Tuesday, November 11, 2008

Business Times: Look at pricing structure, risk disclosure too

11 Nov 2008
By OH BOON PING

LAST month, DBS Bank agreed to return up to $80 million to investors who were mis-sold the DBS High Notes 5 series - a welcome move by many. But as the saga continues, public attention should be paid not just to the way products were mis-sold, but also the pricing structure and risk disclosures involved.

To recap, the note is a 5.5 year credit-linked series that pays 5 per cent annual premium on the Singdollar tranche with an underlying 'default' basket of eight securities including the now collapsed Lehman Brothers. If either of the reference entities undergoes a credit event - such as bankruptcy, this means that investors who bought the notes will receive only the net market value of only the underlying securities tied to the defaulting entity.

In a sense, they have become insurers against the total credit risks of the underlying basket in exchange for 5 per cent premium each year on the Singdollar tranche.

And this raises the question: is the interest payment fair given the types of risks involved? Indeed, if we assume that the chances of entities hitting a 'credit' event are mutually independent and equal, this means that investors are paid 5 per cent annually to insure against a total credit risk that is eight times that of one reference entity - scant compensation by any measure.

Yes, all the entities had strong ratings of between BBB+ and AA- when the notes were structured, and the issuer can point to those ratings as evidence that a low interest payout is fair.

Identical insurance
However, it is conceivable that the long counterparty may have to cough out a lot more in premiums if he had bought an identical insurance from general insurance firms with diversified portfolios of insurance assets.


A second issue concerns the level of professionalism among the relationship managers. Not only was product structure not properly explained to some investors, but the investments were sometimes sold to clients who did not have the risk appetite for them.

This is clear from the several cases of mis-selling, where High Notes 5 were sold to 'low-risk tolerance' investors who should not have bought the product in the first place.

In some cases, even the relationship managers did not understand the products but continued to market them to clients, according to some reports.

This is a serious breach of professional conduct since industry best practices dictate that those providing client advisory services have a duty of ensuring that only suitable investment products are recommended to clients, and related information should be transmitted accurately.
What the episode illustrates is that financial advisory standards still leave much to be desired among some local banks and brokers.


A third issue relates to the disclosure of market information on those structured products. Unlike stocks, structured products are not openly traded in a liquid secondary market and investors have no means of getting the latest market data or information except by calling their relationship managers.

The result? Investors have no means of making timely investment decisions, and this may hurt them in volatile market conditions like now.

For example, a check on the Bloomberg showed that spreads on Lehman's five-year senior credit default swap in US dollars had risen rapidly to a few hundred basis points in recent months, while credit spreads widened steadily over the same horizon.

Amending the rules
However, as most investors did not have access to such information, they may end up holding on to a depreciating asset instead of cutting losses.


Therefore, financial regulators may wish to consider amending the rules to require issuers to release such vital market information.


Already, the push for more disclosure in gaining momentum elsewhere, like when the Depository Trust & Clearing Corp said it will now release weekly credit-default-swap data, and similar moves should also be made in Singapore.

Institutional issuers have a duty of ensuring greater transparency, as individual investors deserve no less.

26 comments:

Anonymous said...

Hi,

MM says that most of you have are actually greedy becos of the high interest rates. I think it's not wise to oppose the govt on this issue. Please accept your losses graciously.

GOHCT said...

FINANCIAL MELTDOWN
Ambrose Leung and Fanny W.Y. Fung
Nov 11, 2008
Lawmakers look likely to pass a resolution tomorrow invoking their special powers to investigate the Lehman Brothers saga, as intense lobbying from small investors increased the pressure on them. ...

Anonymous said...

I say those who listen to 20plus year old RMs and actually believed them are stupid as hell.

That is why there need to be stronger regulation in promotion of investment products to prevent mis-selling.

Anonymous said...

This is the first fair article though it did not mention of more risk like the 150 CDO in the underlying assets!

Anonymous said...

By far, this is the best article written in a local newspaper citing the true facts of this whole scam. Cheers to Mr/Ms OH BOON PING. I hope most singaporeans get to read this article although our well-paid ministers might choose to miss it. I still feel that if we continue to make noise, continue to sent petitions,continue to pester our MPs, continue to act as a whole. The government will have to do something positive. This is our hard-earned savings and not another Mas Selamat case. We simply cant let the authorities sweep it below the carpet. Make as much noise as possible, this is the only way we can win this battle!

Anonymous said...

Its a Take It or Leave It thing here in Asia.

Strange, that sounds almost acceptable, looking from past trends.

Anonymous said...

agreed. BOYCOTT AMERICAN PRODUCTs, across ASIA...FIX the TOXIC CDOs...

Anonymous said...

I think people should know that MAS is the one who gave the green light to the banks to sell these products to retail customers.

My advice is not to waste your time with the banks or MAS. I believe once the banks receive your lawyers' letters they will invite you to discuss an amicable settlement.

The banks know they cannot stand up to scrutiny in the court of law regarding the selling of these products.

If DBS is truly repentant, it should at the very least review ALL the High Notes series it sold over the past few years and offer to buy them back from vulnerable or mis-sold investors.

I am sure if there was mis-selling in HN5, then there will be mis-selling in all other HN series.


Best regards
Golden Era

Anonymous said...

Continue to put pressure on the regulator to wake up. It is in comatose state. Prick harder so that the pain will it up.
The enforcement is shit.

Concerned said...

Products of such features should be banned in future, so as to avoid further grief. We are taken for a ride by the issuer and shockingly the FIs just allow such products to be sold to the unsuspecting public. What a shame.

AlphavilleSG said...

I think the writer is being very kind when he said the premium paid out in exchange for the enormous risk is 'scant compensation'

This ought to be a point of reference brought against the banks deception of investors, i.e. not revealing the enormity of the risk tied to the product.

Also call upon the RMs to explain their depth of understanding with regard to the products they are selling, this again will support the fact that they have no reasonable basis for recommending these products, since for the lacking of the expertise to explain or understand what they are in fact selling!

So beside the obvious case of mis-selling to the vulnerable, I think the banks themselves have a lot to answer for.

AlphavilleSG said...

Oh... And here's my biased, see the example with Mas Selamat, given way the PAP govt. has absolved itself of any fault in oversight, renegading to the fault of the lax of SOP by the Gurhka guards...

RMs should be made aware, they aren't going to get any support from the banks or PAP govt. When called to witness, they should realised which side to stand.

Anonymous said...

To anon at 7:27pm

Are you saying Govt. says A, we all must follow A even if it is wrong ?? Why does a country have laws then ? Why do we tax payers pay our Govt. miliion dollar salaries for if they are not doing the right thing ???

Anonymous said...

When is BT or ST going to do a detailed analysis on a land banking company offering?
There already is a good one on this web site (just do a search for Land Banking on this blog). For some reason the press stays away from these companies until they fail and then offers outrage that such things could happen. Is it advertising revenue or fear of lawsuit that stops them from looking more closely ?

Anonymous said...

Some bros had setup a discussion place actually.....http://forums.delphiforums.com/sisualai/start

bsd said...

DBS admits wrong selling?

==

Nov 11, 2008
DBS overhauls sales tactics
By Ignatius Low

SINGAPORE'S largest bank is making big changes to the way it sells investments to customers, as it continues to battle criticism over losses suffered by those who put money into its High Notes 5 product.

DBS Bank plans to ask more detailed questions about a customer's background and how he got the money he is investing. And it will turn away those who are not suited for a product, even if they insist on buying.

'We have learnt something from this and I believe that we will do things differently. Not all of it is going to be popular,' said DBS chairman Koh Boon Hwee in an interview with The Straits Times.

Read Ignatius Low's full story in Wednesday's edition of The Straits Times.

Anonymous said...

Let's see if anything will be done. Because to do something must do it drastic and with big overhaul. Anything less is as good as not doing.

So the authorities may be tempted to leave it as it is and "caveat emptor" for the buyer. This can be hinted from their stand so far on the issue and also from the highest leader mentor of the land.

Folks, just learn to be smarter not to be cheated. Otherwise sorry lah, case closed.

Anonymous said...

"MM says that most of you have are actually greedy becos of the high interest rates. I think it's not wise to oppose the govt on this issue. Please accept your losses graciously."

MM is shooting his foot again. Who is the MOST refer to ? HOw about to town council's loss ? Are the town council greedy ? How come they greedy bunch of people and yet no accountability and responsibility to the public ?

Anonymous said...

Agree with 2:39AM, PAP town councils need to explain their investment in minibonds. Were they misled, did they "went in with their eyes open" becos they are greedy? These are public money, loss need to be accounted. Either the town councils sue the FI for misrepresentation, or the people sue the town coucils for inappropriate handling of public finds.

Anonymous said...

At least Mr OH BOON PING practices true journalism. In comparison, the surface reporting by some in ST and Today had been disappointing.

Anonymous said...

'We have learnt something from this and I believe that we will do things differently. Not all of it is going to be popular,' said DBS chairman Koh Boon Hwee in an interview with The Straits Times.

Thout KBH was the chairman of DBS Board when the ex-CEO the ABC was around. He is still the chairman today. So why now he starts to learn and only now he will do things differently?

DBS sets aside $129m in provision, partly(?) to cover its CDOs portfolio. DBS's CDO exposure as at 30 Sep 08 is as high as $1,425m. DBS's decision to join LB & MS on CLN in launching DBS HN series eases the loss of its LB investment and to KBH he should think that it was the RIGHT decision at least to the extent of hedging the CDO loss to the interest of DBS ord sharedholders . The loss in LB investment is only $13m thanks to the DBS HN5 noters. While the ordinary DBS shareholders are not to be so upset by the DBS 3Q result the large DBS HN5 noters are completely extinguished.

Anonymous said...

If only MAS and govt has looked at pricing structure, risk disclosure too with their eyes opened.

Anonymous said...

"Anonymous Anonymous said...

Hi,

MM says that most of you have are actually greedy becos of the high interest rates. I think it's not wise to oppose the govt on this issue. Please accept your losses graciously.

7:27 PM"


hmm

Sanity said...

Quote

"Anonymous Anonymous said...

Hi,

MM says that most of you have are actually greedy becos of the high interest rates. I think it's not wise to oppose the govt on this issue. Please accept your losses graciously.

7:27 PM"

Unquote

Will you accept the losses (say $100,000) graciously if your dear beloved RM told you that the product is
- alternative to FD,
- very low risk as it is unlikely that the 6 REs (big well established Asian banks) will collapse totally (even if one does, the impact is at most 1/6)
- and that you will get your principal back upon maturity or early recall by them.

That he conveniently forgot to tell you that you are insuring the insurer (Lehmman or Morgan Stanley) and that there is a big baskets of CD0s (100++ companies - not disclosed at all and up to the issuer to claim) that you are also insuring. Any default could mean a 100% loss in your investment.

On top of that, he did not even show you the pricing statement or prospectus and focus on the so called benefits.

Will you risk it all for a mere additional 3% interest per year??

If you wouldn't, why would the rest of us?

Then, will you have accepted the $100,000/= losses GRACIOUSLY under this situation??

Anonymous said...

"Will you accept the losses (say $100,000) graciously if your dear beloved RM told you that the product is
- alternative to FD,
- very low risk as it is unlikely that the 6 REs (big well established Asian banks) will collapse totally (even if one does, the impact is at most 1/6)
- and that you will get your principal back upon maturity or early recall by them.

That he conveniently forgot to tell you that you are insuring the insurer (Lehmman or Morgan Stanley) and that there is a big baskets of CD0s (100++ companies - not disclosed at all and up to the issuer to claim) that you are also insuring. Any default could mean a 100% loss in your investment.

On top of that, he did not even show you the pricing statement or prospectus and focus on the so called benefits.

Will you risk it all for a mere additional 3% interest per year??

If you wouldn't, why would the rest of us?

Then, will you have accepted the $100,000/= losses GRACIOUSLY under this situation??'


Nice retort

Nicer retort: "I mean, so, you didnt went in with your eyes OPENED?.."

Anonymous said...

Are Jubilee, Pinnacle Notes and Minibonds sold to retail investors in USA? If not, why? Is it because the US financial regulator would not have permitted it in the first place because they are high risk products that offer little protection to the retail investor? Why then did MAS allow these products to be sold here?

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