For financial adviser use only. Not to be used with retail clients. Diversification of counterparty risk WINNER 2013 Best Overall SP Provider 2013 Best Income Plan 2013 Best Service to IFAs 2009, 10, 11, 12 & 13 Best Marketing Material 2010, 11, 12 & 13
Collateralisation explained Using a pool of collateral gives investors the opportunity to diversify their portfolio by spreading their counterparty risk across financial institutions. 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 the solvency of four named financial institutions. These financial Institutions are currently: Société Generale SA, Morgan Stanley, Banco Santander SA and The Royal Bank of Scotland plc. 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. Our collateralised products should be considered by investors who wish to diversify their counterparty risk. How does the Security collateral 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, gilts and debt securities. This pool is dynamically managed by Investec on a daily basis to ensure its value equals the current market value of the investor s collateralised Security. 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 Security. Collateralisation in this instance, reduces risk to the issuing counterparty rather than eliminating counterparty risk by means of diversification. 2
What is the practical effect of Investec s collateralised Securities? The practical effect of our collateralised securities is to replace the counterparty risk of Investec Bank plc with the counterparty risk of four other financial institutions. This involves: --The use of a pool of collateral. This is margined daily and therefore equal at all times to the value of the related collateralised Security. This provides a degree of protection 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. --Credit-linkage in equal specified proportions to four financial institutions. So that in the case of a Security linked to four financial institutions, each 1 invested would result in a credit exposure of 25p to each of the four financial institutions. 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. What can be held in the collateral pool? The types of assets that can be held within the collateral pool include: --Cash; --Debt securities issued or guaranteed by the relevant financial institutions; and --UK Gilts. Note: the collateral pool does not provide any security against the failure of one or more of the financial institutions. 3
What happens if one of the institutions fails or becomes insolvent? If any of the institutions fail or becomes insolvent, a 25% proportion of the client s initial investment will be at risk for each insolvency. The amount they will receive in relation to that 25% portion of their investment will be determined as per the below: --Upon an institution failing or becoming insolvent, Investec will determine the fair and reasonable value of the 25% portion of the Securities related to the affected institution. This determination will include factors such as the performance of the FTSE 100 Index up to the date on which the affected institution failed or became insolvent. --Investec will then determine the recovery rate for the affected institution. The calculation of the recovery rate may be made at any point prior to or beyond the maturity date of the Security. In determining the recovery rate in relation to the affected 25% proportion and the date on which the clients will receive such amount, Investec will endeavour to treat the clients as if they had held a similar retail structured product with the insolvent institution. --The amount the clients will receive in respect of the affected 25% portion of their investment will be calculated by Investec multiplying the value by the recovery rate. 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 underlying Securities. 4
The Institutions Société Generale SA Société Generale is a leading global financial institution based in France. The firm has been established for 150 years and is spread over 76 countries, with 32 million customers and 154,000 employees. They offer a large range of services to their clients, including insurance, lending and retail banking. For more information please visit www.societegenerale.com/en/home Market capitalisation (group): $32,771.4mn Fitch Ratings A Total assets $1,235.262mn Moody s Investor Services Limited A2 Profit before tax $3,058mn Standard & Poor s A Morgan Stanley Morgan Stanley is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The firm s employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,200 offices in 43 countries. For more information please visit www.morganstanley.com Market capitalisation (group): 60,984.2mn Fitch Ratings A Total assets 807,698mn Moody s Investor Services Limited Baa2 Profit before tax 7,104mn Standard & Poor s A- 5
Banco Santander SA Banco Santander SA is a retail bank based in Spain and present in ten major markets. It is the Eurozone s leading bank and is among the top 15 financial institutions worldwide in terms of market capitalisation. Banco Santander manages 1.383 billion in funds for more than 102 million clients through its network of 15,000 offices. For more information please visit www.bancosantander.es Market capitalisation (group): 76,175.9mn Fitch Ratings BBB+ Total assets 1,115,638mn Moody s Investor Services Limited Baa1 Profit before tax 7,652mn Standard & Poor s BBB The Royal Bank of Scotland plc RBS is one of the largest banks in the UK, RBS remains the UK s second biggest bank by assets and has a diversified business model with a large presence in the retail market, via its branches and NatWest subsidiary. The UK Government s majority stake confirms the bank s systemic importance to the UK economy and the willingness of the state to provide support. RBS have a substantial retail banking network & deposit book, and are restructuring their activities away from higher risk areas. For more information please visit www.rbs.co.uk. Market capitalisation (group): 34,671.3mn Fitch Ratings A Total assets 1,027,878mn Moody s Investor Services Limited Baa1 Profit before tax - 8,243mn Standard & Poor s A- All institution information, including credit ratings have been sourced from the institution s latest financial reports or websites as at 19 March 2014. Please note all figures have been rounded to the nearest million. For further information please visit the institution websites. None of Société Generale SA, Morgan Stanley, Banco Santander SA and The Royal Bank of Scotland plc has sponsored or endorsed any of the Securities in any way, nor have any of them undertaken any obligation to perform any regulated activity in relation to any of the Securities. 6
How does the collateral work? The client The client invests in a Security with Investec Structured Products, Investec Structured Products is a trading name of Investec Bank plc. Investec Bank plc issues securities which will pay the return. Credit linkage 25% of the client s investment is linked to each institution entity. If one of the institutions fails or goes insolvent then 25% of their investment could be lost. For example, for every 10,000 investment, 2,500 is at risk for each institution. Collateral pool There is a pool of collateral that is kept to the same value as the Security. If Investec fails or becomes insolvent, then the pool of collateral can be sold to pay back the value of the Security. Royal Bank of Scotland plc 25% Société Generale SA 25% Cash Collateral pool Collateral pool value Debt Securities = Security value Banco Santander SA 25% Morgan Stanley 25% Gilts What happens if... 1. Investec does not fail or become insolvent and none of the institutions fail or become insolvent the client receives the Security returns. 2. Investec fails or becomes insolvent the collateral pool can be sold to pay back the value of the Security at that time. 3. One or more of the institutions fail or becomes insolvent 25% of the investment is at risk for each insolvent institution. 7
For technical enquiries call 020 7597 4065 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 Factsheet 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. 314921/TAL 0514