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Tuesday May 12, 2015

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Structured Products

Current Year

Previous Year

ALL U.S. STRUCTURED PRODUCTS Year to Date:

$23.445 billion $18.948 billion in 3454 deals in 3556 deals

Quarter to Date:

$5.530 billion $4.775 billion in 920 deals in 987 deals

Month to Date:

$0.471 billion $0.620 billion in 106 deals in 216 deals

BREAKDOWN OF YEAR TO DATE DEALS EXCHANGE-TRADED NOTES

$6.308 billion $3.592 billion in 379 deals in 330 deals

ALL U.S. STOCK AND EQUITY INDEX DEALS

$15.675 billion $13.530 billion in 2621 deals in 2842 deals

SINGLE STOCK U.S. STRUCTURED PRODUCTS

$3.150 billion $4.160 billion in 1223 deals in 1678 deals

STOCK INDEX U.S. STRUCTURED PRODUCTS

$11.898 billion $8.780 billion in 1343 deals in 1115 deals

FX U.S. STRUCTURED PRODUCTS

$0.140 billion $0.144 billion

in 37 deals

in 33 deals

COMMODITY U.S. STRUCTURED PRODUCTS

$4.418 billion $2.549 billion in 372 deals in 257 deals

INTEREST RATE STRUCTURED PRODUCTS

$0.419 billion $0.848 billion

in 33 deals

in 74 deals

INTEREST RATE STRUCTURED COUPONS

$24.924 billion $15.788 billion in 902 deals in 608 deals

PROSPECT N EWS

? Copyright 2015 by Prospect News Inc. Electronic redistribution, photocopying and any other electronic or mechanical reproduction is strictly prohibited without prior written approval by Prospect News. Information contained herein is provided by sources believed to be accurate and reliable, however, Prospect News makes no warranty, and each such source makes no warranty, either express or implied, as to any matter whatsoever, including but not limited to those of merchantability or fitness for a particular purpose.

Bank of America's step-up autocallable notes linked to PHLX Housing Sector index offer access

By Emma Trincal New York, May 11 ? Bank of America

Corp.'s 0% autocallable market-linked step-up notes due May 2017 tied to the PHLX Housing Sector index offer investors exposure to a hard-to-access index and the potential to outperform in a mildly bullish environment, sources said.

The notes will be called at par of $10 plus an annualized call premium of 9% if the index closes at or above the initial

level on the call observation date in June 2016, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes above the step-up level ? 114% to 120% of the initial value ? the payout at maturity will be par plus the index return.

If the index gains by up to the step-up level, the payout will be par plus the step-up payment of 14% to 20%.

Otherwise, investors will be fully exposed to any losses.

Continued on page 2

Benefits of estimated initial value disclosure still debated three years later

By Emma Trincal New York, May 11 ? Three years

after the requirement by the Securities and Exchange Commission that issuers disclose on their prospectuses the estimated initial value of their notes, or EIV, market participants still do not agree on the benefits of the additional rule.

Some said that the disclosure helps investors better understand the cost structure of the products they're buying, but others argued that the EIV is only a snapshot of the cost on the issue date and that it gives little additional information to investors except to confuse them even more.

2012 sweep letter

The EIV reveals the cost of the product on the issue date. It does not give any indication of pricing on the secondary market, a lawyer explained, offering an example: "An issuer on the pricing date

would sell $1,000 in principal amount with 2.5% in commission to the agent. Say the EIV disclosed in the prospectus is $965. The difference between that and the issue price reflects the 2.5% commission plus a 1% differential, which represents the cost of hedging the options and the profit to the issuer."

In this example, the $965 EIV has two components: the value of the bond, which takes into account the issuer's funding rate, and the value of the embedded options.

In April 2012, the SEC in a sweep letter required firms to disclose the difference between an issuer's initial price and the estimate of the notes' initial value.

"The issue was really addressed in depth by Finra with its 05-59 Notice to members in 2005," the lawyer said.

"Finra has been doing that for years. The SEC has finally got involved in this in the wake of the financial crisis.

Continued on page 3

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Bank of America's step-up autocallable notes linked to PHLX Housing Sector index offer access

Continued from page 1

The exact step-up level and step-up level payment will be set at pricing.

Access

"I find it interesting because there are a very few ways to play the housing sector. Getting access to this index is appealing in its own right," said Kirk Chisholm, wealth manager and principal at Innovative Advisory Group.

The index is currently comprised of 19 stocks of companies in the building and prefabrication of residential homes, mortgage insurers and suppliers of building materials.

There is no exchange-traded note or exchange-traded fund listed in the United States that tracks the index, according to a spokesperson at Nasdaq OMX, the index sponsor.

Likely call

"The upside to this is certainly attractive as you can get almost 10% automatically in just one year if the index is just flat or up," he added.

"You'd have to be negative on the first year to really benefit from the bump-up offered by the step payment. If you look at the past return, the index was up 15% in the past 12 months. It's more likely that you're going to get 9% after the first year. In the past five years, the index has gained more than 112%. For a few years it has been moving at a good clip."

The step-up payment is not the most probable outcome in his view.

"It's highly unlikely that you'll collect the 20% bonus at the end because that would mean the index was negative on the first year and then up. However, if it happens, if the index is down in a year and

then just moves up a little bit, you could make 20%. So that's a nice component. Both the autocall and the step-up are attractive.

"Even if all you get is the 9% on the autocall after one year, it's still a pretty decent return.

"So based on those probabilities, it's a good note."

Not too bullish

The note is not a good option for bearish or very bullish investors, however.

"I don't see a huge growth in this market in the next few years, so that makes the notes even more attractive, at least from that standpoint," he said.

"If you envision a very bullish scenario, if you expect growth to be over 20%, the notes offer no advantage: you're long the index and you don't get the dividends. But for someone who expects modest or flattish returns, it's quite appealing. Unless things turn down pretty sharply, we can pretty much predict the outcome. The autocall will kick in, delivering a 9% return in just one year."

The less attractive aspect of the deal, not receiving cash distributions paid on stocks, is common to most structured notes.

"It's a stock index, and you're not getting the dividends," he said.

On a weighted average basis, the yield for the index is 1.29%, according to the weightings listed in the prospectus.

"But even if you're not getting the dividends, I think 9% based on the riskreturn is still decent. You're potentially giving up some of the upside, but it's still a reasonable note if you're positive on the index," he said.

Hedging interest rates risk

Jerrod Dawson, director of investment research at Quest Capital Management, said that he likes the risk-return profile of the notes in both the autocall and step-up scenarios.

"For someone looking to get exposure to the housing space, this note offers a pretty good way to do it by adding after two years some potential alpha with the kicker," he said.

"If investors get called automatically, it's a good outcome too. Most people would be happy with a 9% return. You are capped, but it's a pretty reasonable risk-return in this interest rate environment where interest rate risk is increasing.

"The prospect of higher rates is real with the Fed articulating that it is willing to raise rates. That wouldn't be good for a portfolio of housing stocks," he noted.

He does not see the lack of any buffer or barrier as a drawback.

"There is no downside protection, but you're not giving up anything. You're not getting protection, but you wouldn't have it anyway if you owned the shares," he said.

"Someone who thinks there is a strong upside potential for housing stocks would not want to be invested in the notes. They would risk being capped out.

"But someone who is moderately bullish in the sector would be an ideal buyer."

As of April 30, the top three holdings in the index were Weyerhaeuser Co. with a 14.09% weighting, Vulcan Materials Co. with an 11.24% weighting and Masco Corp. with an 8.47% weighting.

BofA Merrill Lynch is the underwriter. The notes will price in May and settle in June.

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Benefits of estimated initial value disclosure still debated three years later

Continued from page 1

"In the years following the Lehman Brothers demise, they became even more involved because matters were more serious. Lehman after all was the most significant distributor of structured notes."

`Sanity check'

Carl Kunhardt, wealth adviser at Quest Capital Management, said the EIV disclosure makes a difference.

"It is helpful. I see it as some kind of sanity check," he said.

"You do a quick calculation. If the value is materially lower than par, then you can start asking some questions. Is there something else that I missed? What is it? What's driving that value down?

"I haven't called a desk for a structured note, but I know I can. I did call once about a REIT. I couldn't get from point A to point B, and so I called the desk, which for us is Raymond James. But if I didn't have Raymond James, I would certainly call the syndicate desk. They usually have a number to call on the prospectus."

Confusing

A structurer on the other hand downplayed the benefits of EIV disclosure.

"Now you see all those disclosures. I am not a big fan of them because they're not saying anything," he said.

His focus was on transparency in the secondary market.

"All it says is that the EIV is less than the initial price, and it gives you a value only on that day," he said.

"But the value varies with time. You could get less than the EIV if you put the notes back to the issuer a month later, a year later. What's the point? People can easily get confused and assume they're being given the price at which the bank would buy back the securities. I know that the docs say it's not a minimum price. Assuming investors understand this or even read it, the EIV doesn't tell them anything.

"It looks like a bid, but it's not a bid

of course. How could they show you a bid anyway? The market moves all the time. Profits are a function of costs and hedging. This part is constantly changing. It's based on the volatility of the underlying, interest rates, time, dividend yields, everything.

"There is no way you can disclose the value of a structured note beyond the initial price. And nobody sells on day one except a fool. So what's the point really?"

The lawyer agreed to a degree. "Yes, it is a snapshot. The value will change as you move away from the issue date, of course.

"The value of the bonds is not going to vary that much except over time. But the value of the derivatives could move tremendously in a very short time.

"The whole point though is to make the cost clear to the investor. And that's what it does."

Approved

A sellsider said the disclosure marks a progress.

"It's been very helpful. It's not perfect because of the liquidity that the product provides, but it's a progress," he said.

"It tells you if you bought something today, if everything including the market was frozen and the bank insisted on keeping its fees how much the bank would give you back.

"The rest would be used to build the product, to sell it and to give a margin of profit to the issuer.

"Compared to the old, old days when you didn't know what you were getting into, when you had no disclosure of fees, no disclosure of costs or anything whatsoever, it's a real improvement.

"This was an effort at standardizing disclosure and to look at a structure versus another one.

"You have the fee disclosure, and in addition, you get a pretty good idea of what other costs are such as the cost of constructing the product.

"If the broker gets 2% and the

prospectus says that there is an additional 1%, you know that the cost to you is going to be about 3%. It may not be the exact amount, but it's pretty close.

"Knowing that kind of information goes a long way of what it used to be.

"Of course it's not perfect. Getting pure price transparency would require having real-time quotes, which you don't have with structured notes.

"But I can tell you one thing: it was universally approved."

Imperfect yet necessary

An industry source had a more skeptical view.

"It's required. Whether it's helpful or not is another issue. It gives people a sense that it's a buy-and-hold instrument, so it's informative," this source said.

"It hasn't made a difference for the sellsiders and doesn't seem to make any difference for investors."

While conceding that the EIV disclosure has a "very, very limited utility," the lawyer said the rule is still necessary.

"We know of investors that have invested millions in structured notes who still claim that the disclosure was less than adequate. Even the most sophisticated investors are going to claim that the disclosure is less than perfect.

"The biggest concern was to be as transparent as possible with investors.

"Structured products are complex because they have a derivative component. So you have to make sure that investors are told as much as possible about the value of what they're investing."

There is nothing wrong about disclosing the cost on the initial day of trading, this lawyer added.

"It's not very practical to expect full disclosure at any time.

"You can't give a dynamic picture of the value unless you are updating the prospectus every single day, which would be impossible given the administrative costs."

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Bank of Montreal plans enhanced return notes tied to iShares MSCI EAFE

By Angela McDaniels Tacoma, Wash., May 11 ? Bank of

Montreal plans to price 0% buffered bullish enhanced return notes due Aug. 31, 2016 linked to the iShares MSCI EAFE exchange-traded fund, according to a 424B2 filing with the Securities and

Exchange Commission. If the ETF return is positive, the

payout at maturity will be par plus 200% of the ETF return, subject to a maximum redemption amount of $1,170 per $1,000 principal amount of notes. Investors will receive par if the ETF declines by 5% or

less and will lose 1% for every 1% that it declines beyond 5%.

BMO Capital Markets Corp. is the agent.

The notes are expected to price May 22 and settle May 28.

The Cusip number is 06366RN50.

Bank of Montreal plans enhanced return notes tied to iShares MSCI EM

By Angela McDaniels Tacoma, Wash., May 11 ? Bank of

Montreal plans to price 0% buffered bullish enhanced return notes due Aug. 31, 2016 linked to the iShares MSCI Emerging Markets exchange-traded fund, according to a 424B2 filing with the Securities and

Exchange Commission. If the ETF return is positive, the

payout at maturity will be par plus 200% of the ETF return, subject to a maximum redemption amount of $1,175 per $1,000 principal amount of notes. Investors will receive par if the ETF declines by 5% or

less and will lose 1% for every 1% that it declines beyond 5%.

BMO Capital Markets Corp. is the agent.

The notes are expected to price May 22 and settle May 28.

The Cusip number is 06366RN43.

Bank of Montreal plans contingent risk absolute return notes on S&P 500

By Marisa Wong Madison, Wis., May 11 ? Bank of

Montreal plans to price 0% contingent risk absolute return notes due May 30, 2017 linked to the S&P 500 index, according to a 424B2 filing with the Securities and Exchange Commission.

If the index finishes above its initial level, the payout at maturity will be par plus

the return. If the index return is less than or equal

to zero and a barrier event has not occurred, the payout will be par plus the absolute value of the index return. A barrier event will occur if the index closes below the barrier level on any during the life of the notes. The barrier level is expected to be 76.5% to 80.5% of the initial index level

and will be set at pricing. If the index return is less than or equal

to zero and a barrier event has occurred, investors will be fully exposed to the index's decline.

BMO Capital Markets Corp. is the agent. The notes will price on May 22 and settle on May 28. The Cusip number is 06366RM77.

Barclays plans to price phoenix autocallable notes linked to Apple

By Angela McDaniels Tacoma, Wash., May 11 ? Barclays

Bank plc plans to price phoenix autocallable notes due May 20, 2020 linked to the common stock of Apple Inc., according to a 424B2 filing with the Securities and Exchange Commission.

Each month, the notes will pay a contingent coupon at the rate of 8.65% per year if Apple shares close at or above the

barrier price, 75% of the initial share price, on the observation date for that month. Otherwise, no coupon will be paid for that month.

Beginning in May 2016, the notes will be called at par plus the contingent coupon if the shares close at or above the initial price on any monthly observation date.

If the notes are not called and the

shares finish at or above the barrier price, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will lose 1% for every 1% that the final share price is less than the initial share price.

Barclays is the agent. The notes will price May 15 and settle May 20. The Cusip number is 06741UWE0.

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Barclays to price leveraged notes linked to 30-year Euro CMS rate

By Marisa Wong Madison, Wis., May 11 ? Barclays

Bank plc plans to price 0% leveraged 30year Euro Constant Maturity Swap ratelinked notes, according to a 424B2 filing with the Securities and Exchange Commission.

The notes are expected to mature between 45 and 60 months after issue.

The payout at maturity will be the greater of (a) $900 and (b) $1,000 plus the product of (i) $1,000 times (ii) 10 times (iii) the difference of the final swap rate minus

the strike swap rate. The strike swap rate will be the initial

swap rate plus a spread of 0 to 50 basis points, which will be set at pricing.

Barclays is the agent. The Cusip number is 06741UVZ4.

Barclays to price notes linked to EquityCompass Share Buyback index

By Angela McDaniels Tacoma, Wash., May 11 ? Barclays

Bank plc plans to price 0% notes due June 7, 2018 linked to the EquityCompass Share Buyback index, according to a 424B2 filing with the Securities and Exchange Commission.

The index seeks to capture returns that may be available from investing in a basket of stocks that are selected using the EquityCompass Share BuyBack Strategy, a trading restriction filter and concentration procedures. The strategy selects a portfolio of stocks of up to 30 companies with the most significant share buyback announcements in the prior three months. It is based on the premise that stocks of companies that announce share buybacks may be more likely to perform well because share buybacks are a signal to the market

that the management of a company believes the company's shares are undervalued.

The notes are putable subject to a minimum of $10,000 principal amount of notes. If the closing indicative note value falls to or below $250, the notes will be automatically called.

For each $1,000 principal amount of notes, the payout at maturity or upon redemption will be 97.5% of the sum of (a) $1,000 plus (b) $1,000 multiplied by the closing indicative note return.

The indicative note return on any day is the percentage change of the closing indicative note value from the initial closing indicative note value to the current closing indicative note value on that day.

The initial closing indicative note value is $1,000. On any business day, it will be (a) the closing indicative note value on the last

note rebalancing date multiplied by (b) one plus the net index periodic return as of that business day. The note rebalancing dates are the sixth calendar day of each month.

The net index periodic return equals the index periodic return as of that business day minus the investor fee, which is 0.9% per year.

The index periodic return equals the performance of the index from its closing level on the last note rebalancing date to its closing level on that business day.

Barclays is the agent. One or more affiliates of the index selection agent, Choice Financial Partners, Inc., may act as a dealer in the offering and may receive a selling commission.

The notes will price June 4 and settle June 9.

The Cusip number is 06741UWB6.

Barclays plans phoenix autocallables linked to S&P 500, Russell 2000

By Angela McDaniels Tacoma, Wash., May 11 ? Barclays Bank plc plans to price

phoenix autocallable notes due May 20, 2025 linked to the lesser performing of the S&P 500 index and the Russell 2000 index, according to a 424B2 filing with the Securities and Exchange Commission.

Each quarter, the notes will pay a contingent coupon at the rate of 7.45% per year if each index closes at or above its coupon barrier level, 70% of its initial level, on the observation date for that quarter. Otherwise, no coupon will be paid for that quarter.

Beginning in May 2016, the notes will be called at par plus the contingent coupon if each index closes at or above its initial level on any quarterly observation date.

If the notes are not called and the final level of the lesserperforming index is greater than or equal to its barrier level, 50% of its initial level, the payout at maturity will be par plus the contingent coupon. Otherwise, investors will lose 1% for every 1% that the lesser-performing index finishes below its initial level.

Barclays is the agent. The notes will price May 15 and settle May 20. The Cusip number is 06741UWD2.

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