For financial adviser use only. Not to be used with retail clients. The Gilt option Diversification of counterparty risk
The Gilt option explained The Gilt option gives investors the opportunity to diversify their portfolio by transferring their counterparty risk to the UK Government. It is designed to reduce the risk of potential loss to their investment should Investec fail or become insolvent, this is achieved by a process called collateralisation. Instead the risk to their investment will be dependent on whether the UK government experiences a Credit Event. What is collateralisation? Collateralisation is a process widely used by financial companies to help reduce counterparty risk. Structured products, like all investment products, are subject to counterparty risk. Therefore, any return of capital from a structured product depends on the solvency of the counterparty (i.e. the product provider) and its ability to meet its obligations. Collateralisation is the use of assets (collateral) separated from the product provider, to help mitigate this risk. In the event of insolvency of the product provider these assets could be sold to help compensate investors. Our collateralised products should be considered by investors who wish to diversify their counterparty risk. How do Investec s Gilt option Investment Plans work? Investec posts a pool of collateral with an independent custodian. The types of asset that can be held within the pool of collateral include: cash and Gilts. This pool is dynamically managed by Investec on a daily basis to ensure its value equals the current market value of the investor s Gilt option Plan(s). In the event of Investec failing to meet its obligations, the pool of collateral may be sold in order to return the value of the Plan. Collateralisation in this instance does not eliminate counterparty risk but rather diversifies the risk away from the issuing counterparty. 2
What is a Credit Event? A Credit Event occurs when the UK Government: --becomes insolvent, or --defaults on its payment obligations, or --experiences a restructuring of its debt obligations in a manner that is detrimental to creditors. What is the practical effect of Investec s Gilt option Plans? The practical effect of our Gilt option Plans is to replace the counterparty risk of Investec Bank plc with the counterparty risk of the UK Government. The Gilt option involves the provision of regularly margined collateral by Investec as plan manager to collateralise its obligations under the Investec Plans. This provides a degree of security for clients investments in the event that Investec becomes insolvent, providing the value of the collateral doesn t fall after Investec fails or becomes insolvent. This provides an alternative investment choice for customers who may already have a holding in other Investec products and/or who may wish to spread the risk of counterparty default within their investment portfolio across a wider range of entities including the UK Government. What can be held in the collateral pool? The types of assets that can be held within the collateral pool (for the Gilt option Plans) include: --Cash; and --UK Gilts. The collateral pool is managed by Investec and held with Deutsche Bank AG, London Branch plc as custodian. Note: the collateral pool does not provide any security against the failure of the UK Government. 3
What happens if the UK Government experiences a Credit Event? If the UK Government experiences a Credit Event, 100% of the client s investment will be at risk. The amount they will receive in relation to their investment will be determined as per the below: --Upon the UK Government experiencing a Credit Event, Investec will determine the fair and reasonable value of the Securities. This determination will include factors such as the performance of the FTSE 100 Index up to the date on which the UK Government experienced a Credit Event. --Investec will then determine the Recovery Rate, which will be either the ISDA Auction Final Price or the Market Value. --The amount the clients will receive of their investment will be calculated by Investec multiplying the value by the Recovery Rate. For further details and examples of the process, please refer to our Plan brochures. Management of collateralised products The collateral pool is managed by Investec and held with Deutsche Bank AG, London Branch who acts as an independent Custodian. Deutsche Trustee Company Limited acts as Trustee. The independence of the Custodian from Investec is vital so that they can ensure the segregation of the collateral assets from Investec. Under the terms of the relevant agreements, Investec posts collateral to secured accounts maintained by Investec with the Custodian in relation to the relevant securities underlying the Investec Gilt Plan. What are the credit ratings of the UK Government? The below table shows the credit ratings of the UK Government. Fitch Ratings Moody s Investors Service Limited Standard & Poors UK Government AA+ Aa1 AAA All of the above long term credit ratings are correct as at December 2014. Source: Bloomberg. Please be aware that these credit ratings can change at any time. For future updates on credit rating activity, please refer to our website. The UK Government has not sponsored or endorsed any of the Plans or the underlying securities in any way, nor has it undertaken any obligation to perform any regulated activity in relation to any of the Plans or the underlying securities. 4
How does the Gilt option work? The client The client invests in a Plan with Investec Structured Products, Investec Structured Products is a trading name of Investec Bank plc. Investec Bank plc issues securities which will pay the Plan return.* Credit linkage 100% of the client s investment is credit linked to the UK Government. If the UK Government experiences a Credit Event then all of their investment could be lost. Collateral pool There is a pool of cash and Gilts that is kept to the same value as the Plan. If Investec fails or becomes insolvent, then the pool of collateral can be sold to pay back the value of the Plan. What happens if... 1. Investec does not fail or become insolvent and the UK Government does not experience a Credit Event the client receives the Plan return.* 2. Investec fails or becomes insolvent the collateral pool can be sold to pay back the value of the Plan at that time. 3. The UK Government experiences a Credit Event 100% of the investment is at risk. *Note that the Plan return is dependant on the terms of this Plan. 5
For technical enquiries call 020 7597 4065 Including technical information on our Plans and queries relating to Structured Products. For administration enquiries and valuations call 0844 892 0942. Including Application Form assistance and confirmation of receipt, payment and commission enquiries. For literature visit www.investecstructuredproducts.com Send completed and signed Application Forms to: Investec Structured Products, PO Box 12066, Brentwood, Essex CM14 9LZ. This communication is meant to be read only by financial advisers. This material is issued by Investec Bank plc of 2 Gresham Street, London EC2V 7QP, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered under Financial Services Register reference 172330. It is not being issued to, nor should it be redistributed to or used by, persons who are retail customers. This material does not constitute investment advice and should be read in conjunction with the Plan brochure and Prospectus relating to the Securities, details of which can be obtained from Investec Bank plc. Whilst all reasonable care has been taken to ensure that the information stated herein is accurate and opinions fair and reasonable, neither Investec Bank plc nor any of its directors, officers or employees shall be held responsible in any way for the contents of this document. 316297/TAL 1214