Open letter to SFC

Open letter to SFC - Investigation into Foreign Banks selling Equity linked notes(ELN) -- Philip Khan

June 28, 2009.

To: Securities and Futures Commission Hong Kong.
Attn.: Chief Executive Officer, Mr. Martin WHEATLEY, JP.

c.c. : Hong Kong Monetary Authority –
Chief Executive, Mr. Joseph YAM Chi-Kwong, GBS, JP
Executive Director, Mr. Raymond Li

Dear Sir,

INVESTIGATION INTO FOREIGN BANKS
SELLING LEHMAN EQUITY LINKED NOTES

I represent a group of Bank customers having purchased the EQUITY LINKED NOTES (ELN).

During our meeting last Friday on June 26, 2009 at IFC basement with HKMA, Mr. Raymond Li, Executive Director of Hong Kong Monetary Authority, we have expressed our concerns to HKMA that they have not referred sufficient cases of ELN to SFC for further investigation and follow up.

Mr. Raymond Li confirmed that they may have referred sample cases to SFC which should provide sufficient grounds for SFC to initiate investigations into Banks. Mr. Raymond Li reconfirmed that those cases should include ELN, PPN, CLN, Constellation and mini-bonds.

Mr. Raymond Li also confirmed that the 667 cases under HKMA disciplinary consideration were already been or will be referred to SFC as well.

Can SFC please confirm that SFC have sufficient grounds or cases for investigation into all the Banks including Standard Chartered Bank, Citibank, and ABN AMRO selling Equity Linked Notes (ELN) through private placements?

Can SFC also please confirm that they have already received the 667 cases under HKMA disciplinary consideration and will investigate into those involving Banks as well?
In fact, Citi Ka Wah, Shanghai Commercial Bank, Dah Sing Bank, Bank of China, may have sold Mini-bonds but they also have sold ELN (which HKMA included PPN into the same category as ELN). So does SFC also investigated into the Equity Linked Notes mis-selling by these Banks, or is SFC only concentrated on Mini-Bonds? I noted that SFC already may have completed their investigation on at least DAH SING BANK selling PPN NOTES (which though PRINCIPAL PROTECTED are actually identified in the same category as EQUITY LINKED PRODUCTS).

Hang Seng Bank was also involved in selling ELN or PPN, however there was no mention to it at all.

However, I noted from HKMA press releases up to date to June 26, 2009, that they have so far referred 458 cases involving 16 Banks to SFC for action, which includes 367 minibonds , 91 others (ELN & PPN), and 24 cases of Products referenced to Lehman, which may include Constellation and Octave Notes.

There may be no doubt that the 367 cases of minibonds may include sample cases of all those complaints of 14 to 16 Banks selling these minibonds. It may also be assumed or understood that the 24 cases may be referring to mainly Constellation Notes and mostly from DBS.

On the 91 OTHERS cases, all these were PRINCIPAL PROTECTED NOTES (PPN) sold by DAH SING BANK.

1./ On October 17, 2008 HKMA referred the first batch of 24 cases involving 2 banks, which included 23 cases of OTHERS PRODUCTS (DAH SING BANK - PRINCIPAL PROTECTED NOTES).

2./ On October 24, 2008, HKMA referred the second batch of 40 cases involving 2 banks, which included 39 cases of OTHERS PRODUCTS (again are cases from DAH SING BANK - PRINCIPAL PROTECTED NOTES) .
As at October 24, 2008, there were 1 Mini-bond cases, 1 Constellation, and 62 cases of OTHERS PRODUCTS referred by HKMA to SFC. In fact these 62 OTHERS PRODUCTS cases were all involving DAH SING BANK who sold the LEHMAN PRINCIPAL PROTECTED NOTES in end of August, 2008 even after Lehman has already been downgraded by June 6, 2008 by rating agencies and there was news that Lehman may go into bankruptcy.

3./ On November 21, 2008, HKMA referred in their sixth batch of 53 cases, including 21 cases of DAH SING BANK (PRINCIPAL PROTECTED NOTES).
TOTAL: 83 CASES DAH SING BANK (PPN).

4./ On December 24, 2008, another 1 case of DAH SING BANK PPN.
TOTAL: 84 CASES DAH SING BANK (PPN).

5./ On March 20, 2009 there were 2 more cases of OTHER PRODUCTS.
TOTAL 86 CASES DAH SING BANK (PPN)

6./ On April 24, 2009 there were another 7 cases of OTHER PRODUCTS.
TOTAL : 91 cases DAH SING BANK (PPN)

All these OTHER PRODUCTS cases so far referred to SFC only involve the PRINCIPAL PROTECTED NOTES by DAH SING BANK.

Logically, it is clear that cases involving the three foreign banks including Standard Chartered Bank, Citibank, and ABN AMRO are not referred by HKMA to SFC for any action or further investigation.

As at Jan. 9, 2009, cases referred to SFC involve 14 Banks.

As at Jan. 16, 2009, cases referred to SFC involve 15 Banks.

As at Feb. 20, 2009, cases referred to SFC involve 16 Banks.

Up to June 16, 2009, there were only cases involving 16 Banks referred to SFC, from where it is assumed that the three foreign banks selling EQUITY LINKED NOTES (ELN) were not included. To repeat, these foreign banks included STANDARD CHARTERED BANK, CITIBANK, and ABN AMRO.

HANG SENG BANK was also neglected in the whole investigation process.

SFC must investigate into all these Banks, and the bank victims are relying on both SFC and HKMA to co-operate and resolve the issue with no further delay.

During our meeting on June 26, 2009 with Raymond LI of HKMA, he reiterated that HKMA have no authority to ask Banks to compensate, neither can HKMA impose any sanctions against any of these Banks.

On the HKMA press release of October 17, 2008, A HKMA spokesperson said that the cases had been reviewed by the HKMA, which had determined that there were sufficient grounds for referring them to the SFC in accordance with the mechanism established under the Securities and Futures Ordinance and the Memorandum of Understanding between the HKMA and the SFC. “The HKMA is satisfied that there are adequate justifications for referring them immediately to the SFC, which is the authority ultimately responsible for deciding whether a bank has been guilty of misconduct," the spokesperson said. "The SFC will review the evidence and will consult with the HKMA in determining what sanction, if any, is to be imposed," the spokesperson added. Sanctions that the SFC may impose on a bank include suspension or revocation of registration, reprimands, fines or prohibition orders.”

In my observations, those cases referred to SFC were mostly been settled between the Banks and the complainants (except a few may still be under negotiation). These include a lot of Mini-Bonds and PPN. It is a great achievement by SFC and HKMA.

SFC’s approach of top to down investigation on Banks has proved to be successful. SFC has achieved to the best of the investors interests with Sun Hung Kai and KGI voluntarily offering to purchase all outstanding Mini-Bonds at the principal amount invested by their clients. It was a great encouraging step resolving the issues to the highest public interest avoiding unnecessary costs and expenses. It is important that SFC continue to adopt the top to down approach into their investigations of banks. This should include the investigation into Banks including all banks selling ELN notes.

Sincerely,
Phillip Khan

HKMA to probe Octave Notes

HKMA to probe Octave Notes

http://www.thestandard.com.hk/news_detail.asp?pp_cat=1&art_id=83700&sid=24277507&con_type=1

The Hong Kong Monetary Authority is to investigate banks within two weeks over the sale of Octave Notes that have plunged in value.

Alfred Liu
Friday, June 19, 2009

The Hong Kong Monetary Authority is to investigate banks within two weeks over the sale of Octave Notes that have plunged in value.
An HKMA spokeswoman said after a meeting with the Democratic Party yesterday that the regulator will investigate how banks sold the credit-linked notes issued by Morgan Stanley.
The authority has received 665 complaints relating to Octave Notes, including those referred by the Securities and Futures Commission. About 550 cases are related to the bankrupt Lehman Brothers.
The HKMA is also investigating the alleged misselling of Lehman minibonds whose value fell sharply after the US investment bank collapsed.

The authority said it will stick to its target to complete investigations into 70 percent of the complaints amounting to 15,000 cases - both minibonds and Octave Notes - by March next year.
The Democratic Party has received 300 complaints linked to Octave Notes and three have been settled, according to legislator Kam Nai-wai.
Meanwhile, liquidators of Lehman Brothers Commercial Corp Asia secured more than US$200 million (HK$1.56 billion) for creditors from China real estate assets, accounting firm KPMG said.
Most of the deals involved the sale of loans to the original borrower or a compromise on repayment following extensive negotiations, KPMG said.

曾蔭權

雷曼苦主禮賓府抗議

昨午二時，三十多名雷曼苦主自發到中環禮賓府外聚集，抗議政府遲遲未解決雷曼事件，其後陸續有逾百名苦主到場聲援，期間苦主多次舉起「雷曼不解決，曾蔭權下台」的標語抗議。警方亦架起鐵馬，並派出約六十名警員在場維持秩序。

精明債券單張有寫明不保本及產品屬高度風險

金融深淵 任志剛：銀行售ＣＬＮ時無法知悉次層ＣＤＯ掛勾機構

(經濟通)2009年6月11日 星期四 17:01

《經濟通通訊社１１日專訊》金管局 總裁任志剛 於財經事務委員會特別會議表示，銀行於銷售信貸掛勾票據時，不可能知悉第二層債務抵押證券所掛勾之信貸參考機構，因發行人會於分銷銀行銷售後才將產品包裝，進行第二層掛勾。但他明確指出，銀行有責任向客戶披露相關信貸風險，以及持續披露信貸市場上有關消息。

任氏又指，精明債券與雷曼迷債的單張，就他看有所分別，指精明債券單張有寫明不保本及產品屬高度風險。但他強調，倘銀行將高度風險產品銷售予低風險 胃納之客戶便屬違規，而銀行違規銷售遭客戶投訴，金管局定必嚴肅處理。而於雷曼事件後，金管局亦已責誠銀行向客戶進行持續披露及確保有足夠人解答客戶問 題。

另外，證監會 行政總裁韋奕禮再次表示，銷售單張無可能將所有條款詳列，但原則是要以披露為本，銷售章程為最終依靠文件。而就精明債券而言，產品標明不宜銷售予沒有經驗的投資者。

此外，韋氏續稱，由於調查雷曼迷債一事相當複雜，需要時間找出事實真相，未能提出具體調查時間表，並會依照政府所決定的做法，於雷曼事件結束後才考慮金融市場的整體監管應如何改變。（ｖｙ）

證監：「精債」暫未出事

韋奕禮稱，加強規管投資工具銷售手法新指引，希望可在今年底或明年初發出。
　【本報訊】摩根士丹利發行的「精明債券」岌岌可危，證監會行政總裁韋奕禮昨日出席一金融論壇後表示，證監會現時暫未收到有精明債券「爆煲」的報告，但他相信若再有多1-2間與精明債券掛鉤的公司倒閉，或觸發部分系列會以零價被強制收回。屆時，投資者或將血本無歸。據了解，精債系列16「最高危」，只要再有一家掛鉤公司出事便會「歸零」，惠譽將其評級進一步下調至「C」級。
　美國通用汽車申請破產保護，觸發投資者擔憂精債「爆煲」，韋奕禮回應稱，雖然精明債券的部分系列與通用汽車的信貸狀況掛鉤，但即使通用汽車已申請破產保護，短期內這些債券不會爆煲。星展銀行亦曾指出，該行發行的Constellation債券當中，部分系列持有與通用汽車有關的抵押品，但通用汽車清盤對抵押品價值帶來的損失，不足以觸發該等Constellation債券遭提早贖回。
20多項迷債事件尚在調查
　雷曼迷債風波未息，精明債券又成一計時炸彈，令投資者質疑證監會的金融監管質素。韋奕禮坦言，早前與新鴻基證券及凱基證券達成和解後，證監會尚有20多項雷曼迷債事件的調查在進行中。他透露，今年第三季就加強規管投資工具銷售手法發出諮詢文件，希望可在今年底或明年初發出新指引。
　被問及摩根大通中國區主席李小加能否勝任港交所(0388)新行政總裁一職，韋奕禮回應稱，他曾與李小加會面，但現階段是過早就對方的能力作評論。不過，他表示，遴選委員會已揀選合適的人選，認為遴選過程沒有問題，並指李小加擁有中國背景，有助填補中港市場之間的空隙。

Risky Business

A major overhaul of Hong Kong’s financial regulators may be required following the minibonds scandal, writes Justice Lai.

If the new year is a time for fresh starts and self-improvement, the reports produced by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) on December 31 couldn’t have been more timely. Submitted to Acting Financial Secretary Professor KC Chan and promising suggestions on “how Hong Kong can improve its [financial] regulatory framework and enhance investor protection and education,” the reports were prompted by the local minibonds debacle that followed the collapse of US investment bank Lehman Brothers last year.

The suggestions themselves have yet to be made public, but many agree that serious corrections are well in order. According to the HKMA, over 40,000 local investors purchased Lehman-backed investment products, $12.6 billion of which were “minibonds.” Many low-income, elderly citizens put large portions of their entire savings into the latter under the impression that they were buying stable, low-risk corporate bonds. Only with the collapse of Lehman, and subsequently most of their savings, did they realize they had really invested in risky, complex derivatives attached to the US financial giant.

As to how they got drawn into such investments in the first place, their supporters point to mis-selling by local banks. Only in Hong Kong and Singapore were such products sold at retail level, in some cases to people who are illiterate. Supporters of the victims in Legco say the banks failed to explain the full nature of the products and the risks involved to customers, as they are required by existing regulations. “We have a very detailed regime requiring banks to assure investors of the risks, and I don’t think these were followed,” says Civic Party legislator Ronny Tong. He adds that numerous pamphlets distributed by the banks were “questionable,” often not properly stating that the products being sold were not traditional bonds.

Yet the banks aren’t the only ones being blamed. Many say that authorities such as the HKMA and SFC are culpable, too. “There’s been a failure on the part of the regulatory bodies,” says legislator Audrey Eu. “They did not make sure that the bank staff selling these products were complying with the code of conduct.” That code requires sellers to distinguish between professional and ordinary investors, professional investors being those with at least US$8 million.

This lapse in regulation has been attributed to the outdated and inefficient structure of the authoritative bodies. Traditionally, brokerage houses have peddled high-risk investment products, while banks restricted themselves to selling stable bonds. Accordingly, two separate bodies were set up to monitor these different transactions, the SFC monitoring the brokerage houses, and the HKMA monitoring the banks. Now, however, banks have begun selling products traditionally sold by brokerage houses. “The boundary between the two different types of financial institutions has become blurred, and the HKMA is less experienced at regulating the new practices taken on at banks,” says Stephen Cheung, professor of finance at the City University.

In response, Cheung advocates setting up a firewall within banks to separate those selling high-risk investment products from those selling low-risk ones, whereupon the former could then be properly monitored by the SFC. Others support more far-reaching changes to the system. Webb-site.com, run by well-known investor-protection activist David Webb, has called for all the financial services regulators in Hong Kong—the HKMA, the SFC, the Mandatory Provident Fund Schemes Authority (MPFA) and the Office of the Commissioner of Insurance (OCI)—to be unified into one single body that would be equipped to oversee the issuing and sale of all financial products.

On top of such regulatory streamlining, Webb calls for a statutory “cooling-off period,” during which clients can reconsider and cancel any purchases they made in a high-pressure sales environment (where they may not have had time to go through the relevant material about their purchase). He also advocates mandatory disclosure of all commissions paid to banks for such sales. It remains to be seen how extensive the SFC and HKMA’s own recommendations will be—and how well the government will respond to them—but observers such as Webb warn that action is crucial. “Without such reforms,” he warns, “there is a risk of either repeated crises or an outright ban on the sale of such products.”

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HKMA Bank Voodoo economics management teams:

Mr Y.K. Choi as Deputy Chief Executive

Three HKMA evil guys that bought Lehman Minibonds to HK:

1. Y.K.Choi
2. Yue
3. Ryback (retired)

Joseph Yam used Ryback that let loose on bank complaints that led to Lehman Minibonds scandals.

HKMA Appointments

The Hong Kong Monetary Authority (HKMA) announced today (Friday) that the Financial Secretary, following the advice of the Governance Sub-Committee of the Exchange Fund Advisory Committee, has approved the appointments of Mr Y.K. Choi as Deputy Chief Executive responsible for the banking system and Mr Eddie Yue as Deputy Chief Executive responsible for monetary management, financial infrastructure, reserves management, and strategy and risk. Both appointments take effect on 1 September 2007.

Mr Choi, who is currently Deputy Chief Executive responsible for monetary management, financial infrastructure, reserves management, and strategy and risk, joined the HKMA as Head (Banking Policy) in 1993. He became Head (Administration) in 1994, and was appointed Executive Director (Banking Supervision) in 1995 before taking up his present position in June 2005. Before joining the HKMA he served in the Office of the Commissioner of Banking from 1974 and became Assistant Commissioner of Banking in 1990 after a one-year secondment to the Bank of England. Mr Choi will succeed Mr William Ryback, who retires from the HKMA on 31 August after having served as Deputy Chief Executive with responsibility for the banking system since 2003.

Mr Yue, who will succeed Mr Choi, is currently the Executive Director with responsibility for monetary management and financial infrastructure. Mr Yue joined the HKMA in 1993 as a Senior Manager, after having served as an Administrative Officer in the Hong Kong Government since 1986. He became a Division Head in 1994, working in a number of divisions, including Monetary Management, External Relations, and Banking Development, and serving as Administrative Assistant to the Chief Executive of the HKMA. Mr Yue was appointed Executive Director (Corporate Services) in June 2001 and to his present position in July 2004.

Commenting on Mr Ryback’s forthcoming retirement from the HKMA, the Chief Executive of the HKMA, Mr Joseph Yam, said that Mr Ryback had made great contributions at a time of change and development in Hong Kong’s banking sector. “During his four years with the HKMA, Bill Ryback has seen through the preparation and introduction of policies to give effect to the Basel II reforms in Hong Kong. This has been a considerable and complex undertaking with far-reaching implications for banking in Hong Kong. The experience and wisdom that Bill brought to Hong Kong have helped ensure the success of this project, and have helped enable Hong Kong to be among the first jurisdictions in the world to implement Basel II. Bill’s colleagues and friends in the HKMA wish him every happiness in his retirement,” Mr Yam said.

For further enquiries, please contact: Sara Yip, Manager (Press), at 2878 8246 or Thomas Chan, Senior Manager (Press), at 2878 1480

Hong Kong Monetary Authority

30 March 2007

HANS GENBERG is Executive Director, Research Department at the Hong Kong Monetary Authority (HKMA). He is also Director of the Hong Kong Institute for Monetary Research (HKIMR). He obtained his PhD degree in Economics from the University of Chicago. He had been working as a Professor in Economics at the Graduate Institute of International Studies since 1979. Prior to joining the HKMA and HKIMR in February 2005, he was the Head of the Economics Section of the Institute. He has also been a visiting scholar at the International Monetary Fund and the World Bank. He has published widely on issues related to monetary and exchange rate policy in a number of journals, including the Journal of Monetary Economics and the Journal of International Economics. He has a keen research interest in monetary and financial developments in East Asia

CHO-HOI HUI is Head, Market Research Division of the Research Department, HKMA. He was previously a senior manager in the Banking Policy Department. Prior to joining the HKMA in 1997, he was a derivative analyst at Citibank. His research papers have appeared in a number of journals, including the Journal of Risk, Finance and Stochastics, the Journal of Fixed Income, and Quantitative Finance. He holds a BS in physics from the University of Wisconsin at Madison and a PhD in applied physics from Cornell University.

Its seems those PhDs are either from U. of Chicago Voodoo economics policy and in Physics. No macroeconomic experts and social science majors in HKMA to take care of HK government economics policy, HKMA only cares about derivative products and gambling in international markets.