Development of synthetic diamond derivative products
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Development of Synthetic Diamond Derivative Products. Vickie Flores, Adrian Mulryan Private Investor Products (“PIP”), Structured Products. Agenda. About structured derivative products and the addition of diamonds Development of a new derivative and structured product

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Development of Synthetic Diamond Derivative Products

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Development of synthetic diamond derivative products

Development of Synthetic Diamond Derivative Products

Vickie Flores, Adrian Mulryan

Private Investor Products (“PIP”), Structured Products


Agenda

Agenda

  • About structured derivative products and the addition of diamonds

  • Development of a new derivative and structured product

  • The contractual framework and legal issues

  • The role of diamond products in portfolio diversification

  • Recent examples, issues and developments

  • Further information

  • Questions?


About structured derivative products

About Structured Derivative Products

  • Synthetic investment instruments

  • Exchange traded and OTC

  • Cheaper and easier alternative to direct investment

  • Structured product types (performance tracking, yield enhancement, leverage, capital protection)

  • Wide range of structured product underlyings across all asset classes


Who buys a structured product

Who Buys a Structured Product?

Who?

  • Individual retail investors

  • Corporate and commercial investors

  • Private Bankers

  • Asset Managers (to assist with asset allocation)

  • Financial Product Distributors/Advisors


Why buy a structured product

Why Buy a Structured Product?

Why?

  • Access to otherwise inaccessible markets or pay offs

  • Portfolio diversification

  • Cost efficient for the investor

  • Tax efficiency or mitigation

  • Enhanced yield or protection


How diamonds would fit with the existing abn amro structured products range

How diamonds would fit with the existing ABN Amro structured products range

  • Proven demand for commodity and alternative underlyings from investors and asset allocators

  • Limited correlation with existing underlyings

  • New, exciting and previously inaccessible underlying

  • Removes the need for storage, insurance and security

  • Bullish view of diamond prices held by many

  • High profile in current financial press


Problems in developing a structured product

Problems in Developing a Structured Product

  • Price transparency and agreed price sources

  • Standardisation of underlying assets (stones) and agreed valuation methodology

  • Identification of demand for rough vs polished diamonds

  • Disruption events

    These same issues apply to developing a diamond derivative contract


Requirements to develop a new derivatives contract

Requirements to develop a new Derivatives Contract

  • Willingness from market participants

  • Backing of financiers to the industry e.g. ABN Amro Bank NV for diamonds

  • Standardisation of documentation and delivery mechanism

  • Facilitator to standardise documentation e.g. ISDA

  • Working group of interested parties

  • Regular reporting to industry through existing mediums, trade press and web sites


Characteristics and considerations for a derivative product

Characteristics and Considerations for a Derivative Product

  • 2 Distinct groups: OTC and Exchange Traded

  • 3 Major classes: Forwards/Futures, Options, Swaps

    Considerations in developing of a Diamond Derivative Contract:

  • Contract terms and specification

  • Delivery mechanism – cash or physical settlement

  • Depository and verification by gemologist

  • Legal documentation (ISDA)

  • Direct settlement / central clearing (margining)


Contractual framework

Contractual Framework

  • What is a Derivative?

  • ISDA

  • Master Agreements & Definitions

  • Benefits of Derivatives

  • Access to Derivatives

  • Types of Retail Structured Product


Legal issues

Legal Issues

  • Challenges – Hedging – Polished vs. Rough

  • Timing

  • Product Types

  • Settlement


How synthetic diamond products can assist with portfolio diversification

How synthetic diamond products can assist with portfolio diversification

  • Historic traditional portfolios contained 3 asset classes (stocks, bonds and cash)

  • Benefits of portfolio diversification across asset classes increasingly recognised:

    • Maximised returns for minimised risk

    • Reduced volatility during both bull and bear markets

  • Full analysis required, but correlation with existing commodities expected to be fairly low

  • Increasing demand from investors for “alternative investments” not linked to bonds and stocks

  • Diamonds both a consumable and store-of-value asset so particularly suitable for portfolio diversification


  • Recent examples and developments

    Recent Examples and Developments

    • The Development of a Freight Derivative Contract

      • Established market (1744) based on trust

      • Lack of trade standardisation, transparency and pricing

      • Development of OTC Forward Freight Agreement (“FFA”) contract

      • Introduction of Central Clearing

      • Adoption of ISDA (2005)

      • Launch of NYMEX futures contract

      • Similarities and differences with Diamonds

      • Lessons that can be learnt from freight derivatives

  • Launch of Diamond fund on the LSE by Diapason (10th July 2007)

  • High profile recent press articles


  • Further information on structured products

    Further Information on Structured Products

    • ABN Amro Markets Web Site

      • http://www.abnamromarkets.com

    • Structured Retail Products

      • http://www.structuredretailproducts.com


    Questions

    Questions

    • Any Questions?


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