Chateau Valtice, 22-23 May 2008 Derivatives and risk management in the new EU regulatory landscape MASARYK UNIVERSITY FACULTY OF ECONOMICS AND ADMINISTRATION INSTITUTE FOR FINANCIAL MARKET Derivatives and risk management in the new EU regulatory landscape BRNO 2008 Review: Ing. Dagmar Linnertová Editor: Ing. Gabriela Oškrdalová Masaryk University, 2008 ISBN 978-80-210-4632-0 Contents Foreword............................................................................................................5 Martin Svoboda (Dean, Faculty of Economics and Administration, Masaryk University) Portfolio valuation and hedging using derivatives and complex structured products...6 Martin Svoboda (Dean, Faculty of Economics and Administration, Masaryk University) Derivatives and risk management; Hedging risks ....................................................13 Sarah Dees (Executive Director, New Markets Structured Sales, Goldman Sachs) Modifying risks and return expectations by using structured products .....................24 Heinrich Karasek (Manager, Structured Products & Equities, Bank Sal. Oppenheim jr. & Cie.) Innovation in stock­related products....................................................................43 Ales Jelinek, (Equity Derivatives Solutions CEEC, NATIXIS) Derivative use in the Czech asset management and pension funds industry legislative framework .........................................................................................51 Michal Franěk (Deputy Director, Financial Markets Legislation, Ministry of Finance) Derivatives and pensions funds ­ CZ case............................................................56 Viktor Kotlán (Director, Institutional Asset Management and Structured Products, Česká spořitelna) Asset-liability management & optimized strategic asset allocation; Benefits of structured investments ..................................................................................59 Tomas Hochmeister (Institutional Sales Czech Republic & Slovakia Global Equity Derivatives, Societé Genérale) Changes to the CRD: Large exposures..................................................................70 Jiří Król (Director, Financial Markets Policy, Ministry of Finance) UCITS reform; Management company passport ....................................................75 Zdeněk Husták (Of Counsel, BBH Prague, Attorneys at Law) Internal market for asset management; Challenges for 2008 and later......................79 Didier Millerot (Deputy Head of Unit, Asset Management, European Commission) Foreword On 22nd to 23rd May 2008, an international seminar dealing with the use of derivatives by financial institutions and with the changes of European Union regulation targeted at banks and collective investment funds was held at the Valtice chateau. In the view of the recent turbulences on the financial markets, the subject of the seminar was very topical as it was focused on such issues as the creation of financial derivatives and their use as risk management tools by financial institutions. The seminar was further devoted to the upcoming fundamental changes of European legislation for collective investment funds and their potential impact on business in the financial sector. One of the seminar panels was directly concerned with the reform of the Capital Requirement Directive for credit institutions and investment firms. The seminar hosted delegates of financial institutions leading the global derivatives market (Goldman Sachs, Société Générale, Sal. Oppenheim jr. & Cie.), as well as important representatives of the European Commission, the Czech National Bank and the Czech Ministry of Finance. The findings discussed at the seminar represent a valuable asset not only for portfolio managers, traders and risk managers, but also for senior managers in various financial services institutions responsible for strategic development of their businesses. The seminar was organized by the Institute for Financial Market, which was launched towards the end of 2007 as a research institute of the Faculty of Economics and Administration, Masaryk University. As part of its activities, the Institute holds specialist seminars for financial institutions, conducts research primarily concerned with the financial market, its regulation, and consumer behaviour on the financial market. The Institute also plans to cooperate with financial subjects and to provide support for specialist education and training aimed at professionals in the financial sector. Last but not least, the Institute has an ambition to systematically participate in financial education of the general public, including high school and university students. More information about the Institute for Financial Market is available at www.institute-fm.econ.muni.cz. Brno, June 2008 Martin Svoboda Dean, Faculty of Economics and Administration Masaryk University 5 Martin Svoboda, Dean, Faculty of Economics and Administration, Masaryk University Portfolio valuation and hedging using derivatives and complex structured products Derivatives and risk management in the new EU regulatory landscape Derivatives and risk management in the new EU regulatory landscape www.institute-fm.econ.muni.cz Portfolio according to Markowitz Strategy is grounded on modern portfolio theory by Harry M. Markowitz, a Nobel Prize laureate in economics. The goal is a defensive strategy based on a wide diversification of the portfolio, a diversification concerning not only various types of the underlying classes of assets (shares, indices, commodities, currencies, alternative investments), but also different product structures, issuers, and lifespan. In the medium and long run, this strategy provides investors creditable return even when the prevailing market trend is downward and, simultaneously, it promises an attractive participation when overall market direction is upward. By investing in a single security, the investor gains an efficient access to the potential of structured financial products without the need to invest one's time and effort in the choice of suitable components. 6 Derivatives and risk management in the new EU regulatory landscape Interes ratesCurrenciesCommoditiesBondsIndices Precious metals Real estate Hedge funds Private Equity Capitalprotection YieldEnhancement Specialsituations Participation Goal Defensive strategy / Property build-up / Low volatility Portfolio diversified in various underlying asset classes An active participation in positive market trends page 3 www.institute-fm.econ.muni.cz Derivatives and risk management in the new EU regulatory landscape The Entire Band of Asset Classes: Selected Underlyings Shares Indices Strategies Commodities Currencies Microsoft MSCI World Dividends GSCI EUR/USD IBM Dow Jones IA Value DJ-AIG EUR/JPY Royal Dutch S&P 500 Growth Gold EUR/CHF DuPont NASDAQ 100 Momentum Silver USD/JPY Amgen EURO STOXX 50 Sector Rotation Platinum USD/GBP Nokia DAX 30 Ethical Oil USD/CNY BASF Nikkei 225 Seasonal Natural Gas USD/ZAF NTT DoCoMo CECE-EURO Timing Copper CHF/HUF Rio Tinto HSCEI China Long/Short Aluminium Nestlé AMEX Biotech Market Neutral Wheat Coca-Cola DJ Internet Hedgefunds Corn GlaxoSmithKline STOXX Telecom Sugar www.institute-fm.econ.muni.cz page 4 7 Derivatives and risk management in the new EU regulatory landscape The Puzzle: Solutions For Every Investment Target Participation Capital Protection Yield Enhancement Special Situations Derivatives and risk management in the new EU regulatory landscape Capital protection The basic motivation of the strategy is to provide investors with risk-free or moderately risky investment products which are in the maximum degree independent of overall market trends and may serve as a basis for consistent return amounting to approximately 5 per cent p.a. Products with full capital guarantee, or fixed-interest rate investments discount products deeply in the money plus a combination of discount products and put warrants as well as callable structures (`Express') are utilized. Another group of instruments fitting in this category are bonus products with barrier level over 40 per cent of the initial price defensively oriented hedge funds `Lock-in' certificates (`All Time High') with active protection mechanisms. 8 Derivatives and risk management in the new EU regulatory landscape Yield Enhancement This segment represents products promising an attractive performance potential in virtually all, at least slightly probable, investment scenarios (statistically speaking), i.e. growth phases, stagnation period, and to a certain degree also slump phases). This is primarily the domain of Bonus and Protect Momentum products, combining unlimited return and a comfortable hedging with a potential for overproportionate participation in market growth. Derivatives and risk management in the new EU regulatory landscape www.institute-fm.econ.muni.cz Participation The selection of classic open end products aims at participating in markets with particularly interesting growth potential chances in the medium run. Nowadays, primary investment goals are oriented towards technological megatrends (such as biotechnology), emerging markets countries (China, India, Eastern Europe), as well as commodities, above all agricultural products (soft commodities). 9 Derivatives and risk management in the new EU regulatory landscape www.institute-fm.econ.muni.cz Special situations As this strategy incorporates financial products of relatively speculative nature, it utilizes various short-term opportunities, volatility fluctuations, market inefficiencies, and special situations identified by means of a technical analysis. In the centre of attention are the so-called `vola plays' providing partial hedging and enabling investors to benefit from periods when the fluctuations in the price of highly volatile shares calm down. In addition, this segment offers investors with a potential for engagement in the currency and interest area. Derivatives and risk management in the new EU regulatory landscape www.institute-fm.econ.muni.cz page 10 Themes and future trends Renewable Energy Emerging Markets Water Infrastructure Hedge Funds Commodities Energy Commodities Soft Commodities Precious Metals Currencies Sustainability Africa Alpha Products Volatility 10 Derivatives and risk management in the new EU regulatory landscape Demanded trends 0 5 10 15 20 25 30 Infrastructure Water Demography Real Estate Emerging Markets Renewable energy (Research: 150 financial consultants and asset managers)) Derivatives and risk management in the new EU regulatory landscape Conclusion I. The retail investor becomes the centre of attention of issuers (,,Struggle" for investors' sympathies) The ability of issuers and financial brokers to react promptly to all investment trends and make them available to a wide range of investors To offer investment in shares, indices, currencies, commodities or, on the other hand, the use of special investment strategies To invest with a very low risk rate 11 Derivatives and risk management in the new EU regulatory landscape Conclusion II. The investors always find on the market a suitable derivative on the condition that s/he defines: 1) Investment period 2) Risk s/he is willing to undergo 3) Market expectations If there is a derivative on the market, the investor may give priority to it over a direct investment in an underlying asset. 12 Derivatives and Risk Management Hedging risks May 2008 Introduction Sarah Dees, Vice-President New Markets Assets (FICC), Goldman Sachs Goldman Sachs "Goldman Sachs is a global investment banking, securities, and investment management firm that provides a wide range of services worldwide to a diversified client base that includes corporation, financial institutions, governments, and high net worth individuals." 13 Introduction Scenario * Hedging is a powerful financial tool. It can be used as a strategy to enhance or insure against investments * There is a limited derivatives market in the Czech Republic through which to employ hedging strategies Presentation * The Benefits of Hedging * Users and Purposes of Hedging * Examples of Hedging Instruments * 3 Case Studies * Recommendations to the Czech Republic Why Hedge? Financial and Commodity Derivatives are Financial Instruments that have been Traded in Global Markets for the past 20 Years They are used for two purposes: Hedging: Risk reducing strategies with the aim to limit losses or lock-in profits in bear and bull markets respectively Speculation: Leveraged investments bearing unlimited profits or losses 14 0 2 4 6 8 10 12 14 16 18 20 <(10)% (8)-(10)% (6)-(8)% (4)-(6)% (2)-(4)% 0-(2)% 0-2% 2-4% 4-6% 6-8% 8-10% 10%+ Price Return Over Quarter, Net of Option Premium CountOverPast10Years Unhedged Returns Hedged Returns Illustration: The Benefits of Hedging 1996 4.1% 25.1% 21.1% 1997 5.2% 26.4% 21.2% 1998 6.9% 25.5% 18.6% 1999 8.0% 19.6% 11.6% 2000 6.6% (7.7)% (6.3)% 2001 6.5% (12.7)% (7.5)% 2002 7.9% (21.8)% (7.4)% 2003 10.1% 21.5% 11.4% 2004 5.9% 9.7% 3.8% 2005 5.1% 6.1% 1.0% 2006 4.3% 12.6% 8.3% Average 6.4% 9.5% 6.9% Std. Dev. 16.8% 11.0% Avg / Std. Dev. 56.5% 62.5% Max 26.4% 21.2% Min (21.8)% (7.5)% Hedging Changes the Expected Return Distribution MSCI-World Returns, "Hedged" Includes 3-month ATM Put Source: Bloomberg, Goldman Sachs Research estimates Cost of 1-Year at-the-Money S&P 500 Hedged Year Put Return Return Hedged Returns Over Time (S&P 500) Puts limit downside risk in bad years Improved risk- adjusted return Equities have fallen by 2% of more in 22% of quarters over the past decade; Hedging reduces this "tail" Who Hedges and Why? The Use of Derivatives is Widespread. Hedging is Often Used for Risk Management Purposes Users Reason Corporate Treasury Asset and Liability Management Asset Managers and Pension Funds Risk Management Governments and Municipalities Debt Management Central Banks Liquidity Access Optimisation Corporate Investors Input & Output Matching Reducing the Cost of Funding General Public Inflation or Recession Hedging 15 ˇ Interest Rate Swaps * Interest Rate Futures * Equity Options * Equity Swaps Hedging Instruments Interest Rate Risk Equity Risk Credit Risk Commodity Risk Currency Risk * Commodity Options * Commodity Swaps * Commodity Forwards * Credit Default Swap * Credit Options * FX Options * FX Forwards Hedging Principles Checklist Is There a Profit or Position to Protect? * Specific position to protection or general portfolio insurance? * Locking-in current levels or protecting against tail risk? Are There Specific Risks to Protect Against? * Risk that market drifts lower or Gaps lower? * Macro inflection points: interest rates, FX, inflection points * Geo-political event risk * Comfortable with momentum, but not with valuations What Factors Affect a Hedging Strategy? 16 Case Study 1 Hedging Equity Risk * 50bn CZK in equity portfolios in the Czech Republic in mid 2007 * Global and CEE markets declined 15% since August 2007 * Loss in Net Asset Value approx 7.5bn CZK (equivalent to 1% GDP of the Czech Republic) Source: Goldman Sachs ­ Past performance figures are not a reliable indicator of future returns Bear Markets in Europe since Summer 2007 (60)% (40)% (20)% 0% 20% 40% 60% 50% 75% 100% 125% 150% Payout Underlyer Buy 100% Put Sell 80% Put Sell 120% Call Total Position Hedging Strategy * An investor has an exposure to the Prague equity index PX * The investor wishes to hedge his position in summer 2007 * Option strategy Buy 100% Put option Sell 80% Put option Sell 120% Call option * Underlyer: Prague Index PX * Maturity: 2 years * Denomination: CZK * Premium: 0% Results * In February 2008, the price of the underlyer dropped to 75% of the initial spot price seven months ago * The Investor incurred a loss of 5% as opposed to a loss of 25% if he didn't hedge Case Study 1 Hedging Equity Risk Option Hedging Strategy 17 Case Study 1 Hedging Equity Risk Accounting for an Put Option on the PX Index * The investor has 50,000 exposure to the Index PX. The market price of the index is 50. The investor wishes to hedge the downside price risk, and on 1 July 2007 enters into an at-the-money put option expiring in 2 years. The exercise price is 50 per share and the investor paid a premium of 4,000 (or 8% of notional). The put option is designated as a fair value hedge of the PX index. Effectiveness is measured by comparing decreases in fair value of the PX index below 50 with the intrinsic value of the option * The following illustrates the two year calculation of fair values 1245-Intrinsic Value -234Time Value 12684Fair Value of Put 50505050Put Strike 38464550PX Index 30 Jun 200931 Dec 200831 Dec 20071 Jul 2007 6,000(2,000)4,000Gain/Loss on Derivative (8,000)3,000(5,000)Gain/Loss on PX Index P&L 30 Jun 200931 Dec 200831 Dec 2007 * Note that if it is probable that the AFS security will be sold upon the expiration of the option, the investor may apply cash flow hedge accounting. If cash flow hedge accounting were applied, gains or losses are taken to equity until the expiry of the hedging relationship. Assuming again that the hedge is assessed on an intrinsic basis, the accounting journal entries for a cash flow hedge would be as follows Case Study 1 Hedging Equity Risk Accounting Journal Entries (Hedge Accounting) * For simplicity assume hedge effectiveness is assessed annually and effectiveness tests are met 18 Case Study 1 Hedging Equity Risk Index (Other Recognised Gains/Losses) (12,000)--Recycled Loss on Disposal of PX Index 12,000--Recycled Gain on Option (8,000)1,000(5,000)Gain/Loss on PX Index 8,000(1,000)5,000Gain/Loss on Derivative (2,000)(1,000)(1,000)Change in Time Value of Option P&L 30 Jun 200931 Dec 200831 Dec 2007 Accounting Journal Entries (Hedge Accounting) (Continued) * For simplicity assume hedge effectiveness is assessed annually and effectiveness tests are met * If no hedge accounting had been applied, the company would have recognised the gains and losses on the PX Index in equity until disposal and a loss on disposal of 8,000 Case Study 2 Hedging Interest Rates Risk Since May 2005 the 1y swap rate increased from 1.7% to 4.2% * The level of interest rates in the Czech Republic was the lowest in Europe in the last few years * The Czech National Bank has increased interest rates since 2005 in order to fight inflation * Companies and banks that used variable funding experienced significant increase in financing costs Source: Goldman Sachs ­ Past performance figures are not a reliable indicator of future returns 19 Case Study 2 Hedging Interest Rates Risk Problem * For example in February 2007 CSOB Prague issues 5y bond with a variable coupon at mid swap with a notional of CZK100mio * Mid swap rate in February 2007 is 3.35% and the expected payment in February 2008 is therefore 3.35% * CZK1,000mio = CZK33.5mio * CSOB has a view that the mid swap rate will be 4.2% in one year time and the coupon payment CZK42.0mio which is CZK8.5mio Solution * Buy a simple 5y at the money Cap on Czech 5y swap rate for 0.25% of the notional which translates into CZK2.5mio Result * Increased financing costs are compensated by profit from the derivative of (4.2% - 3.35%)*1,000mio = CZK8.5mio * In total, CSOB pays 2.5mio (premium) + 42mio (coupon) ­ 33.5mio (profit from option) = CZK11mio * If not hedged, CSOB would pay CZK42mio which is 31mio higher * Alternatively, if the mid swap rate decreased below 3.35% in one year time, CSOB would only pay CZK2.5mio above the coupon payment. * Steepening risk is priced off the forward curve in the market and pays off when realized steepness in the future is larger than the steepness priced in Case Study 3 Hedging Against Global Economic Slowdown * The US economy has already weakened, with GS economics expecting GDP growth to be negative in H1 2008 * With the likelihood of a marked economic slowdown increasing both in Europe as well as globally, we focus on an investment that will likely perform in a recessionary environment when other assets such as equities under perform Source: Goldman Sachs ­ Past performance figures are not a reliable indicator of future returns The Rate Curve Historically Steepened during Economic Downturn 20 Case Study 3 Hedging Against Global Economic Slowdown 100% Principal Protected Note Linked to Yield Curve that Profits from Economic Slowdown * From an investor perspective buying a 100% principal protected Note with an embedded option on e.g. the difference between the 30 year and the 2 year interest rate offers a particularly attractive investment * Some investors have "exploited" the steepening of the US interest rate curve and the trade has proved extremely beneficial for them given negative correlation between GDP and steepness * At maturity, an investor receives 100% of his capital PLUS: Participation * Max(30yEUR ­ 2yEUR ­ Strike, 0) * Suitable for both institutional and retail investors Drivers of the Interest Rate Differential Source: Goldman Sachs ­ Past performance figures are not a reliable indicator of future returns Conclusion Why Czech Investors Should Hedge * According to AKAT CR* total assets under management in mutual funds declined by CZK20bn in Q1 2008. This is a result of losses and redemptions which were triggered by falling markets * The largest impact has been on equity and fixed income funds. This contrasts to guaranteed funds which reported a positive growth in terms of assets * Had the asset managers (including pension funds) hedged during the recent market downturn the loss would have been significantly reduced * With low interest rates and high inflation, diversification and hedging is the key way to generate real rates of return in unfavourable market conditions *Source: www.akatcr.cz 21 Conclusion Why Czech Investors Should Hedge * Hedging ­ potential implications for the Czech economy Less volatile and higher risk-adjusted returns of pension and mutual funds Protection against "fat tail events" such as recent correction in global markets More efficient Asset and Liability Management Better stability of the Czech capital market Conclusion Recommendations to the Czech Republic 1. Review of the Current Legal Restrictions on Derivatives Use * Legal restrictions on use of derivative instruments for asset managers 2. Improve Accounting Standards * Need for more clarity over Czech accounting standards * Tendency for auditors to view hedging instruments as speculative investments 3. Upgrade Infrastructure and Technical Equipment * Out-dated IT, Accounting, Trading and Other Systems 4. Local Asset Managers are Hesitant to Be the First to Start Using Derivatives 5. Knowledge, Awareness and Understanding of Derivative Instruments can be Improved 22 Questions and Answers ? 23 BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG Modifying Risks and Return Expectations by Using Structured Products Chateau Valtice, 22 May 2008 22 May 2008 | Page 2 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Speaker Welcome! Heinrich Karasek, CEFA Director Structured Products & Equities President ZFA (Austrian Derivative Association) BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG 24 22 May 2008 | Page 3 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Content Utilizing Certificates - Opportunities And Limitations Of Using Investment Products Page 4 Strategies - To Implement Your Market Expectation Page 7 Reverse Convertibles Page 9 Discount Certificates Page 13 Express Certificates Page 16 Bonus Certificates Page 19 TWIN-WIN-Certificates Page 23 Investment Strategies With Certificates - Classification Of Risk In A Dynamic Way And Rating Of Certificates Page 26 Development Of The Certificate Market, Respective Size And Market Analysis Page 32 BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG 22 May 2008 | Page 4 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG UTILIZING CERTIFICATES Opportunities And Limitations Of Using Investment Products 25 22 May2008 | Page 5 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Multiple Risk-Return Profile UTILIZING CERTIFICATES Share/Index Structured Products 1 Euro Profit/Loss depends on product type: minimum redemption, partial protection, losses converted to profit Change of one Euro in the share price corresponds to: 22 May2008 | Page 6 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG The European Equity Market During The Last Ten Years A rough ride for investors from time to time ­ the road can be smoothed by using the right instruments, e.g. Bonus certificates. DJ EURO STOXX 50 closing price weekly 1.800,00 2.300,00 2.800,00 3.300,00 3.800,00 4.300,00 4.800,00 5.300,00 5.800,00 15.05.1998 15.05.2000 15.05.2002 15.05.2004 15.05.2006 15.05.2008 Period Index Price Source: Bloomberg Issue of first Bonus Certificate And now? UTILIZING CERTIFICATES 26 22 May 2008 | Page 7 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . STRATEGIES To Implement Your Market Expectation 22 May 2008 | Page 8 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . The Ideal Product For Each Market Expectation STRATEGIES Put your market expectations into practice using structured products. MARKET EXPECTATION Reverse Convertibles, Discount Certificates, Express Certificates neutral Capital Guaranteed Certificates , Bonus Certificates, TWIN-WIN- Certificates no positive Outperformance Certificates, long Turbo negative Reverse Structures, Warrants, short Turbo 27 22 May 2008 | Page 9 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . REVERSE CONVERTIBLES High Yields For Sideward Markets 22 May 2008 | Page 10 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . Higher ,,Coupon" Than Government Bonds REVERSE CONVERTIBLES High-Yield-Bond Credit Risk No redemption due to insolvency Bonds in Foreign Currencies FX Risk Lower redemption due to devaluation of the currency (higher redemption in case of appreciation) Reverse Convertibles Share Delivery of shares in case of lower share price High Coupon due to ... BUT there is risk... 28 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . 22 May 2008 | Page 11 CLASSIC-Reverse Convertibles Payoff Profile at Maturity REVERSE CONVERTIBLES ISIN DE000SEL6TK5 Underlying Schoeller-Bleckmann Oilfield Equipment AG Start 6 February 2008 Maturity 23 December 2008 Strike Price 48,07 EUR Coupon p.a. 13,50% Offer Certificate 101,32% Maximum Yield 6,56% Maximum Yield p.a. 11,02% * Market Expectations: - short-/medium term investment in sideward markets, there is the possibility of a market disruption during the investment period * Ideal structured product: - the coupon is paid in any case Redemption At maturity the investor receives the nominal amount provided that the underlying quotes are at or above the strike price. Otherwise shares are delivered at maturity the coupon is paid in any case. Indicative Levels are based on current market data on 15 May 2008. The figures represent gross performance and do not include any provisions. 22 May 2008 | Page 12 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Reverse Convertibles - Performance And Redemption REVERSE CONVERTIBLES Share Price Issue Maturity Strike Price 52,50 Euro Nominal Amount Shares Shares Nominal Amount 29 22 May 2008 | Page 13 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . DISCOUNT CERTIFICATES Strong Returns - Appealing Entries 22 May 2008 | Page 14 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Discount Certificates ­ Benefit From Below Market Entry Discount certificates offer: * to purchase the certificate at a lower price than the current price of the share or the index * to benefit from gains, even if the value of the underlying remains unchanged or falls slightly * in return: profit is limited by cap Your advantage: * risk cushion through discount at time of purchase * maximum profit in sideward markets * investment for a fixed term * the discount is higher, - the better the dividend yield - the higher the volatility * the price of the option increases with longer maturity * cede of dividends DISCOUNT-CERTIFICATES 30 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . 22 May 2008 | Page 15 CLASSIC-Discount-Certificate DISCOUNT-CERTIFICATES Payoff Profile at Maturity * Outperformance: - sideward markets BUT limited due to cap - maturity is determined at issue * Ideal conditions: - high dividend yield / high implicit volatility * Market expectations: - sideward markets for short-/medium term investments * Advantage: - the investor buys the underlying at a discount in comparison to the current share price ISIN DE000SDL0V93 Underlying Komercni Banka AS Start 19 April 2007 Maturity 23 December 2008 Cap 4.500 CZK Price of Underlying 4.230,00 CZK Offer Certificate 156,24 EUR Discount 6,92% Maximum Yield 14,29% Maximum Yield p.a. 24,32% Indicative Levels are based on current market data on 15 May 2008. The figures represent gross performance and do not include any provisions. 22 May 2008 | Page 16 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . EXPRESS-CERTIFICATES Easy. Fast. Attractive. 31 22 May 2008 | Page 17 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Express Certificates - Direct Return Access EXPRESS-CERTIFICATES Express certificates are: * profitable - chance to achieve an attractive yield * lucrative - in case of sideward markets * partially protected - if the call level is below the reference price * buffered - comfortable risk buffer through PROTECT-level Your advantage: * autocallable: if the underlying quotes at or above the call level on valuation day, the certificate pays an appealing redemption amount * only the closing level of the underlying determines the redemption amount at maturity * possibility of early redemptions until maturity * various risk buffers for early and final redemption * longer maturity permits a larger risk buffer * cede of dividends 22 May 2008 | Page 18 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . CLASSIC-Express-Certificate Underlying DJ EuroSTOXX50 Reference Price at Issue 4.087,12 points Start 28 February 2007 Maturity 07 April 2011 31 March 2008 31 March 2009 31 March 2010 31 March 2011 3,675.00 points 3,675.00 points 3,675.00 points 3,675.00 points PROTECT-Level only on the last observation date 2,850.00 points 108.00 Euro 116.00 Euro 124.00 Euro 132.00 Euro Observation Dates respective early redemption amount respective Call-Level Issue date fixing of reference price of the index Call-Level = 100.00 Euro on 1st observation date underlying 90,00% (Call-Level) yes Redemption 108.00 Euro no on 2nd observation date underlying 90,00% (Call-Level) yes redemption 116.00 Euro no on 3rd observation date underlying 90,00% (Call-Level) yes redemption 124.00 Euro no on 4th observation date underlying 90,00% (Call-Level) yes redemption 132.00 Euro no the index closes between the PROTECT-Level at 80,00 Euro and the Call-Level at 100,00 Euro? yes redemption 100.00 Euro no redemption equals to the amount expressed in Euro considering the actual level of the index and the respective ratio Payoff CLASSIC-Express EXPRESS-CERTIFICATES 32 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG22 May 2008 | Page 19 BONUS-CERTIFICATES Minimum Redemption. Risk Buffer. And Unlimited Profit. 22 May 2008 | Page 20 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG PROTECT-Bonus-Certificates ­ Gain (Even) From Weakening Markets BONUS CERTIFICATES PROTECT-Bonus-certificates offer: * Bonus: the bonus amount is paid in a sideward or slightly falling market as long as the underlying does not hit or breach the PROTECT-Level * unlimited chance of profit in case of rising markets * at maturity the investor is at worst in a no lesser position than having invested in the share or in the index Ideal for the following market expectations: * uncertainty about a sustainable and positive performance of the underlying * price decline can not be ruled out * Bonus, risk buffer, unlimited chance of profit * cede of dividends 33 22 May 2008 | Page 21 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Mechanics Of A PROTECT-Bonus-Certificate BONUS CERTIFICATES Payoff at Maturity * Market expectations: - long term rising markets with a risk of market disruption during the expected investment period * Ideal structured product: - risk buffer via a partial protection - the investor expects the indices to recover from a market decrease; - unlimited and full participation in the positive performance of the underlying * Ideal conditions: - high implied volatilities and high dividend yields * Outperformance: - slightly falling markets and sideward moving markets ISIN DE000SBL66M8 Underlying DJ EURO STOXX 50 Strike Price 3.525,00 points Start 12 June 2006 Maturity 22 September 2009 Price Underlying 3.839,57 points Bonus Level 4.700,00 points = 22,41% Bonus Amount 1.175,00 points PROTECT-Level 2.525,00 points = 65,76% Offer Certificate 41,51 Bonus Yield 13,23% Bonus Yield p.a. 9,55% p.a. Indicative Levels are based on current market data on 15 May 2008. The figures represent gross performance and do not include any provisions. 22 May 2008 | Page 22 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Index Price Issue Maturity Bonus Level 108,00% Offer 100,00 EUR PROTECT-Level 59,00% Bonus Amount Bonus Amount Redemption equal to the price of the underlying Bonus Amount PROTECT-Bonus-Certificate: Performance And Redemption BONUS CERTIFICATES 34 22 May 2008 | Page 23 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG TWIN-WIN-CERTIFICATE Win In Case Of Rising And Falling Markets 22 May 2008 | Page 24 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG TWIN-WIN-Certificates ­ Profit From The Ups OR Downs TWIN-WIN-CERTIFICATES TWIN-WIN-certificates offer: * participation in rising as well as in falling markets * unlimited and full participation in the positive performance of the underlying (could even be leveraged!) * negative performance of the underlying is paid as positive performance as long as the PROTECT-Level is not breached during the observation period Ideal for following market expectations: * uncertainty about positive performance of the underlying * decline in price can not be ruled out * benefit from over proportional participation rate * risk buffer, chance of unlimited profits * cede of dividends 35 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . 22 May 2008 | Page 25 TWIN-WIN-Certificate TWIN-WIN-CERTIFICATES Redemption At maturity the investor will participate in the positive performance with a leverage of 1,25 (that is to say if the index closes above the strike price), if the PROTECT-Level has not been breached. Should the underlying close below the strike price on the observation date, the negative performance is paid as a positive performance as long as the PROTECT-Level has not been breached during the observation period. If the PROTECT-Level is hit during the observation period, the redemption amounts to the closing level of the underlying on the valuation date, BUT the investor still has the possibility to participate with the leverage of 1,25 above the strike price in rising markets. ISIN DE000SEL6ZE5 Underlying DJ EURO STOXX 50 Price Underlying 3.850,16 points Start 5 February 2008 Maturity 25 June 2010 Strike Price 3.850,00 points PROTECT-Level 2.500,00 points = 64,93% Leverage 1,25 Offer Certificate 101,63 Euro * Ideal structured product: - participation in rising as well as in falling markets - unlimited and full participation in the positive performance of the underlying (could be even leveraged!) - negative performance of the underlying is paid as a positive performance as long as the PROTECT-Level is not being breached during the observation period * Ideal condition for a launch of the structured product: - high dividend yields/ high implied volatilities/ high interest rate differential (e.g. USD against JPY) Indicative Levels are based on current market data on 15 May 2008. The figures represent gross performance and do not include any provisions. Payoff Profile at Maturity 22 May 2008 | Page 26 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG INVESTMENT STRATEGIES WITH CERTIFICATES Classification Of Risk In A Dynamic Way And Rating Of Certificates 36 22 May 2008 | Page 27 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Perception of Risk and Types of Certificates Large preference to avoid worst case risks after 2000-2003 capital guaranteed certificates * the investor is particularly sensitive to small losses bonus certificates express certificates parachute certificates * expectations of decreasing market oscillation (volatility) discount certificates bonus certificates INVESTMENT STRATEGIES WITH CERTIFICATES Utility function based on Prospect Theory (Kahnemann/Tversky) perceived benefit profit/loss 22 May 2008 | Page 28 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Risk Features Of Certificates INVESTMENT STRATEGIES WITH CERTIFICATES The risk of certificates depends on: * type of certificate * payoff feature * underlying(s) * maturity Methodical standards for measuring risks of certificates: * objective and comprehensive risk valuation * comparability of investment types and issuers * capturing particular details of structured products * consideration of risks: price changes, interest rate, foreign exchange, volatility and issuer * foreign exchange risk * risk free interest rate * creditworthiness of issuer the risk is dynamic Use VaR to rank structured products by risk classes 37 22 May 2008 | Page 29 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Concept of Value at Risk INVESTMENT STRATEGIES WITH CERTIFICATES VaR describes the risk of losses in Euro (or in %): * indicates a theoretical maximum loss that is not exceeded with a very high probability VaR marks a point on the probability curve of possible yields. VaR can be calculated both for single and overall positions. Therefore three factors are crucial: * holding period (10 days) * confidence level (99%) * investment amount (10.000 ) 22 May 2008 | Page 30 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Implementation of VaR Values in Risk Classes INVESTMENT STRATEGIES WITH CERTIFICATES Determination of risk classes on the basis of VaR for benchmark investments * estimated period of five years * VaR refers to the investment amount of 10.000 EUR speculative volatile small shares (e.g. Shares of solar companies) 1.750 < VaR 10.0005 willing to take increased risk members of indices (average)1.250 < VaR 1.7504 willing to take risk ATX, DAX, DJ EuroStoxx 50, Dow Jones, S&P 500 750 < VaR 1.2503 willing to take limited risk i.Boxx Europe, EMU Bond Index 250 < VaR 7502 safety driven fixed income indices ( 1 - 5 years) 0 < VaR 2501 Investor TypeBenchmarksLimit in EUR Risk Class 38 22 May 2008 | Page 31 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG VaR Werte For Certificates (15 April 2008) INVESTMENT STRATEGIES WITH CERTIFICATES 7 April 2011 23 December 2008 23 December 2008 25 June 2010 22 September 2009 Maturity DE000SCL6FH2 DE000SDL0V93 DE000SEL6TK5 DE000SEL6ZE5 DE000SBL66M8 ISIN 3 3 2 3 3 Risk Class DJ EURO STOXX 50 Komercni Banka AS Schoeller-Bleckmann Oilfield Equipment AG DJ EURO STOXX 50 DJ EURO STOXX 50 Underlying 843,76851,61 CLASSIC- Express- Certificate 1,083.00936,92 CLASSIC- Discount- Certificate 1,299.00714,31 CLASSIC- Reverse Convertible 843,76891,55 TWIN-WIN- Certificate 843,76796,05 PROTECT- Bonus- Certificate VaR 10 days VaR 10 days Product 22 May 2008 | Page 32 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Development of the certificate market, respective size and market analysis 39 22 May 2008 | Page 33 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Development Of The Certificate Market And Its Respective Size * In 1989 the first certificate was issued ­ it was a participation note on the Dax index. * The size of the market has grown to be significant: - the German market is the largest and has been estimated at 136 billion Euro end of March 2008 (source: Derivate Forum). - in Austria the market volume of the five biggest issuers amounts to 5,4 billion Euro. The total market is estimated to be about 12 billion Euro (source: Zertifikate Forum Austria). * huge growth rates are expected: - Germany: in 2007 the volume in certificates rose by 17.2%. By 2010 volume is expected to increase to 194 billion, that is a further increase of 20% p.a. - Austria: in 2007 the market volume of certificates grew by 19,9% - it is expected that in 2008 the market will rise by 20%. BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG 22 May 2008 | Page 34 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Market Analysis - Breakdown Of The Market By Product Categories In Germany BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG Source: Deutscher Derivate Verband Index Certificates 5,22% Others 0,39% Hedge Fonds- Certificates 5,17%Basket- / Themen- / Strategie-Certificates 2,67% Outperformance- / Sprint-Certificates 0,67% Express Certificates 16,67% Reverse Convertibles 0,71% Discount Certificates 13,88% Capital Guaranteed Certificates 35,53% Bonus- / Partial Protection-Certificates 19,09% Open interest in investment products by product category as of 31 March 2008 40 22 May 2008 | Page 35 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Market Analysis ­ Breakdown Of The Market By Product Categories in Austria BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG Open interest in investment products by product category as of 31 March 2008 Reverse convertibles 0,57% Discount certificatese 1,04% Partial protection/ Bonus certificates 10,40% Index certificates 8,14% other certificates 1,77% Capital guaranteed certificates 78,08% Source: Zertifikateforum 22 May 2008 | Page 36 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG Q&A... Thank you for your attention! BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG 41 February 2008 | Page 37 Bank Sal. Oppenheim jr. & Cie. (Österreich) AG . Impressum BANK SAL. OPPENHEIM JR. & CIE. (ÖSTERREICH) AG * Published by: Bank Sal. Oppenheim jr. & Cie. (Austria) AG Stock im Eisen-Platz 3 1010 Vienna/Austria www.oppenheim-derivate.at +43 (1) 518 66 - 24 24 derivate@oppenheim.at * Layout: Sal. Oppenheim jr. & Cie. Team Klassische Medien 50667 Cologne Copyright Copyright This work is protected by copyright. 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(Austria) AG for the recipienťs investment decisions and eventual losses shall be excluded. 42 Innovation in Stock­Related Products May 2008 Frankfurt Ales Jelinek, NATIXIS Im Trutz Frankfurt 55 D-60322 Frankfurt am Main Tel: (+49) 69 97153-367 Fax: (+49) 69 97153 102 2 28 Caisses ďEpargne BFBP (central body) CNCE (central body) 20 Banques Populaires Free Float (1) : 31% 34,5% 100% 20% CCI 20% CCI 34,5% 100% as of 07/12/2006 Organisation Capital Structure 20% shareholding in the retail banking networks of Banques Populaires and Caisses ďEpargne Shareholder agreement with BFBP und CNCE (1) Including DZ Bank (1,13%),San Paolo IMI (1,68%) 43 3 Correlation Products Still Space for Innovations? Popular correlation products in recent years 100% capital protection Maturity: 3-5 years Underlying: Basket of Stocks (15-30 stocks, global exposure) Examples: Altiplano, Corridor Swing Everest Cappuccino 4 Altiplano: Observation: yearly, monthly, daily Coupons depending on the number of stocks that break the barrier during the observation period Catch-Up mechanism Lock-In mechanism Take-Out mechanism Corridor: higher coupon; reduction of the coupon dependent on the number of stocks that break one of the barrier (upper barrier or lower barrier) { StockstheofePerformancon thedepends(e.g.10%)Coupon:X%;SBarrierSifX%, e.g.1,50%Coupon,Minimum:Y%;SBarrierSifY%, i0it i0it C(t) ×> ×= Correlation Products Still Space for Innovations? 44 5 Swing: Observation: yearly Minimal coupon guaranteed; Coupon paid dependent on the stock with the minimum absolute performance Option with a low probability of positive intrinsic value at maturity Lock-In mechanism 3%e.g.coupon,minimum:Y%;Y%;1 S S Min.MaxC(t) 1jt jtn 1j -= - = Correlation Products Still Space for Innovations? 6 Cappuccino: Observation: yearly Floor-alternative 2%;e.g.coupon,Minimum:Y% ; n 1 Y%;Max.C(t) n 1j ×= = jR 1 S S ,1 S S %13.. j0 jt j0 jt -=>= jj elseRforgeR Correlation Products Still Space for Innovations? 45 7 Everest: Coupon as a sum of the basic coupon (X%) and the participation (P) on the worst performing stock Minimal coupon guaranteed Observation: yearly, monthly, daily Lock-In mechanism Take-Out mechanism Target Redemption 30%e.g.ion,participat:P 8%;e.g.ofcouponbasic:X% 2%;e.g.ofcouponminimal:Y% 1 S S Min.PX%Y%;Max.C(t) j0 jtn 1j -×+= = Correlation Products Still Space for Innovations? 8 Everest ,,Best × Worst" Higher coupon if the dispersion of the two stocks (best and worst) declines Product may have a positive performance even on a bear market, especially if even the best performing stock has a negative performance 10%e.g.coupon,basic:X% e.g.1%;coupon,minimal:Y% 1 S S Min.1 S S Max.X%Y%;Max.C(t) j0 jtn 1j j0 jtn 1j -× -+= == Correlation Products Still Space for Innovations? 46 9 New Underlying Assets Constitute the Product Innovations 10 Commodities: New Underlying Assets Constitute the Product Innovations 47 11 New Indexes (Themes) Dynamic Indexes (basket composition depends on the given algorithm) Alternative Assets (e.g. life insurance policies on the secondary market) New Underlying Assets Constitute the Product Innovations 12 Dynamic strategy Stocks selection (15) from a pool of 200 stocks Selection criterion: Sharpe Ratio Underlying: 5 stocks with the highest value of Sharpe Ratio Yearly rebalancing and new selection 100% capital guarantee Maturity: 3 years + Participation on the performance of the underlying 200 stocks 15 stocks Sharpe Ratio selection Top 5 Global Alpha Rotator 48 13 Alpha Express Structures (Index vs. Index): Coupon and early cancellation with redemption = 100% in case of outperformance after the first year Double coupon and early cancellation with redemption = 100% in case of outperformance after year 2 Capital guarantee or conditional capital guarantee at maturity in case that there was no outperformance in previous years Alpha-Products 14 Capital Guaranteed Structures (Basket of Stocks vs. Index): Coupon depends on the average relativ performance of the underlying stocks versus index Minimum coupon payment Cap e.g.10%:Cap2%;e.g.coupon,minimum:Y% Cap; I I S S Min. n 1 Y%;Max.C(t) n 1j 0 t j0 jt -×= = Alpha-Products 49 15 Mixture of different Asset Classes: * stocks * bonds * inflation * real estate * commodities * currencies * alternative assets Participation products: usually capital guaranteed usually one final payoff optimisation mechanism very popular (,,Rainbow", ,,Himalaya", ,,Best of") Hybrid Products 16 This document is a marketing presentation for discussion and information purposes only. 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Disclaimer 50 Derivative use in the Czech assetDerivative use in the Czech asset management and pension fundsmanagement and pension funds industryindustry ­­ legislative frameworklegislative framework "Derivatives and risk management in the new EU regulatory landscape" Institute for financial market seminar 22 May 2008 Michal Franěk Ministry of finance Czech Republic Collective investment ­ UCITS funds * Investments in derivatives ­ Act on Collective Investment (,,ACI") - harmonised with 85/611/EC UCITS Directive (,,UCITS"). * Soon harmonised with 2007/16/EC implementing Directive (,,ID") - clarification of certain definitions of UCITS Directive 51 Collective investment ­ UCITS funds 2 1) Purpose of derivative investments * As a part of fund`s investment policy (§ 26/1/g ACI; Art. 19/1/g and Art. 21/3/3rd indent UCITS) * As a part of fund`s employment of techniques and instruments used for efficient portfolio management (§ 27/2 ACI and its implementing decree No. 604/2006; Art. 21/2/2nd sentence UCITS and Art. 11 ID) Collective investment ­ UCITS funds 3 2) Types of eligible derivative instruments * a) derivatives dealt in on regulated markets (§ 26/1/f) ACI; Art. 19/1/g)/1st sentence UCITS and Art. 8 ID) * b) OTC derivatives under specific conditions (§ 26/1/g) ACI; Art. 19/1/g)/2nd sentence UCITS and Art. 8 and Art. 9 ID) 52 Collective investment ­ UCITS funds 4 3) Duties of managers regarding derivatives investments * a) to employ a risk-management system (to monitor and measure risk, to assess of the value, to communicate it to supervisor) - § 27/1 ACI; Art. 21/1 UCITS * b) to follow investment limits - § 27/3-7, § 28/5 ACI and § 4, 5 of implementing decree No. 604/2006; Art. 21/2,3 and 22/1/2nd indent Collective investment ­ non-UCITS funds marketed to public * Legal rules for derivative investments mirroring those applicable to UCITS funds * a) non-UCITS funds investing in transferable securities ­ see § 49b/2-6, § 51/1/f) ACI and implementing decree No. 604/2006 * b) non-UCITS funds of funds ­ see § 49/2-6 ACI and implementing decree No. 604/2006 and also § 51/1/f) with regard to § 55/6,7 ACI * c) open-ended real-estates funds ­ just for efficient portfolio management - see § 49b/2-6 ACI 53 Collective investment ­ non-UCITS funds marketed to qualified investors * No rules applicable to derivatives investments in ACI; depend on founders` and managers` decision * Investment policy (i.e. including derivative investments) must be specified in prospectus Pension funds * Pension fund may employ derivatives investment only for hedging purposes (§ 33/7 of State contributory supplementary pension insurance Act) and representing no more than 5% of its assets (§ 34/4/2nd sentence) 54 Future * Less quantitative limits in legislation, more risk-based approach? * This would require change of UCITS Directive in case of UCITS funds Thank you! Contact: michal.franek@mfcr.cz jan.sovar@mfcr.cz 55 ERSTE GROUP Derivatives and pensions funds ­ CZ case Viktor Kotlán Director, Institutional Asset Management Email: vkotlan@csas.cz Valtice, May 22 2008 vkotlan@csas.cz2 TOPICS - Philosophy of regulation - Hedging vs. speculation - Derivatives vs. structures - Conclusions 56 Valtice, May 22 2008 vkotlan@csas.cz3 PHILOSOPHY OF REGULATION - Industry concept ­ dealing with other people's money - Versus: sophisticated investors (compare municipalities, non-fin corporations, ...) Valtice, May 22 2008 vkotlan@csas.cz4 HEDGING VS. SPECULATION - Thin line btwn protection and risk taking - Definition of the limit (5%): volume vs. exposure? - Matching IR risk with swaps out of the limit? 57 Valtice, May 22 2008 vkotlan@csas.cz5 DERIVATIVES VS. STRUCTURES - What is more risky: - Discount certificate (non-derivative?) vs - Structured bond (derivative) - How will you tell in legislation? Valtice, May 22 2008 vkotlan@csas.cz6 CONCLUSIONS - Disclosure over regulation - Industry standards and peer pressure - ? 58 Asset-Liability Management & Optimized Strategic Asset Allocation Benefits of Structured Investments May 2008 Tomas Hochmeister ALM FIG BANK OF THE YEAR 2007 59 The contents of this document are given for purely indicative purposes and have no contractual value. Prior to any investment in the product, you should make your own appraisal of the risks from a legal, tax and accounting perspective, without relying exclusively on the information with which you were provided, by consulting, if you deem it necessary, your own advisors in these matters or any other professional advisors. Subject to compliance with legal and regulatory requirements, Société Générale may not be held responsible for the financial or other consequences that may arise from the investment in this product. This product may be subject to restrictions with regard to certain persons or in certain countries under national regulations applicable to said persons or in said countries. It is your responsibility to ensure that you are authorised to invest in this product. The documents relating to this product will provide for methods of adjustment or substitution in order to take into account the consequences on this product of extraordinary events which may affect one or several of the underlying instruments on which it is based or, as the case may be, the early termination of this product. This document does not constitute an offer for sale of securities in the United States. The securities can be neither offered nor transferred in the United States of America without being registered or being exempted from registration under the US Securities Act 1933, as amended. The attention of investors is drawn to the fact that, by the maturity date, the price of certain products can be subject to an important volatility due to the evolution of market parameters and more precisely the price of the underlying instrument and the interest rates. The potential return may be reduced by the effect of commissions, fees or other charges. Certain products embed leverage i.e. either the issuer of these products may borrow funds to invest more than 100% of the amount initially invested by the investor in the underlying assets or the issuer of an underlying instrument may borrow funds to invest more than 100% of its assets in other assets, which involves in both cases further risks. Therefore, the value of these products will amplify the upwards and downwards movements in the value of the underlying assets or in the value of these other assets, and these products may even have no value. The accuracy, completeness or relevance of the information provided is not guaranteed although it has been drawn from sources believed to be reliable. The information presented in this document is based on market data at a given moment and may change from time to time. Back testing permits the calculation of returns that the product would have had if it had been launched in the past, presented according to the maturity date. It allows an understanding of how the product would have performed at different market stages over previous years. For certain Products with a capital protection, such capital protection is only ensured on the Maturity Date, and the secondary market price of the Notes may fall below this capital protection during the life of the Notes. Moreover the investor should be aware that the capital protection feature requires for the Issuer, the Guarantor and/or their affiliates, to enter into hedging transactions which have a cost and which may affect the market price, liquidity or value of the Notes, especially when comparing them to the market price, liquidity and value of the underlyings of the Note. The Issuer and the Guarantor assume no responsibility whatsoever for such consequences and their impact on the investment. This document is confidential and may not be communicated to a third party (with the exception of your external advisors on the condition that they themselves respect the confidentiality) without prior written consent from Société Générale. Confidential Presentation ALM FIG BANK OF THE YEAR 2007 May 2008 Tomas Hochmeister Asset-Liability Management & Optimized Strategic Asset Allocation Benefits of Structured Investments 60 Benefits of Structured Investments 61 4 Why to invest in structured solutions ? Reason #1 - Achieving a better Risk / Return profile Based on current risk management tools, it is possible to mitigate the risks borne by an institution which invests in various asset classes such as equities Tailor-made structured investments allow to adjust the risk / return profile of the asset classes For instance: reduction of the downside risk vs. give-up of some extreme potential upside Consequence: better balance between expected return and risks borne more comfort by the institutions which do not need to worry in distressed market conditions and buy at then expensive levels protection Towards a better Risk Management Example: two investments in equity markets Similar expected returns Extreme downside risk significantly mitigated 0 100 200 300 400 500 600 700 -10.0% -7.5% -5.0% -2.5% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% 17.5% 20.0% EuroStoxx 50 dividends reinvested Equities with guarantee of capital strong risk mitigation less "extreme" upside potential yearly compounded return from year 1 to year 10 level of the tw o strategies at the end of year 10 value return value return expected 206 7.5% 196 7.0% VaR 95.0% 61 -4.8% 100 0% VaR 97.5% 49 -6.9% 100 0% VaR 99.0% 39 -9.0% 100 0% equities risk-control solution 10 years horizon 62 5 Why to invest in structured solutions ? Reason #2 - Access to a new asset class which provides diversification Structured investments can give access to new asset classes which are not directly available in the traditional markets: what we call the hidden assets volatility dividends correlation dispersion gap risk etc. What brings hidden assets: diversification investment opportunities What we call hidden assets Example: benefits of an exposure to implied volatility 0 200 400 600 800 1000 1200 1400 1600 1800 02/01/90 02/01/91 02/01/92 02/01/93 02/01/94 02/01/95 02/01/96 02/01/97 02/01/98 02/01/99 02/01/00 02/01/01 02/01/02 02/01/03 02/01/04 02/01/05 02/01/06 02/01/07 0 10 20 30 40 50 60 70 80 Equities (S&P500) Volatility (VIX) surge in implied volatility fall in implied volatility volatility in % S&P500 Implied volatility reflects the uncertainty in the markets. It tends to increase significantly in periods of crisis Historical correlation with equity returns: -67% An exposure to implied volatility provides strong diversification benefits It is an asset class which has raised a lot of interests from financial institutions in the past two years 63 6 Why to invest in structured solutions ? Reason #3 - Benefit from Market Opportunities, the Warren Buffet case Aside diversification, structured investments allow to take advantage of financial market conditions compared to financial institution long-term views A mismatch between financial market prices and financial institution long-term expectations: market prices reflect an equilibrium between supply & demand and change constantly pension funds expectations reflect a long-term investor perspective and are stable For example, in a low risk / low implied volatility situations, the market might give a very cheap price for equity upside potential whereas a long-term institution might not change its expectations in the long-term for equity markets In such a situation to invest in equities through an option-based strategy vs. a direct investment would be particularly attractive Market Opportunities The Warren Buffet Case Warren Buffet, through its investments with its holding Berkshire Hathaway, changed radically his mind 2002: "I view derivatives as time bombs" 2006: "derivatives, just like stocks and bonds, are sometimes wildly mispriced. [ ... ] We currently have 62 contracts outstanding. I manage them personally" Warren Buffet took a significant position in equity markets by selling long-dated equity put options market view: equity markets will not be lower than today in 10 to 20 years to take this position requires a structured solution more than USD 5bn collected as option premium in 2007 (source: Berkshire Hathaway, Shareholders Letter 2007) 64 7 Why to invest in structured solutions ? Reason #4 - Dynamic Management and optimisation of Market Timing Once the strategic asset allocation decision has been taken, it is important to be comfortable on: the market timing of the investments as well as the market timing of potential adjustements This service can be provided by asset managers in a discretionary manner, for example balanced managers as regards the equity / bonds or equity / credit allocations Structured investments allow to address this need in a transparent manner by catching: lowest levels to invest in an asset class highest levels to exit an asset class and invest in another About dynamic management and Market Timing Example: coming back to the equity investment A pension fund wishes to capture the highest level reached by equities with a 8 years horizon Example (*): at maturity, the investor receives the maximum amount between: 100% capital and 80% x EuroStoxx50MAX / EuroStoxx50initial x capital where EuroStoxx50MAX represents the highest level reached by the equity index across 8 years with annual observations Systematic and transparent optimisation of the market timing (*) indicative pricing dated November 2007 65 8 Why to invest in structured solutions ? Reason #5 - Taking into account the Asset-Liability framework Financial institutions have often long-dated liabilities / cash outflows objectives payments in 5, 10, 20 and 30 years to pensioners (pension funds), policyholders (insurance companies) or back to the State / the local economy (sovereign accumulation funds) They represent, from a mark-to-market perspective, a strong exposure to interest rate. We usually talk about the duration of liabilities A traditional investment in equities does not bring any particular sensitivity to interest rate. We usually say that equities do not have a specific duration As a result, a direct investment in equity markets entail an interest rate mismatch between assets and liabilities This mismatch is not optimal as interest rate risk is not rewarded Reflected by new Risk-Based European pensions & insurance regulation: FTK (Netherlands), FSA (UK), SST (Switzerland), Solvency 2 (European insurance), Traffic-Light models (Sweden, Denmark), etc. Meeting long-dated liabilities Example: structured investments & duration Structured investments, as soon as they present a bond format such as a guarantee of capital, provide duration to an asset class The guaranteed capital component can be seen as a zerocoupon bond if rates fall by 1%, the value of this zero-coupon bond will increase significantly example: if the time to maturity of a guaranteed capital investment is 10 years, the value of the zero-coupon will increase by about 10% As a result, from an Asset-Liability viewpoint, a structured investment can be better than a direct investment in a given asset class provided it manages to: maintain the expected return provide a less risky profile it behaves well when rates fall 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 31/12/98 30/04/99 31/08/99 31/12/99 30/04/00 31/08/00 31/12/00 30/04/01 31/08/01 31/12/01 30/04/02 31/08/02 31/12/02 30/04/03 31/08/03 31/12/03 30/04/04 31/08/04 31/12/04 30/04/05 31/08/05 31/12/05 30/04/06 31/08/06 31/12/06 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 EuroStoxx 50 10Y swap rate equity markets fell by -66% in 3 years interest rate decreased by 2.9% in 5 years equity interest rate in % 66 Appendices 67 10 SG CIB, a global leader in Structured Investments Risk Magazine 2005 Awards Risk Magazine 2005 Awards IFR Equity Derivatives House of the year 2005 Albourne 2004 SG : Most reasonable leverage provider Lyxor AM: Best managed account platform Albourne 2004 SG : Most reasonable leverage provider Lyxor AM: Best managed account platform 2005 Another Multi Awarded Year 2004 The Grand Slam 3 times Worldwide Equity Derivatives House of the Year IFR Equity Derivatives House of the year 2004 IFR Equity Derivatives House of the year 2004 Risk Magazine 2006 Awards Risk Magazine 2005 Awards 2006 Confirmation of SG Leadership and expertise IFR Equity Derivatives House of the year 2006 The Banker Investment Banking Awards "Equity Derivatives House of the Year" 2006 Euromoney Awards Top Global Prize "Best Bank" 2006 Structured Products Awards "House of the Year Equity Derivatives 2006" Albourne 2004 SG: Most reasonable leverage provider Lyxor AM: Best Managed Account Platform SG: Most reasonable leverage provider Lyxor AM: Best Managed Account Platform Albourne 2006 2007 Celebrating 20 Years Of Innovation in Equity Derivatives The Banker Investment Banking Awards "Equity Derivatives House of the Year" 2007 Euromoney Awards "Best Equity Derivatives House" 2007 Risk Magazine "Equity Derivatives House of the Year" 2008 Risk 20th anniversary issue "Modern Great in Equity Derivatives" ALM FIG BANK OF THE YEAR 2007 68 69 ChangesChanges toto thethe CRD:CRD: LargeLarge exposuresexposures JiJiřříí KrKróóll Disclaimer This presentation does not represent official views of the Ministry of finance. 70 Structure of the presentation * Definitions * Look-through approach * Reporting * Discretions and the 800% limit * Inter-bank exposures * Intragroup exposures Definitions: group of connected clients 71 Look through approach to securitisation positions, CIUs and ,,other items" (Art. 106) Inter-bank exposures (Art. 111) 72 Discretions and the 800% limit Intragroup exposures (Art. 113) 73 Thank you for your attention! 74 BBH 6/6/2008 Slide 1 UCITS Reform Managament Company Passport Valtice, 22nd May 2008 Zdeněk Husták (ZHustak@bbh.cz) Institute for Financial Market Conference BBH 6/6/2008 Slide 2 Scope of Management Companies Activities ANNEX II UCITS Directive ,,Functions included in the activity of collective portfolio management" Investment management Administration: legal and fund management accounting services customer inquiries valuation and pricing (including tax returns) regulatory compliance monitoring maintenance of unit-holder register distribution of income unit issues and redemptions contract settlements (including certificate dispatch) record keeping Marketing 75 BBH 6/6/2008 Slide 3 Current structures Fund Management Company (Promoter) Investment Manager/ Adviser Administrator Custodian Distributor Paying Agent (Bank) Member State A Member State B Fund notification Regulator MS A Regulator MS B BBH 6/6/2008 Slide 4 Full Management Company Passport Fund Management Company (Promoter) Investment Manager/ Adviser Administrator Custodian Distributor Paying Agent (Bank) Member State A Member State CMember State B Fund NotificationMC Passport Regulator MS A Regulator MS B Regulator MS C 76 BBH 6/6/2008 Slide 5 Partial Management Company Passport Fund Management Company (Promoter) Investment Manager/ Adviser Administrator Custodian Distributor Paying Agent (Bank) Member State A Member State CMember State B Fund NotificationMC Passport Regulator MS A Regulator MS B Regulator MS C BBH 6/6/2008 Slide 6 MC Passport and Risk Management considerations Responsibility of Management Company (Promoter) for risk management of a Fund Outsourcing issues Partial MC Passport Will fund domicile member state require risk management function being conducted in this state /at least partially/? What should be the role of a custodian in fund risk management from the regulatory perspective? Regulatory cooperation and ,,common approach" Will there be a ,,common understanding" of regulators of what the ,,standard" risk management of fund looks like? ,,Over-sensitiveness" of some MS towards use of derivatives and some risk mitigation techniques 77 BBH 6/6/2008 Slide 7 Contact Zdeněk Husták, of counsel Brzobohatý Brož & Honsa v.o.s., Attorneys at law Klimentská 10 110 00 Prague 1, Czech Republic tel.+ 420 234 091 355 e-mail: zhustak@bbh.cz web: www.bbh.cz Thank you for your attention 78 1 Internal Market for Asset Management Challenges for 2008 and later Didier MILLEROT European Commission DG MARKT G4 2 The main challenges * How to build on the UCITS success story while taking account of market evolution? * How to develop the Internal Market beyond UCITS, while making sure that there is clarity on products suitable for consumers vs more qualified investors? * How to make sure that retail investors are provided performing and diversified investment opportunities, while keeping an appropriate level of information and protection? * Need to take into account the new political environment: less legislative appetite (Single Market Review), need to build strong economic cases 79 3 The UCITS Reform Basic idea: preserve the UCITS approach while improving the efficiency of its functioning * Improve the notification procedure and develop the management company passport * Provide new management opportunities: mergers and master feeder structures * Improve disclosure rules: Key Investor Information 4 The UCITS Reform Management company passport is the biggest challenge: * Technically: allocation of responsibilities between home/host? supervision and enforcement of rules related to activities/risk management procedures performed on a remote basis (Common funds)? Funds/ManCo need proportionate and cost-effective procedures? * Politically: UCITS IV is a package, MCP is a key part linked with other (master/feeder), better regulation constraints 80 5 New IM developments: non-harmonised funds and private placement * Today, only UCITS benefit from IM passport * Legitimate right for other products to get one but subject to better regulation test: 1) strong economic case 2) no undesired effect (both economic and legal) 6 New IM developments: non-harmonised funds and private placement * Private placement: for what products? Which qualified investors? Impact assessment in May * Non-harmonised funds: case built by OEREF industry report, need to evaluate case for other products (ex. Funds of Hedge funds) based on national experience. Retailisation study. Communication in the autumn. 81 7 Current debate on retail investment products * Differences of legal framework/approach for products offered to retail investors? Is this a problem? Are some of these products mis-sold to consumers? * Call for evidence in the autumn: maybe some issues of investor information/protection but no Commission conclusion yet (autumn) * What is an appropriate level of consumer protection? Need for EU vs national action? Need to move from a sectoral to a more horizontal approach? What consequences? 82 Masaryk University Faculty of Economics and Administration Institute for Financial Market Derivatives and risk management in the new EU regulatory landscape Edited by Ing. Gabriela Oškrdalová Published by Masaryk University, 2008 First edition, 2008, number of copies: 25 CDs Serial number ESF-5/08-02/58 ISBN 978-80-210-4632-0 INSTITUTE FOR FINANCIAL MARKET FACULTY OF ECONOMICS AND ADMINISTRATION, MASARYK UNIVERSITY A:Lipová 41a, 602 00 Brno, Czech Republic W:http://institute-fm.econ.muni.cz