AUDREY EU
MS AUDREY EU (in Cantonese): President, this morning when the Chief Executive attended a radio programme, he said to this effect, "It was a pity that the Lehman Brothers used the word 'bonds' because the product is not a kind of bond but a derivative. The term 'bonds' was used when the product was offered. Maybe some people might think that it is a kind of bonds. From the structure of the product, I do not think that it is a kind of bonds. It was a rather complicated kind of derivative really." This is the meaning of the verbatim record of the interview which I looked up. I wish to ask the Chief Executive especially about the remark that he made to the effect hat "some people might think that it is a kind of bonds …… I do not think that it is a kind of bonds."This is because I believe and the Chief Executive also knows it very well that there are laws regulating such matters in Hong Kong. Those who engage in the sale and marketing of these derivatives are subject to regulation. The relevant
LEGISLATIVE COUNCIL ─ 16 October 2008105
regulatory bodies are the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC). These products cannot be sold without the approval given by the SFC of the relevant papers and this applies especially to the retail sale of these products to the banks which in turn sell them to the small investors.Hence may I ask the Chief Executive whether your remark to the effect that "some people might think that it is a kind of bonds …… I do not think that it is a kind of bonds" is sort of irresponsible and sarcastic? Or are you admitting directly or indirectly that the SFC has been irresponsible and has been in dereliction of duty of supervision when it gives approval to these papers to permit the retail sale of such complicated derivatives and high-risk products in the banks to the small investors?
CHIEF EXECUTIVE (in Cantonese): Ms EU, what I mean is that at that time my feeling was that this was not a kind of bonds. And what I said on the radio today was nothing more than my own feelings. I can see from its contents that it is obviously a derivative and not a bond. So if the form they adopt or the methods employed in selling these products in Hong Kong are permitted under the existing regulations, this is something we have to look into precisely. We know that the event has occurred and what they have used and the monitoring methods adopted are something that you perhaps know better. We use the disclosure method and all the related information is given to all the buyers and investors. On the other hand, we oversee the sale of these products so that they come under the regulatory scope of some rules and standard practice. In this regard, what we should look for after the occurrence of the Lehman Brothers event is whether or not these regulations are sufficient. This is something we need to explore and deal with. However, personally I do not think that this kind of so-called minibonds is a kind of bonds. It is not a kind of bonds.
MS AUDREY EU (in Cantonese):President, the Chief Executive has not answered my question. I asked the Chief Executive that since he knows we have got a regulatory mechanism and had the SFC which is tasked with supervision not given approval to these papers, it could not be sold to small investors in the name of bonds at the retail level by the banks. Since the Chief Executive says that this is not a kind of bonds, the question I wish to ask is whether or not it was a sarcastic or irresponsible remark and whether or not the SFC will be held accountable for this event.
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I got a letter of reply from the Chief Executive today because I had written to him and suggested that a series of measures should be taken. You have only done part of it. You said yesterday that funding would be made to the Consumer Council as a kind of litigation fund and you also said that the HKMA would be asked to handle the matter and appoint some mediators. However, the problem now is that many people have lost their confidence in the banks because of this.The suggestion I made to you is unlike what Mr CHIM Pui-chung has said, not that a special court should be set up or there should be an arbitration mechanism which does not allow appeals. There is actually a mechanism for arbitration.I made a suggestion to you in my letter, that apart from the part which you have accepted earlier on, another part is to appoint independent arbitrators. This is because arbitration entails expenses. The Government should at least take up the responsibility and provide some resources and appoint some independent professionals tasked with arbitration. Should mediation fail, at least a fair arbitration procedure should be provided for each case.
CHIEF EXECUTIVE (in Cantonese): Ms EU, first of all, no one should be sarcastic with respect to the Lehman Brothers saga and no one should say anything sarcastic. I was only telling the truth about these problems. I said that they were not bonds and they are remarks I made from the bottom of my heart. After looking at the structure of these products, I am convinced that they are obviously derivatives. As I have just said, under our existing system, we rely on the disclosure method and the name used is permitted under this existing system. Under these circumstances, is this right or proper? Should any review be undertaken after this event? This is something we should explore and it is also something we should study in-depth.On the suggestions you have made to me, they have been given careful consideration and you would know that we are now implementing some of them.As for the arbitration option you have mentioned, would arbitration be possible only when the two parties agree? As far as I know, arbitration cannot be carried out if any one party refuses to resort to arbitration. Right?
MS AUDREY EU (in Cantonese): President, I wish to make a clarification of this part. My request is that at least the Government should provide resources and appoint some independent arbitrators. It is, of course, another question whether or not the two parties are willing to come to arbitration. But at least the Government should provide such resources and at least it should be responsible for this part. This is one of the questions I asked.
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CHIEF EXECUTIVE (in Cantonese): In the statement I made yesterday, I said that the HKMA had set aside resources to undertake mediation work in this incident. I would think that this should be of help to the people concerned in tackling the problem of settlement of accounts and undertaking mediation, and also in identifying better arrangements should such incidents happen again. We have allocated such resources and the HKMA will pay for the expenses in appointing some people to tackle the incident by way of mediation.
LEGISLATIVE COUNCIL ─ 16 October 2008105
regulatory bodies are the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC). These products cannot be sold without the approval given by the SFC of the relevant papers and this applies especially to the retail sale of these products to the banks which in turn sell them to the small investors.Hence may I ask the Chief Executive whether your remark to the effect that "some people might think that it is a kind of bonds …… I do not think that it is a kind of bonds" is sort of irresponsible and sarcastic? Or are you admitting directly or indirectly that the SFC has been irresponsible and has been in dereliction of duty of supervision when it gives approval to these papers to permit the retail sale of such complicated derivatives and high-risk products in the banks to the small investors?
CHIEF EXECUTIVE (in Cantonese): Ms EU, what I mean is that at that time my feeling was that this was not a kind of bonds. And what I said on the radio today was nothing more than my own feelings. I can see from its contents that it is obviously a derivative and not a bond. So if the form they adopt or the methods employed in selling these products in Hong Kong are permitted under the existing regulations, this is something we have to look into precisely. We know that the event has occurred and what they have used and the monitoring methods adopted are something that you perhaps know better. We use the disclosure method and all the related information is given to all the buyers and investors. On the other hand, we oversee the sale of these products so that they come under the regulatory scope of some rules and standard practice. In this regard, what we should look for after the occurrence of the Lehman Brothers event is whether or not these regulations are sufficient. This is something we need to explore and deal with. However, personally I do not think that this kind of so-called minibonds is a kind of bonds. It is not a kind of bonds.
MS AUDREY EU (in Cantonese):President, the Chief Executive has not answered my question. I asked the Chief Executive that since he knows we have got a regulatory mechanism and had the SFC which is tasked with supervision not given approval to these papers, it could not be sold to small investors in the name of bonds at the retail level by the banks. Since the Chief Executive says that this is not a kind of bonds, the question I wish to ask is whether or not it was a sarcastic or irresponsible remark and whether or not the SFC will be held accountable for this event.
LEGISLATIVE COUNCIL ─ 16 October 2008106
I got a letter of reply from the Chief Executive today because I had written to him and suggested that a series of measures should be taken. You have only done part of it. You said yesterday that funding would be made to the Consumer Council as a kind of litigation fund and you also said that the HKMA would be asked to handle the matter and appoint some mediators. However, the problem now is that many people have lost their confidence in the banks because of this.The suggestion I made to you is unlike what Mr CHIM Pui-chung has said, not that a special court should be set up or there should be an arbitration mechanism which does not allow appeals. There is actually a mechanism for arbitration.I made a suggestion to you in my letter, that apart from the part which you have accepted earlier on, another part is to appoint independent arbitrators. This is because arbitration entails expenses. The Government should at least take up the responsibility and provide some resources and appoint some independent professionals tasked with arbitration. Should mediation fail, at least a fair arbitration procedure should be provided for each case.
CHIEF EXECUTIVE (in Cantonese): Ms EU, first of all, no one should be sarcastic with respect to the Lehman Brothers saga and no one should say anything sarcastic. I was only telling the truth about these problems. I said that they were not bonds and they are remarks I made from the bottom of my heart. After looking at the structure of these products, I am convinced that they are obviously derivatives. As I have just said, under our existing system, we rely on the disclosure method and the name used is permitted under this existing system. Under these circumstances, is this right or proper? Should any review be undertaken after this event? This is something we should explore and it is also something we should study in-depth.On the suggestions you have made to me, they have been given careful consideration and you would know that we are now implementing some of them.As for the arbitration option you have mentioned, would arbitration be possible only when the two parties agree? As far as I know, arbitration cannot be carried out if any one party refuses to resort to arbitration. Right?
MS AUDREY EU (in Cantonese): President, I wish to make a clarification of this part. My request is that at least the Government should provide resources and appoint some independent arbitrators. It is, of course, another question whether or not the two parties are willing to come to arbitration. But at least the Government should provide such resources and at least it should be responsible for this part. This is one of the questions I asked.
LEGISLATIVE COUNCIL ─ 16 October 2008107
CHIEF EXECUTIVE (in Cantonese): In the statement I made yesterday, I said that the HKMA had set aside resources to undertake mediation work in this incident. I would think that this should be of help to the people concerned in tackling the problem of settlement of accounts and undertaking mediation, and also in identifying better arrangements should such incidents happen again. We have allocated such resources and the HKMA will pay for the expenses in appointing some people to tackle the incident by way of mediation.
3 則留言:
Dear Ms 余若薇,
Firstly, I would like to thank you for standing up for Minibond victims.
Here is from the weekend's news:
公民黨余若薇反映，不少個案都是客戶所須簽訂的銷售文件無可挑剔，但銀行口頭上未有解釋清楚
I believe, the "客戶所須簽訂的銷售文件無可挑剔" is a myth that HKMA and banks try to let everyone believe. "客戶所須簽訂的銷售文件無可挑剔" is NOT true because banks omitted material information. Banks never gave clients Minibond's (Synthetic CDO) Collateral Information which is material information to the true nature & risks of Minibond. No professional intermediary could have valued the Minibond using only the information provided in Program Prospectus & Issue Prospectus & marketing material.
Banks and HKMA have been silence on the "collateral information" from day 0.
Why was Minibond Collateral information material information?
or: Why did banks consider Collateral Information as immaterial information?
1. First, let's take a look at the now well-exposed Minibond structure (e.g. Series 19-36, and earlier ones with Synthetic CDO Collateral):
(i) Minibond had CDS with 7 well-known reference entities;
and:
(ii) Minibond CDO Colalteral had CDS with over 100 reference entities (some were at sub-investment grade).
The Bank passed us the Program Prospectus & Issue Prospectus that dedicated many pages on the “credit-linked to 7 well-reference entities”, the 7 reference entities’ ratings, and the impact of any default event related to the 7 well-known reference entities.
What kind of collateral information was disclosed in the Issue Prospectus? It was described as AAA-rated CDO, or: AAA-rated Synthetic CDO to be exact.
1. Does the AAA rating suggest that the collateral would be at low default rate and thus no need for disclosure?
The Issue Prospectus provided default rate based on historic data from 1981-2004. However, such data does not provide any meaningful reference for the AAA-rated synthetic CDO collateral. Because the default rate data was based on AAA/AA/A/BBB-rated bond that is very different from Synthetic CDO (whose history is shorter than 20 years).
2. Does CDO information needs to be disclosed?
Regardless if CDO information needs to be disclosed or not, the CDO collateral selected by Minibond (arranger) was in fact Synthetic CDO, as stated in the "selection of collateral" (of Issue Prospectus). That is, the Minibond collateral is not a 'conventional' CDO (without CDS), it is a Synthetic CDO (i.e. comprised with CDS).
3. What was the most important feature of Synthetic CDO?
Synthetic CDO may not invest into any debt/loan/bond at all. Its value is decided by the credit risk of its portfolio holding. Thus, the collateral is credit-linked to portfolio of reference entities. (sounds familiar?)
3. For Minibond Series 19:
The collateral was credit-linked to 125 reference entities. The collateral would loose 100% principal on the 10th default event out of the 125 reference entities, That is, a mere 8% of default rate (out of the reference entities portfolio) would result in collateral 100% principal loss! (On the Minibond top layer, minibond could lose principal on the first default event, i.e. 1 out 7, which is over 14% default rate. Although the chance of hitting the 8% default rate seems to be higher than the 14% of default rate. That is, Minibond top layer started to crack, there is better chance to lose the collateral principal value which requires 8% of default rate of the collateral reference entities pool. ).
The CDS in the CDO collateral synthetically transferred the credit risk of 125 reference entities to Minibond holders. Therefore, the value of minibond was not only affected by the credit-event with the 7 well-known companies, but also was greatly affected by the credit events related to the 125 reference entities in the CDO collateral.
4. If the fact that Minibond was credit-linked to 7 well-known companies was important and was material information to the Minibond's true feature and risks,
we can CONCLUDE that the risks of the Minibond also greatly depended on the information regarding number / name / rating of the reference entities & reference obligations in the (synthetic) CDO collateral and the rules regarding their default event. The risk of minibond would vary greatly If collateral were credit-linked with 7 or 50 or 125 or 155 reference entities. The risk of minibond would vary greatly if collateral would lose 100% principal upon the 10th or 50th or 100th or 125th default event out of the 125 reference entities.
5. Our questions are:
why did banks consider collateral informations such as number of reference entities / their credit-rating / default impact to the collateral principal (loss) as immaterial ?
Why the above collateral information was never discussed / disclosed to clients?
and:
How many people would be interested in buying the minibond (for the same term & return rate) if they were told/given the collateral information ?
Lehman could argue that the Program Prospectus and Issue Prospectus touched every aspects (in a selective in-balanced way). However, regardless what Lehman provided or not-provided as mandatory documents (or display documents), regardless what was or was not disclosed in the Issuer Prospectus, banks are not no-brainer minibond-sellers (HKMA or banks can correct me if I were wrong about this). Banks are regulated financial intermediaries by SFC Code of Conduct which requires that "Intermediaries were still under an obligation pursuant to the Code of Conduct to explain the nature and risks of the product they were selling", and "make adequate disclosure of relevant material information".
Therefore, banks should understand the product (per Code of Conduct), after exercising reasonable due diligence. Banks should have realized that the collateral information is part of material information for clients to understand the true feature and risks of minibond. Banks should have requested such information for their clients. Banks should have provided and/or discussed with clients on the collateral information. Because we bought minibond from banks, not from Lehman.
You can suggest banks to provide evidence of institutional buyers that bought Synthetic CDO without Synthetic CDO documents. Would "AAA rating" be sufficient information for Synthetic-CDO ? Would they need to have document/information describing the number of reference entities / reference entities' rating /reference entities industry range / impact of default rate (e.g. 8% or 20% default event would lead to 100% principal loss)/etc.
My guess is that, Minibond (and DBS Constellation) were probably the only examples that banks can find.
Because banks (as selling-agent) were in fact willing to collaborate, I would suggest fraudulently, with Lehman, to hide the information and risks of synthetic CDO from the Bank's retail clients, with the objective of increasing the sale of the Minibonds. For a product like synthetic-CDO / CDS, how many people in HK really know ?
I am pretty sure when banks selling CDS or buying CDS, they knew exactly how many reference entities are associated with the CDS or Synthetic CDO. Like group insurance for a company, it makes difference to insure a company that has 10 or 50 or 100 or 150 employee. The Insurance company needs to know the rough range of employee number.
"Mahogany Notes" is a Credit-Linked Notes sold in Australia by a Lehman entity, arranged by Lehman Asia (the same department that arranged Minibond in HK and Singapore). It was summarized in the web page below:
http://minibondvictim.blogspot.com/2009/01/austalia-mahogany-notes-prospectus.html
BTW, I did not notice the trick on the 'collateral information'. But a CDS professional (via friend's friend's network) explained to me about the material information & documents that an agent should give to clients on CDS/Synthetic CDO products.
I wish to thank you in advance for reading through the long messy email. I would be happy to exchange options or discussions with you on the subject.
Best Regards
Jean
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