MINI-Future Certificates (MINIs)

Leveraged certificates are suitable for investors who have a directional view on a specific Underlying and wish to monetise their view, whilst ensuring they know the maximum possible loss on the position (the “Stop-Loss”).

Leveraged Long certificates are developed to benefit investors with a bullish view on the price of the Underlying, whereas Leveraged Short certificates benefit those with a bearish view on the price of the Underlying.

Due to the leveraged nature of leveraged certificates, the products are mainly suitable for experienced investors.

Advantages

• Leveraged earnings potential
• Certainty about maximum loss (equal to premium)
• No volatility element in the price of a Leveraged Certificate
• High pricing transparency
• No margin requirements
• Access to many underlyings in different asset classes (shares, indices, bonds, FX, commodities) and different regions
• Built-in stop-loss

MINI-Long

Assumptions
Comparison between a MINI-Long Certificate and an Open-ended Certificate to show the leverage effect.

XYZ share stands at 3,650.

Assumptions
Comparison between a MINI-Long Certificate and an Open-ended Certificate.

XYZ share increases to 3,800.

(financing level change due to handling cost is not taken into consideration in this example).

As financing costs will be added to the Financing Level, the investor only pays the financing cost for the period the product is held.

MINI-Short

Assumptions
Comparison between a MINI-Short Certificate and an Open-ended Certificate to show the leverage effect.

XYZ share stands at 3,500.

Assumptions
Comparison between a MINI-Short Certificate and an Open-ended Certificate.

XYZ share decreases to 3,250.

Basics

The investor investing in a leveraged certificate receives the full increase or decrease in the price of the underlying, but only finances part of the underlying, the rest is financed by RBS (this creates the leverage). The level of the leverage shows the larger price variation of the leveraged certificate in comparison to the underlying. For example, if an index moves by 1%, a leveraged certificate with a leverage of 5 will move by 5%. Likewise, a leveraged certificate with a leverage of 10 would have moved by 10%. The higher the leverage, the more sensitive the leveraged certificate is for price movements of the underlying. This works for both increases and decreases, so a drop of 1% with a leverage of 10 would result in a 10% loss for the leveraged certificate. However, the investor cannot lose more than the initial investment when purchasing the leveraged certificate.

Financing Level

An investor who buys a leveraged certificate only finances part of the underlying, the rest is financed by RBS. The part financed by RBS is called the financing level. When buying a leveraged certificate long, the investor will pay interest on the financing level. When buying a leveraged certificate short, the investor will, in general, receive interest dependent on the overnight interest rates and the type of underlying. The interest paid or received will change the financing level on a daily basis. Also, possible dividends paid by underlying securities will affect the financing level. For leveraged certificates that reference bonds or commodities, the underlying is a futures contract. Rolling into a new futures contract can also affect the financing level.

Stop Loss

Leveraged Certificates are open-ended (no maturity date). However they do have a stop-loss level, which can trigger redemption. This Stop-Loss level is put in place to ensure that the investor cannot lose more than the price initially paid for the Leveraged Certificate. If the price of the underlying hits or breaches the Stop- Loss level, the Leveraged Certificate will terminate and the investor will receive the difference, if any, between the termination value (as calculated by RBS) and the financing level multiplied by the entitlement and adjusted for exchange rates. This termination value will always be greater than or equal to the financing level, so the investor will always receive an amount greater than or equal to 0.

On a monthly basis, the stop-loss levels are reset to match the then prevailing financing level, plus (in case of a leveraged certificate long) or minus (in case of a leveraged certificate short) the stop loss premium. This is unique to the underlying and dependent on its liquidity and volatility. Rolling of futures and dividend payments can also trigger adjustments to the Stop-Loss level.

Leveraged Certificate Valuation

The theoretical value of a leveraged Certificate is the difference between the price of the underlying and the financing level, multiplied by the entitlement (the “amount” of underlying an investor partially buys when buying one leveraged Certificate) and adjusted by the applicable FX-rate (in case the currency of the underlying is different from that of the leveraged Certificate).

For example, when the price of a share is EUR 25, the financing level is EUR 20 and the entitlement is 1, the price of the leveraged Certificate is (25 - 20) x 1 = EUR 5.

For underlyings that are trading at a high level (e.g. the Dow Jones) or a low level (e.g. EUR/USD exchangerate), the entitlement will not be equal to one, to avoid having very high or low prices of the leveraged Certificate itself. An entitlement of 0.01 for instance means that an investor who buys one leveraged Certificate effectively buys exposure to 1% of the difference between the price and the financing level for the underlying.

Assumptions
Dow Jones level: 12,000
EUR/USD: 1.50
Financing level: 13,000

The value of a EUR-denominated Leveraged Certificate
Short with an entitlement of 0.01 will now be:
(13,000 – 12,000)/1,5 x 0,01 = EUR 6.67.

Risks

Leveraged Certificates are by definition highly leveraged investments, where buyers risk losing their entire invested capital. A stop-loss event will result in the position being unwound and the investor receiving the residual value, which is dependent on market circumstances and could be zero. If used for hedging, a stop-loss may result in the hedged portfolio becoming unhedged.