our platform to other institutions which want to
issue their own products and at the same time raise funding and
reduce risk weighted assets in the context of existing loans,
mortgages or deposits in certain durations. The IPO gives us a

more independent setup which will be helpful in expanding our
whitelabeling strategy.
The focus by EFG FP comes after two years of expansion in
Europe and Asia Pacific. Over the period the firm has launched
offices in Hong Kong and London, with distribution operations in
Spain, France and Germany, among others.
We are primarily looking to add white-labeling partners in the
markets in which were already present, said Schoch. On top
of our existing partnersEFG International, two additional Swiss
banks and one insurance companywe are currently speaking to
two Swiss institutions. Further down the road, we also intend to
offer our white-labeling model abroad to strengthen our footprint in
other jurisdictions in which we operate.
The firm also plans to expand its electronic structured products
platform, known as CONSTRUCTOR, after adding autocallables
in December. Schoch added that the firm would not open up the
platform to other issuers, which Bank Vontobel did in September
with its Deritrade platform, although he added that white-label
products could be added in the future.
Nomura Preps Japan ETN Program
subsidiary of Mitsubishi UFJ Financial Group, also listed the

Maxis Topix Risk Control (5%) ETF, which aims to target a volatility
of 5% (DI, 2/21).
Nomura is targeting professional investors and high-net-worth
individuals with the new series of ETNs. The notes are imbedded
with swaps that track the referenced indexes, according to Shiota.
Nomura Securities plans to issue four exchange-traded notes

from a new platform. The NEXT Notes will be issued Feb. 18 on the
Tokyo Stock Exchange.
Nomura is looking to issue now as investor interest in leveraged,
inverse and volatility structures has grown recently, according to
Makoto Shiota, head of the ETF marketing group in Tokyo. Given
the nature of the flexibility for the product setup, ETN products
would be preferred over [exchange-traded fund] products for nontraditional indices, Shiota said in an e-mail. Nomura also offers an
ETF program in Japan called NEXT FUNDS.
The ETNs are NEXT NOTES HSI Leveraged ETN, NEXT
NOTES HSI Short ETN, NEXT NOTES KOSPI200 Leverage ETN
and NEXT NOTES F-KOSPI200 Inverse ETN. They reference
leveraged and inverse indices in Hong Kong and South Korea.
Japans ETF and ETN market was active last year with a number
of deals issued, compared to other regions in Asiasuch as Hong
Kong and Singapore. Simplex Asset Management launched two
sets of deals, including Japans first leveraged and inverse ETFs
(DI, 12/7). Mitsubishi UFJ Asset Management, the Tokyo-based
8
Jarck Departs Deutsche Bank

Thomas Jarck, managing director and head of U.S. index flow
trading in global equity derivatives at Deutsche Bank in New York,
has left the firm.
His departure comes little over a year and a half since joining
the firm. He reported to Dushyant Chadha, head of equity
derivatives for the Americas. Chadha was unavailable for comment.
Jarck arrived in June 2011 from Citigroup, where he was head
of U.S. index flow, exchange-traded funds and ETF options trading
in New York. Prior to Citi, he held equity derivative trading positions
at Credit Suisse and Letco, a Chicago-based options trading firm.
He could not be reached and a spokeswoman did not return
calls by press time.
Derivatives Week
Equity
Stock, Index Structures Take Off In Tokyo
Knock-in, knock-out structured products linked to the Nikkei and
single Japanese stocks are being snapped up as Japans equity
market rebounds sharply.
The most common trade is knock-in-knock-out type of notes
that pay a fixed coupon and, if its above a certain trigger level, the
notes will redeem, said a structurer in Tokyo. Quite a lot of these
trades and some single stock ones have been done recently.
Knock-in, knock-out structured products contain a knock-in put
which redeems the deal at par as long as the Nikkei is above a
certain trigger level. Otherwise, the notes will redeem at the ratio
between the final and initial value.
Japanese equity has rebounded in response to the Bank of
Japan and governments stimulus plan.
In a recent client note, strategists at BNP Paribas said Japan
could experience mild nominal wage rises and consumer prices
could swing to positive growth this year. Interest rates are likely to
remain low as the BoJ continues its [Japanese Government Bond]
purchases, but we think domestic demand will expand under negative
real-term interest rates, the strategist noted. We believe not only
overseas investors but domestic investors will enter the market soon.
The strategists noted investors could deploy a number of strategies
to take advantage of the improving market sentiment, including a

June or September call spread on the Nikkei at 194 or 234. BNP also
said investors could deploy a July worst-of call at 105% referencing
a number of Japanese stocks, including Shin-Etsu Chemical,
Bridgestone, TDK at 2.85%, Honda, Toyota Motor, Nissan Motor at
3.65% and MUFJ Financial, SFMG, Mizuho Financial at 3.45%.
Asia Investors Tap Vol

Via Upside Calls
ahead of fundamentals and some others are worried about staying

underweight the exporting economies of [South] Korea and
Taiwan, the strategists added.
Investors in Asia are buying volatility via upside calls on U.S. and
Chinese stocks as sentiment improves in the U.S. and Asian markets.
A senior equity trader said flow had been seen on upside calls
referencing Apple and Chinese communications company China
Mobile. You have index volatility in Hong Kong at levels we havent
seen in almost eight years, so really low levels in vols are leading
clients to buy upside calls, the trader said.
The trader noted some clients had also bought accumulators
and simple equity-linked notes referencing Apple. Accumulators
combine a strip of forwards and knock-outs, allowing investors to
buy stocks from the bank for a predetermined amount of time at a
predetermined level, as long as it does not breach an upside barrier.
Investors could also start playing skew on the S&P 500, selling
puts at 90% and buying calls at 110% in a bid to play the difference
between the vol and the skew, the trader added. Theres about an
8 point spread, so that skew is actually still quite steep, he said.
Whereas you have the vol, pure index vol at 12, so the ratio of the
vol to the skew is at historically very high levels.
BNP Paribas strategists said recently in a client note that Asian
investors had started the year positive on equities. But investors
still have concerns over China slowing in the second half of 2013.
Some investors are concerned about Indian share prices running
UBS NY Equity Sales

Honcho Departs
Jay Elkins, head of delta one sales for the
Americas at UBS in New York, has left.
He departed a few days ago after four years
with the firm. He joined from Lehman Brothers
where he was a managing director in equity
derivative sales for 10 years. Prior to that, he
worked at Bankers Trust for six years in equity
Jay Elkins
derivative sales.
Details of his reporting line and future destination could
not be gleaned. He could not be reached. A spokeswoman
confirmed the departure.
MS Adds HK Index Trader

Morgan Stanley has hired Yuichi Yamashita, an ex-v.p. and index
arbitrage trader at Socit Gnrale in Hong Kong.
Yamashita started late last year as executive director focusing
on high frequency and index arbitrage trading. He joined SocGen
in June 2006 and left last November. Yamashita was an equity
index option and volatility arbitrage trader at Daiwa Securities in
Tokyo 1998-2006.
Further details could not be determined by press time. Yamashita
and a spokesman did not return calls seeking further information.
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Regulation & Clearing
he International Swaps and Derivatives Association has criticised initial margin requirement
proposals from the Securities and Exchange Commission, noting that the requirements
would curtail the use of uncleared swaps for hedging. In Europe, firms are awaiting the
European Parliaments Economic and Monetary Affairs Committees debate on derivative technical
standards, which takes place on Tuesday.
LCH Hits USD500B In NDF Clearing

LCH.Clearnets ForexClear platform has
cleared USD500 billion of fx non-deliverable
forwards since its launch last March.
The service, which is supported by 14 market
participants, calculates margin requirements
through 24 hours and undertakes the risk netting
and settlement of trades on maturity.
Gavin Wells
ForexClear clears NDFs in 11 currencies
and has recently begun reporting cleared fx trades to a swap data
repository run by the Depository Trust and Clearing Corp.
Gavin Wells, ceo of ForexClear in London, told DI there are
expansion plans. A key priority is to meet the regulatory mandates;

there is the U.S. client clearing model that well launch later this
quarter and we will follow that with the European client model under
[the European Market Infrastructure Regulation].
Wells noted that ForexClear has seen the most activity in Brazil,
India, China, Korea and Russia NDFs since its launch. We will also
add more currencies to the NDF service, we will look at what the
buyside want and what has the most benefits to members and clients.
We will continue to look at resolving the challenges around the liquidity
which will enable us to work with [Continuous Linked Settlement]
and that is what will enable options clearing, Wells added.
HKEx Lays Out Extended Futures Trading Plans

The Hong Kong Exchange has presented its plans for after hours
futures trading to the Legislative Councils Panel on Financial Affairs.
Gerald Greiner, head of global clearing, Calvin Tai, co-head
of equities, fixed income and currency, and Felix Wang, co-head
of clearing risk management, represented the exchange at the
panel review.
The HKEx has been planning to extend hours for futures trading
since 2011. The exchange had initially planned to introduce AHFT
in the second half of 2012, after a consultation found over 130
exchange participants supported the proposal.
The HKEx noted in its proposal to the LegCo that investors

wanted the extended hours in order to adjust positions in response
to European market developments. The move also will prompt the
development of infrastructure in order to offer global asset classes
in Hong Kong, such as renminbi, interest rates and commodities in
an additional trading session.
The HKEx plans to open after hours trading from 5:00pmto-11:00pm for HSI futures, HHI futures and gold futures. The
exchange is looking at introducing trading late March, subject to
Securities and Futures Commission approval.
SEC Initial Margin Proposals To Hit Hedging

Initial margin requirements in proposals from the Securities and
Exchange Commission would curtail the use of uncleared swaps for
hedging and challenge the resilience of the financial system. Thats
the view of the International Swaps and Derivatives Association
which has outlined its concerns in a letter to the agency.
The proposals cover capital, margin, and segregation requirements
for security-based swap dealers (SBSDs) and major security-based
swap participants (SBS), and capital requirements for broker-dealers.
The regulator set out two alternatives for margin. One would
mean SBSDs would only need to collect variation margin, but not
initial margin. The second approach, which is consistent with the
U.S. Commodity Futures Trading Commission and banking
regulators proposed margin rules, would require SBSDs to collect
both types of margin.
ISDA has urged the SEC does not require the collection of IM
10
as without the widespread use of IM models, dealers and their

counterparties could not fund the requirements. If IM models are
used as proposed, increased amounts of IM would be required as
volatility increases, which would pose severe systemic risks, wrote
the association.
If the rules are used for the uncleared sector, market
participants would be subject to increased collateral demands
when collateral becomes most expensive. Dealers would be
subject to a liquidity call when their ability to obtain funding would
be constrained by market stresses. Asset managers, who generally
hold low cash balances, will have to sell assets to meet collateral
demands, placing downward pressure on asset prices and further
exacerbating stresses in the market, wrote ISDA.
The association noted that the proposals would also impact
liquidity in the uncleared SBS market due to the costs of IM.
Derivatives Week
DerivativesWeek
People DataBank
ith frequent news of firms cutting and winding down various divisions, Banco
BilbaoVizcaya Argentaria stood out this week with its expansion in equity
derivativesflow and structured products capabilities in Europe and the hiring of six
staffers. On the debit side, UBS saw the departure of Jay Elkins, head of delta one sales for the
Americas in New York.
Arrivals & Departures by Asset Class

3
Januarys People Moves
20
15
Arrivals
33%
10
Departures
67%
Credit
Equity Commodities FX
Interest
Rates
Equity
Interest
Rates
FX
Fixed
Income
Credit
Month-to-Date Arrivals
Month-to-Date Departures
Firm
Name
Role
Firm
Name
Role
BAML
Michael Slater
Co head, commodities
StoneHedge Partners
Makram Fares
BAML
Colin Toh
Co head, commodities
CEO, new launch, interdealer broker and

advisory firm
BBVA
Stephen Garrett
Executive Director, flow equity derivatives
Barclays
Stephen Roti
Global head, equity linked origination
BBVA
Benjamin Cazenave
Associate, structured products
Barclays
Dan Malone
Head, rates sales
Barclays
Rob Heck
Head, European equity flow derivative trading
BBVA
Mattias
Gustawsson
Vice president, structured products,

Scandinavia
BNP Paribas
Chee Chen Poh
Managing director, fixed income trading
BNP Paribas
Hudson Wong
Director and trader
Deutsche Bank
Thomas Jarck
Managing director and head, U.S. index flow
Brevan Howard
Riyaz Daya
Capula Investment
Management
Gagandeep Singh
Trader, emerging markets fx options
Citigroup
Prashant Puniya
Trader, G10 fx options
ETF Securities
Frank Spiteri
Head, retail distribution
Holland Park Capital
Eli Vichman
Managing Partner
trading, global equity derivatives

JPMorgan
Pete Cherasia
CAO
Morgan Stanley
Zachary Heng
Executive director and fx investor salesperson
Morgan Stanley
Supat Julsiri
Executive director, non-deliverable forward
Vincent Dumontoy
Equity Index Trader
trader
Morgan Stanley
Yuichi Yamashita
Executive director, high frequency and index

arbitrage trading
Morgan Stanley
Morgan Stanley
Stuart Morris
Institutional Sales - UK & Eire
Nomura
Pradeep Kanwar
Vice president, structured credit trading
Morgan Stanley
Simon Hogan
COO, Equity
Nomura
Gavin ONeill
Managing Director, structured credit trading
Morgan Stanley
Shiv Chadha
Equity Derivatives Sales
Executive Director, structured credit trading
Morgan Stanley
Sanjay Chablaney
Head, ETF Trading
Morgan Stanley
Pascal Baup
Corporate Equity Derivatives, France
Morgan Stanley
Hojun Hwang
Index Trader (VIX)
Morgan Stanley
Guido Rizzato
Equity Structuring
Morgan Stanley
Christian Matthew
Head, Equity Structuring, Japan
Nomura
Alex Mahler
RBC
Cyril Cannamela
Sberbank
Bill Beller
Head, equity options
Socit Gnrale
Michael Sauerbrey
Head, pension funds and insurance sales,

Germany and Austria
Pemberton
The information is gathered from our own reporting in addition to other market sources. To supply information, contact Managing Editor Rob McGlinchey in London at
rmcglinchey@euromoneyplc.com, or Executive Editor Peter Thompson in Chicago at pthompson@iiintelligence.com.
11
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Learning Curve
Bermudan Swaption Pricing Under Multiple Curves
By Georgios Tsouderos, Damien Jenner and Xue Chen, financial engineers at Calypso Technology
We revisit the problem of valuing Bermudan swaptions in a 1-factor LGM model when
the yield curves used for projecting and discounting the flows of the reference swap are
different to the yield curves used to value standard European swaptions.
Georgios
Tsouderos
Introduction
It is now common to fully collateralise vanilla transactions but there
are various practical cases where the curves used to project and
discount cashflows for an option may be different to the ones used
when valuing fully collateralised vanilla options:
The index used in the funding leg of the transaction is not the
one referenced by the standard vanilla options (such as standard
swaptions), thus requiring the basis curve to be taken into account.
As an example, the basis between the OIS curve and noncollateralised LIBOR fixings, although low before the recent credit
crisis, has increased dramatically since then.
The transaction is either not collateralised or uses different
collateral to the vanilla options
In this note we re-visit the valuation of an option on an interest
rate swap with early exercise rights (commonly called a Bermudan
option) in the context of a popular short rate model, the Linear
Gauss Markov model (LGMM), when one set of curves is used to
calibrate the model and another set of curves is used to project and
discount the option cashflows.
5-year swap with a lockout of 2 years, the option will typically be

referred to as 5Y-nocall-2Y.
For an option that gives its owner the right to enter into a payers
swap - pay fixed, receive floating - the exercise value at any
exercise date Tiex is
(3) U(T ex ) = f Z (x, T ) c Z (x, T )
i
k k k
i j
where k and j are the coverage fractions for the floating and fixed
leg respectively, f k are the simple forwards off the fixing curve used
for the swap and Z(x, Tj) are the (stochastic) numeraire-normalised
discount factors to T k.
The typical approach has been to set the fixing and discount curves
applicable to the option exercise value to be the market fixing and
discount curves, usually a LIBOR curve in both cases. Consequently,
in a one-factor setting, the value of the swap at the above exercise
date can be computed by assigning the model variable X(t) to the
discount curve and making the basis between the fixing and discount
curves deterministic. This is a generally accepted practice, especially
when the basis between the two curves is not high.
The Model
Valuing A Bermudan Swaption In A Four-Curve Setting
The model is equivalent to the popular Hull-White short-rate model:

given a Gaussian state variable X(t) with dynamic evolution
Increasingly, however, it is pertinent to explicitly incorporate all

four curves involved in the model calibration and valuation of such
an option: the curves associated to the standard swaptions, that
are used to calibrate the model, as well as the fixing and discount
curves applicable to the trade. As in the two-curve setup, we assign
the model variable to the standard swap discount curve. The
valuation of the option then involves two phases:
[Calibration Phase] : Establish a map of the swap in (3) to a
standard swap with the same maturity but different coupon.
A European option on this standard swap will be used to
calibrate the model to the relevant expiry date.
[Valuation Phase]: Approximate the swap value (3) as a function
of the standard swap discount curve, our model primitive.
We examine each of these two phases in more detail
(1)
dX(t) = a(t)dw(t)
the numeraire of the model is defined by

1
(2)
N(t, x) : D(t) exp (H (t)x + 12 H2(t)(t)
t
with (t):= 0 2 (u)du and H(t) a model parameter that is usually
linked to a mean reversion parameter. A direct equivalence with
the popular Hull-White model can be shown but LGM has the
added advantage that, similarly to the HJM model, it automatically
calibrates to the initial yield curve so there is no need to calibrate
an additional model parameter to the initial yield curve.
Valuing a Bermudan Swaption in a two-curve setting

A Bermudan swaption is an option to enter an interest rate swap at
a pre-determined set of dates, typically aligned with the fixed leg
coupon dates. There is usually a lockout, or non-call, period during
which the option cannot be exercised. Thus for an option on an
12
Calibration Phase
For the purposes of calibration we need to map the swap in (3) to
a standard swap, valued off the standard swap curves. To do this
we first incorporate the difference in the fixing curves as a coupon
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approximations to the ones we used in the calibration phase, the
value of the swap can thus be seen to be
(9a)
adjustment. Setting
(4a)
A (x) := j Dj Z (x, Tj )
(4b)
Bi (x) := kk bkZ (x, Tk )
fxd
i
with bk := f k f kXibor being the basis between the trade fixing and
the standard swap curve (which, for notational purposes, we call
the Xibor curve), it follows that the exercise value of the swap is
(5a) U(Tiex ) = f Xibor Z (x, T ) (x) Z (x, T
k k k
j)
V(Tiex) = kk fk OIS (Tk )ZOIS (x,Tk ) i(x)j j (Tj )ZOIS (x,Tj )

with
(9b)
(x):= ci
kk [fkLibor fk OIS] (Tk )Z OIS(Tk )

j j (Tj )Z OIS(Tj )
with
Bi (x)
i(x):= ci fxd
(5b)
Ai

being the basis adjusted fixed leg coupon. As expected, the
adjustment disappears when there is no fixing curve basis.
Next, we consider the transition between the trade discounting
curve and the standard discounting curve (which we call the OIS
curve). Here, an approach similar to the one just described can also
be applied. Instead we adopt a potentially more accurate approach
and observe that the discount factors in the two discount curves are
related through multiplicative adjustments as of (the value date)
(6)
Z (x, T ) = (x, T ) ZOIS(x, T )|x=0
and use those adjustments on the whole domain of x. Substituting

(6) into the swap exercise value (5a) gives
(7)
the approximate, fully adjusted, coupon of the swap that can now
be valued as variable-notional swap on the model lattice.
Results and Discussion

To simplify the discussion we set the market discount and fixing
curves to a flat 2.5% and consider a 10Y-nocall-5Y fixed-for-floating
payers Bermudan swaption with exercise dates on the fixed coupon
dates. We consider separately the effect the trade discount and
forecast curves have on the calibration and value of the swaption for
3 different swap coupons - 1.5% (ITM), 2.5% (ATM) and 3.5% (OTM).
As can be seen from the change in the calibration strikes and
the NPV, a trade discount curve that, at 5%, is significantly different
to the standard curves, brings a non-trivial change in the model
calibration and trade NPV, especially for OTM/ITM trades.
Swaption Calibration Strikes
U(Tiex) = kk fk Xibor (Tk ) ZOIS (x, Tk ) i(x)j j (Tj )ZOIS (x, Tj )

= Uflt(Tiex) i(x)Ai,fxd
(x)
which, due to the presence of the () adjustments, represents
the value of a variable notional swap on the standard swap curves.
There are a number of ways to proceed from here, the simplest is
perhaps to match the value of the swap in (7) with the value of a
standard swap
(8) U flt(T ex) (x)A fxd(x) = U flt(T ex) (x)A fxd (x)
i
i,
and solve for the coupon i(x) of the latter - thus i(x) can be
seen as an affine function of the coupon i(x) that adjusts for the
fixing curve basis. Another approach would be to apply one of the
techniques available for the replication of variable notional swaps.
Valuation Phase
We perform the valuation on a tree using a roll back algorithm used
in standard Markov Functional Models and, more recently, in the
Sali tree implementation.
Here, the intermediate step of mapping the original swap onto
a standard one is no longer required as we are not attempting
to find an equivalent volatility for the corresponding European
Swaption, we rather map directly onto the standard swap discount
curve as this is the curve that is being modelled. Making similar
A different trade fixing curve, however, brings a substantial

change to the model calibration and the trade NPV with the change
in the calibration strikes being of the same size to the difference
between the standard curves and the trade fixing curve. It is
thus apparent that incorporating the trade-specific curves in the
valuation is necessary as it has a significant effect on the valuation
and hedging of the option.
Swaption NPV, $1M
Notional
ATM Coupon
ITM Coupon
OTM Coupon
(2.5%)
(1.5%)
(3.5%)
All Curves at 2.5%
27,501
48,997
15,834
Trade discount at 5%
28,058
44,651
17,966
Trade fixing at 1.5%
15,630
27,124
9,354
13
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Q&A
Andrew Kaufmann, UBS
Andrew Kaufmann is managing director and global head of fx structuring at UBS,
based in London. He spoke to Reporter Beth Shah about structured product trends
in 2012 and what structures and underlyings he expects to be popular for 2013,
hybrid products, emerging market structures, macroeconomics and regulation.
Andrew
Kaufmann
DI: How is UBS planning to develop its fx structuring in 2013?
AK: In terms of product, we work with a variety of clients from
private banks to corporates and large institutions. Within that
space, the majority of the work and development in recent years
has focused on analysis and solutions rather than on new, complex
products and I expect 2013 to be the same.
currencies. Another interesting theme focuses on currencies which

are associated with countries that have high sovereign credit rating.
Investors who are interested in products linked to those will tend
to be interested in gold because it has a similar theme. We have
traded structures which have a combination of those high-rated
currencies and gold within the same investment.
DI: What types of structured products and underlyings were

popular with investors in 2012 and why? Will these sorts of
transactions be popular this year?
AK: In the first half of 2012, on the private bank side, we saw a
large amount of sales in dual
currency products. That tends
The Japanese yen and
to be attractive to clients when
Swiss franc are back
we are in a period of fairly
in play, so we expect
high implied volatility within
to see more interest
currencies and a low-yield
on those two currency
environment. Towards the
second half of 2012 fx implied
pairs.
volatility reduced and we
naturally saw volumes reduce.
Weve had quite an interesting start to the year with a number of
currency pairs moving and we expect to see volumes increase
during Q1 in that space. In addition, on both the corporate and
on the investor side the Japanese yen and Swiss franc are back
in play, so we expect to see more interest on those two currency
pairs. The classic pairs are JPY against the dollar and CHF
against the euro, but there are a number of crosses depending on
client needs. We will either see continued large moves, in which
case clients will need to actively hedge those moves, or you will
see a period of currency stability in which case clients will be
selling volatility. But either way there should be increased flows
there. Gold was very popular last year and I expect it to be popular
again this year.
DI: What happened during the second half of last year, from a
product perspective, when volatility dropped?
AK: There were still a fair amount of dual currency products
because although volatility had dropped, many currencies were
range-bound so many clients were still comfortable with that. Some
clients would take strikes closer to the money in order to maintain
their coupon. We also saw distinct client interest in the U.S. dollar
against the Chinese yuan, which is a characteristically low volatility
currency pair. There are many clients who are taking views which
are bullish CNY against USD over time.
DI: What activity have you seen in hybrid products?

AK: We do hybrids and we will have some trades where clients
can take a view on gold and cheapen it on a knock-out on other
14
DI: What sort of products do clients use to play that bullish view?
AK: Usually one-to-two year investments where the simplest case
is something that gives participation to the strength of CNY. We
are seeing some trades with digital coupons as well, so if CNY
strengthens you get a coupon of X% and if it doesnt then you dont
receive the coupon--those types of trades.
DI: You mentioned that investors are very much looking at
USD/JPY and EUR/CHF. What products are they using to trade?
AK: It very much depends on their views. There are some clients
who take a view that the moves are going to continue and they
have tended to be buying volatility either through over-the-counter
trades, or through investments where they will be buying either
dollar calls or euro calls. A combination of demand for those types
of trades, plus the scale of the currency moves, has led to a rise in
implied volatility for both those currency pairs. There will also be
clients who are looking to take profit, so if they have a long position
in USD/JPY they will be selling USD calls (JPY puts) maybe
through some form of dual currency structure, or similar structures
to that.
DerivativesWeek
Derivatives Week
The
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Q&A
DI: Emerging market currencies have received a lot of
attention. How do you see EM structures evolving this year?
AK: Over the past few years weve seen a lot of attention linked
to emerging markets, particularly in structured notes. The classic
trade was long the BRIC currencies against USD in various formats.
I think that trend will continue because the story of emerging
market growth hasnt changed, its still a long-term secular trade
and frequently reported. I think
there is increased awareness
In 2013 we are seeing of differences across emerging
a clear theme emerge markets, but the way that is
around reallocation
reflected is that clients will
choose which combination
of capital away from
safe haven currencies, of three particular emerging
markets to be bullish of against
and if that continues
USD or EUR, rather than bullish
there could be more
emerging market A and bearish
potential opportunities emerging market B. Its still the
given the clarity of the same trend but perhaps its now
theme.
more fine-tuned. One other thing
that is quite interesting to note is
that recently the emerging market
fx business at UBS was brought in to the fx business. Clearly we
have many clients who trade a combination of emerging market and
G10 currencies, and this will enable us to look at foreign exchange
much more holistically than we may have previously. Thats a sign of
changes within the market.
DI: As regulation develops, do you think that structured
products are going to become simpler?
AK: My personal view is that it has happened already. We have
seen a change across clients and I would expect the current level
of complexity to more or less remain the same going forward.
DI: What have been the greatest challenges in the fx
structured product market within the last 12 months? Where
do you see the market moving this year?
AK: In 2013 we are seeing a clear theme emerge around
reallocation of capital away from safe haven currencies, and if
that continues there could be more potential opportunities given
the clarity of the theme. This is in contrast to 2012 which lacked a
clear theme and meant there were fewer reasons for clients to be
involved in that market.
DI: In terms of regulation what is your biggest concern?
And which regulation will have the greatest impact on your
business?
AK: We see regulatory change as an opportunity and we are well
positioned to be able to advise clients through this change and
ensure they are fully compliant with the regulation. I think once
regulation is clear and we have clear guidance around it, then we

can ensure that we comply with it as well as provide our clients with
what they need in order to comply with it.
DI: Some sellsiders have noted they expect to see a continued
pick-up in correlation products. Do you agree? If so, what sort
of correlation products?
AK: People talk about correlation
We are now in a
products generally, but there are
situation where there
many different products within
that space that meet different
is considerable focus
client needs. Baskets are very
on the U.K. economy
popular with clients who are
and GBP is weakening
looking to provide a thematic
against both the EUR
view; for example they like
and USD.
emerging markets or a region of
the world. Dual barriers on the
other hand tend to provide a more
nuanced view which may be relevant to a particular topic to enable
them to get the leverage they are looking for. So there may have
been a theme that was running such as USD being a proxy for risk
which means that people would take views which are bullish USD
against EUR and sterling for example. We are now in a situation
where there is considerable focus on the U.K. economy and GBP is
weakening against both the EUR and USD. So there may be times
in that change of environment where trading with dual barriers can
be attractive and provide very good potential returns. I dont think
its a secular change where people werent trading these and now
they are, I think its more that at particular times they fit very nicely.
DI: What trends in structured products have you seen during
an environment where interest rates have continued to
decline?
AK: On the investment side for a longer-term principal protected
note the classic trade was something whereby a client invests
100, and then at sometime in the future theyre hoping to get
100 back (subject to issuer credit risk) plus some performance
based on equities, rates or fx. Very often that was 100% principal
protected and had a three-to-five year tenor. Over the past few
years weve seen declining interest rates and also in the past
few months weve seen declining bank credit spreads. What that
means is that the amount of interest that could have been earned,
and which would be used to purchase that performance, has
declined, so were seeing clients accept lower than 100% principal
protection. Within the fx space that means we have moved away
from three-year 100% principal protected trades to more one-year
95% principal protected trades. So we are seeing more clients
enter trades with a shorter tenor--around that one-year area-which fits quite naturally within fx where clients are often more
comfortable taking shorter-termviews.
15
DerivativesWeek
BBVA Expands (Continued from page 1)
Novel Collateralized (Continued from page 1)
We are trying to build out a sustainable equity derivatives

business and, in the last semester, we have beefed up our European
coverage trying to incorporate seasoned equity derivatives people in
the existing team, Arnaud Joubert, head of equity derivative sales
in Madrid, told DI. BBVA has a very low turnover across all teams
and I have been given the mandate to increase the team, which I
think is a very wise move to invest at the trough of the cycle.
The firm has hired five salespeople, including Stephen Garrett,
most recently head of U.K. flow derivative sales for the U.K. at
Commerzbank, as an executive director in flow derivative sales for
the U.K and Switzerland in London. The two others to join the Swiss
sales team are Bolyvann Ngauv, who joins from Crdit Agricole
CIB where he worked in equity and fund-linked products sales for
Switzerland, and Methieu Belgy, who also joins from Crdit Agricole
where he worked in structured product sales for Switzerland. Both
are based in London. Garrett and Ngauv report to Joubert, while
Belgy reports to Ngauv.
Switzerland is where we established coverage last year and
primarily cover private banks and other institutions. It is a strategic
business decision to service the Swiss clientele, given the high
and sustained levels on activity on equity-linked products,
said Joubert. BBVA has no plans to launch an electronic clickand-trade structured products platform, with Joubert waiting to
see which modelthe single-dealer or multi-dealer platform
approachthe market will decide upon. He added that BBVAs
distinctive offering to investors in Switzerland is its presence in
Latin America. We have our hub for equities in Mexico through
Bancomer and from there we have a local presence of banks in
Chile, Peru and Colombia, among other countries. Because we
have the local research thereapproximately 15 analysts and
economists thereand we also have a delta one and volatility
desk based in Mexico, that takes care of Latin America.
The firm has also expanded its sales force covering France,
Benelux and the Nordics. Benjamin Cazenave, who most recently
worked in equity derivatives and cross-asset structured product
sales at Bank of America Merrill Lynch, joined as a salesman in
Paris covering France and Benelux. Also, Mattias Gustawsson,
a salesman at Credit Suisse, joined as a structured product
salesman covering the Nordics. Cazenave reports to Nathalie
Rouault, a senior structured products salesperson for France and
Benelux, while Gustawsson reports to Camilla Zimmer, head of
German and Nordic equity derivative sales.
One of the reasons for a push [in Nordic] is that the region
has proven to be resilient to this crisis to some extentthey have
experienced the difficulties of the eurozone in the 1990s in the
past and, to some extent, are kind of immune to the current crisis
and hence these economies are doing well compared to others in
Europe, said Joubert. In terms of structured products, we see a
high level of resilience with high volumes, large activity, and people
still interested in equities and looking to extract some value in the
asset class.
Rob McGlinchey
otherwise not available in the market when it comes, for example,

to currencies but also coupon formats.
The notes are issued by VIS Finance, a collateralized
issuance vehicle, with UBS acting as the swap counterparty and
arranger, and Deutsche Bank as the custodian. The five-year
notes, which offer lower sensitivity to changes in the underlying
rates compared to bonds, pay
floating coupons quarterly
based on the performance
of three-month USD Libor,
with a redemption of 100%
at maturity subject to the
credit risk of the Swiss
Confederation. The coupons
pay a 0.10% margin over the underlying rate per annum, which is
fixed quarterly, with a floor of 0%.
Capital is protected at maturity should no early redemption event
occur. Such an event would occur should the issuer of the collateral
securitiesthe Swiss Confederationdefault, or should the swap
counterparty default. In the case of the former, the notes would
be redeemed early and the investor would receive a redemption
amount that is equal to the unwind price of the collateral securities
multiplied by the nominal value minus any potential unwind costs. In
the case of the latter, the early redemption amount would reflect the
approximate mark-to-market of the notes.
Investors are exposed to the credit risk of the collateral, in
this particular case; the client is facing the credit risk of the Swiss
Confederation through the transaction. By repackaging a Swiss
franc denominated Swiss Confederation bond into USD, investors
can take advantage of the significantly dislocated CHF/USD basis
swap and invest in an instrument which is attractive to comparable
USD investments with similar credit quality such as U.S. Treasuries,
for example, Schetter said.
Investors will in the future have the choice of whether they want
to be exposed to senior unsecured debt of the issuer, as is standard
in the structured products market, or whether they want to have it
secured by collateral. In this case investors are preliminary facing
the credit risk of the issuer which, however, is collateralized by a
predefined collateral or collateral pool in order to have an extra layer
of protection, Schetter said.
R.M.
16
Quote of the Week

Clearly we have many clients who trade a combination of
emerging market and G10 currencies, and this will enable us to
look at foreign exchange much more holistically than we may have
previously. Thats a sign of changes within the market.Andrew
Kaufmann, global head of fx structuring at UBS in London, on why
the firm integrated its EM fx business with its overall fx business
(see Q&A, page 14).

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VOL. XXII, NO.

Exclusive Insight for Derivatives Buyers, Sellers and Structurers

The weekly issue from Derivatives Intelligence

Novel Collateralized Floating-Rate Structure Surfaces

VIS Finance S.A.

Principal and returns

(continued on page 16)

Collateral interest and

UBS AG, London

Q&A: UBS Andrew Kaufmann

Trough Of The Cycle

BBVA Expands Equity Biz

Investors are moving away from three-to-five year 100%

(continued on page 14)

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3 | Risk Reversal Opportunity

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10 | SEC Initial Margin Proposals

6 | Japanese Tap Long-Dated Fx Structures

8 | Nomura Preps Japan ETN Program

9 | Stock, Index Structures Take Off In Tokyo

9 | Asia Investors Tap Vol Via Upside Calls

9 | MS Adds HK Index Trader

10 | HKEx Lays Out Extended Futures Trading Plans