Tan Kin Lian's Blog: Why are banks allowed to sell structured products that give poor value?

Saturday, November 01, 2008

Why are banks allowed to sell structured products that give poor value?

Mr Tan,

If there is a silver lining that comes out of this minibond/high note/jubilee fiasco, I would hope that its some serious soul searching by all stakeholders, investors, FIs & the government.

Investors have to ask themselves, what is their investment objective, really.
Structure deposits have been around for some time. I have never purchased any but each time I am at any bank, without fail, bank staff would try to promote them to me.
Over the years, I've seen the way they are structured becoming more and more complex & arcane.

My point is, if the general public has been losing money or making unsatisfactory returns, why have the banks been able to launch series after series of the same products ?

Regulators, are they really out to build a "world class" financial centre in Singapore ?

Efforts to develop a vibrant corporate bond market has fizzled out. Look at the corporate bonds listed on SGX, lacking both depth, breath & also market liquidity.

If the recently launched OCBC NCPS preference shares can yield 5 percent, then any good quality corporate can float coporate bonds at around 5 percent, which at 150 basis point spread to 15 year SGS govt bonds, seems about right.

So, if these alternatives are available, would investors need to even consider the structured deposit nonsense the FIs are putting out ??

Lastly, correct me if I am wrong. SGX, along with the KLSE, I think are the only 2 exchanges left in the whole wide world that allow contra trades, ie. allowing investors to sell shares that they have purchased within 3 days, before they are settled, without paying up first. All other exchanges require some sort of margin or deposit. Is this prudent risk management ? I rest my case.

Regards

7 comments:

Anonymous said...: "Why are banks allowed to sell structured products that give poor value?"

Good question

but I thought the answer is precisely what had led everyone coming to here posting their concerns.. er and questions like yours?; November 02, 2008 12:27 AM
Anonymous said...: having 3 day contra trade is not a problem. in fact it is necessary to generate volume in our small market. without contra trades, our market will be too small to be viable.

what is dangerous is to allowed borrowed scripts and even CFD to short sell stocks. short selling under this kind of mechanism is going against the fundamentals of investment in stocks and companies. stocks and companies that are sound and profitable can be sold down by these shortists and their value destroyed. it is worst than a casino. what is worst is that the short sellers are big funds and could sell in the millions against the small investors. it is like a loaded dice.

normal short selling to be covered within the days is acceptable.; November 02, 2008 11:23 AM
G C said...: If I was not wrong my financial products are sold, that included life insurance policies, will not provide the best return to the investors. The reason is most the return has been used to pay as commission to the people who market them. But this theory may not not easy to proof as the actual commission structured of any products sold are private and confidential to the distributors or the FIs and are not required by law to disclosed in such a detail.

I also believe most of us are at the mercy of the FIs and Insurance Company in the case of Life Insurance.

G C Tham; November 02, 2008 11:28 AM
Parka said...: They can sell anything.

They can even sell keyboards if they want if that's what makes money.

I don't suppose the government will want to restrict the variety of products that can be sold. Unless of course the product is dangerous — life threatening.

Financial products are not life threatening. Well, too bad.; November 02, 2008 12:55 PM
freeier said...: 8-)

in my several years in finance sector, and 2 years in singapore.. alot of things i have observed:

1. reliance, most retail investors are not willing to put in effort to learn about financial planning.

2. the punting mentality that is brought about by contra trade. the mickey mouse stock market that are easily manipulated because of no real liquidity

3. and the insistence of the authority not to change the contra system.. if not broken, why fix.. the longer this is prolonged, the worst we will lag behind.

look at the etf and the investment certificates listed in the exchange that provide more efficient investment instrument than any unit trust. nobody likes them, nobody wants them..

go speak to your broker you will know why..

its an overall legacy systematic failure.. and also end investor has a big part to play to break themselves out of this vicious cycle...; November 02, 2008 2:01 PM
Anonymous said...: when we discuss about the stockmarket we need to understand that we are just an anthill trying to be a mountain. we are simply too small. and because of this, remisiers and contra trades are important to generate more volumes. without them our market will simply run to a standstill.

the volumes generated by the contra trades and remisiers, they act as a multiplier by accepting higher risks with their clients, are different from the fictitious and meaningless volume generated by the big boys at no commission or minimal commission. what is harmful of the latter is that they took advantage of little or no commission and their muscles to trade against the small investors and beating them in every trade.

their ability to trade in the millions and the borrowed script facility allow them to create havoc to stock prices. this is very unfair to the small investors.
it will ultimately ruin our stockmarket. it is already half gone.; November 03, 2008 8:51 AM
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