EFTA01365708.pdf

Classification: Confidential Jeffrey, It was a pleasure to talk today and looking forward to meeting when you get back to NY. Please see below for the rationale of the SslOs steepener trade - I just repriced this for USD lbn notional. As discussed, you pay 15bps upfront for an at-the-money-forward (ATMF) CmS option struck at 54.5bps. The current spot is at 71bps, so it is 16.Sbps above the ATMF strike. Last week, before the FOMC minutes were released, the spot was 20bps above the ATMF strike level. The current roll is not as high as last week but, it still represents very cheap optionality which carries roll benefit and unlimited upside in the event of curve steepening at expiry. Purchase options on USD curve steepness (CMS SslOs ATMF curve caps) USD curve steepness close to 5 year lows: (Embedded image moved to file: pic23542.gif) Indicative terms: Notional USD lbn Client buys CMS curve cap on SslOs in USD Expiry 1 year CMS SslOs Strike ATMF (54.5bps) CMS SslOs Spot 71bps upfront premium offer (mid): 15bps (13.5bps) Terminal Payout: Notional*max (CMS SS1OS Terminal Rate-strike, 0) Settlement: Cash Trade Rationale and Implementation: Potential catalysts for steepening in the short term frame include: Economic recovery and a pick up in inflation expectations, which are likely to be a prerequisite for the market to sustainably price a Fed tightening cycle Conversely, given inflation breakevens are currently depressed, if a negative economic shock were to happen, it could imply a more accommodative Fed, which is commonly associated with a steeper curve Deutsche Bank research on total return bond fund returns and rates derivate positioning suggests uS steepeners are less crowded among real money investors while a steepening view can be articulated in various delta-one ways, CMS curve caps allow clients to express a steepening view with limited downside, where the maximum downside is the premium paid. The terminal payout is Notional"Max(Terminal Rate-Strike,0) Because forwards are currently inverted, clients are able to purchase options with a higher positive roll from forwards to spot than the premium initially paid Overview on current market dynamics: This year's USD interest rate curve flattening in 5slOs can be decomposed into three distinct phases: (i) the market repricing Fed tapering in the 10y sector (ii) china's intervention on USDCNY, building up official foreign reserves (iii) increase of deflation and QE expectations out of Europe Hypothetical PnL at Expiry (Embedded image moved to file: pic19910.gif) One lylOy/lOy swap rate vs. lySy/Sy swap rate (as of 10/07/2014) (Embedded image moved to file: pic04365.gif) Positioning research suggests steepeners are less crowded among real money investors (Embedded image moved to file: pic09734.gif) (08 GM Research: Global Fixed Income weekly 7 10/03/14) Please note all prices are indicative and subject to change without notice. Best regards, Daniel CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0056701 CONFIDENTIAL SDNY_GM_00202885 EFTA01365708