Edinburgh-based Scottish Widows, with £73 billion of client money under management, is unique among the city’s investment houses in that it has access to the structured products expertise of Lloyds Treasury, which is part of Scottish Widows’ parent group, Lloyds TSB.
“We work closely with Scottish Widows and speak to their product development team on a regular basis to discuss what each tranche of the GIB (Guaranteed Investment Bond) should look like. Once a particular type of product is in place it tends to be kept fairly similar for the next couple of tranches,” says Julienne Daglish, senior manager for structured investment products at Lloyds Treasury in London.
The product development and structured finance section of Lloyds Treasury is split into four relatively small team components. Daglish’s team comprises three people. Other small teams cover the bond book, the interest rate options book and the structured debt side of the business. “Our desk is responsible for providing structured investment product ideas, and for the packaging and hedging of those products for distribution within the Lloyds TSB group,” says Daglish.
Scottish Widows is Lloyds Treasury’s biggest onshore distributor of structured retail products. The company issues a number of standardised products – currently called the Guaranteed Investment Bond – throughout the year that are sterling-based and linked to the performance of the FTSE 100. “Scottish Widows hedge seven or eight tranches a year with us, so it is something that is generally permanently available,” says Daglish.
Lloyds Treasury and Scottish Widows have changed the structure of their standard offering this year. At the beginning of the year it was a six-year cliquet product, with the investor receiving the better of a fixed return or the sum of the semi-annual cliquet performances on the Footsie. After a couple of tranches the structure was then modified to a five-year maturity with principal protection and the cliquet option replaced with a participation rate on the index. Lloyds Treasury and Scottish Widows have now moved back to the cliquet structure again. The current investment consists of a five-year maturity with the final pay-off calculated as initial capital plus the maximum of 10% or the sum of restricted returns – restricted at 4% – in each period.
Having decided what type of structure to run with, Lloyds Treasury then buys the FTSE equity option element. “We speak to all the major providers of equity options in the market. They supply us with ideas as well as pricing,” says Daglish.
Daglish says she then uses a core group of dealers to buy the options from. “We need to do fairly large deals. We need fine pricing, volume flexibility, to have regular buy-back facilities and to have regular evaluations,” she says.
Lloyds Treasury constantly rolls over similar deals for Scottish Widows, so a new issue can be launched relatively quickly, barring the need for a redesign. “We have to be happy that we not only achieve pricing that will make the product ‘work’, but also that we can book the option in the size we require, and that there are enough counterparties who are prepared to put a price on it. Scottish Widows need to satisfy themselves that the sales force are happy that the product meets customer requirements, and that the investment bond meets all the internal requirements they have to fulfill in order to issue the product,” she says.
Daglish adds that a redesign, rather than a repricing of the product, will be needed if interest rates and/or the equity market have moved in such a way that the product no longer looks attractive.