Tan Kin Lian's Blog: Ban on selling structured notes

Wednesday, July 08, 2009

Ban on selling structured notes

A journalist told me that the ban imposed by MAS is from selling structured notes. The ban does not apply to other types of structured products. Frankly, I do not understand the distinction. Can anyone enlighten me? What kind of structured products are not covered by the ban?

18 comments:

Anonymous said...: Products sold by the banks are quite complicated and really need rocket science to understand.

Look at the latest product by POSB:
http://www.dbs.com.sg/posb/investments/singgrowth/Pages/default.aspx; July 08, 2009 5:47 PM
C H Yak said...: I was approached by a marketeer last week with this brochure and literally with the "cookies" showing 2.78%.

I emailed Mr Tan a copy.

I could not understand what Clause 4 in the brochure is talking about.

I know upon if a Specified Redemption Event occurs from Year 2 onwards or around 8 Aug 2011 as mentioned in Clause 5, there will be Bonus payment, i.e. if Return of each share in the basket of blue chips is at or above 15% on the fixing date.

But I could not understand phrase in Clause 4 - ...where the Bank defaults, the Customer will receive zero interest payments and lose his original investment amount....

As usual we see the "naughty" disclaimers.

I wonder if this structured product is now "illegal" due to the current ban.; July 08, 2009 6:19 PM
Anonymous said...: Toxic products should be ban forever!!!!!; July 08, 2009 7:23 PM
Collin said...: Structured deposits are not covered.; July 08, 2009 7:25 PM
Anonymous said...: C H Yak:

" ...where the Bank defaults, the Customer..."

The Bank refers to POSB, not Lehman or Goldman Sachs or what not foreign ones.

Do you think POSB will default?

Haha!; July 08, 2009 8:15 PM
Anonymous said...: To "July 08, 2009 8:15 PM",

You may like to know that many banks in US have already collapsed and default. The bigger ones were not permitted to collapse but were rescued. Thus, banks defaulting and collapsing is not unthinkable.

Soon, IFRS will waive the requirement of companies to mark-to-market their assets. Thus, banks have become very dangerous animals.

The difference between the structured note and structured deposit is that the latter's counterparty is the bank itself. Thus if the bank default the "deposit" is gone. The issue is that how "senior" the structured deposit is in terms of the investors claim on the banks' asset is not disclosed. For all you know, investors of structured deposits are the last to be able to claim on the assets of the bank if the bank collapsed. Moreover, a structured deposit is not insured by the SDIC.

An insider.; July 08, 2009 9:14 PM
Anonymous said...: If you are tempted by these products that pay a bit more than your patlry fixed Deposit, but do not quite understand the product, my advice is:
WHEN IN DOUBT, DON'T!

Speaking as a "burnt" invenstor.; July 08, 2009 9:51 PM
Anonymous said...: Dear Mr Tan,
"A major difference is that a bank offering a structured deposit is obliged to repay investors their deposit in full when it matures - a key feature of any deposit - while a structured note is similar to a bond, where the bank selling the product may not be legally obliged to ensure that investors recover their money."

source: http://www.businesstimes.com.sg/sub/news/story/0,4574,340998,00.html?

(Banks' reputations bruised, but profits intact in BT 9 Jul 2009); July 09, 2009 5:04 AM
Anonymous said...: I don't even be bored to read any products they are promoting now. THey are liers in my eyes.; July 09, 2009 8:16 AM
C H Yak said...: If Anonymous 5:04 AM's quote from BT is correct, then something must be wrong with Clause 4 of the POSB brochure, where it mentions that the Customer may lose his original investment amount, i.e. the Principal.

Quote
The customer will receive the full principal at maturity or upon Specified Redemption Event, unless in the worst case scenario, where the Bank defaults, the Customer will receive zero interest payments and lose his original investment amount. Any early withdrawal by the Customer may result in the Customer receiving substantially less than the principal amount invested.
Unquote

And if the Bank is also the counterparty, then the drafting of this clause by the Bank is questionable, even though in a possible dispute the Contra Proferendum rule may be applied against it.

If the Bank defaults but default on what?; July 09, 2009 9:10 AM
Anonymous said...: The clauses are for the banks and lawyers to understand and then protect themselves.
As a layman, I do not understand much. Yes, I admit my language is lousy.; July 09, 2009 9:38 AM
Lion Investor said...: The clause refers to that of POSB going bust.

After what happened to Lehman, the bank now has to put in this clause to make sure all the risks is disclosed upfront.

Does the selling of structured products ban extend to POSB?; July 09, 2009 5:37 PM
Collin said...: Lion Investor,

The ban is for notes, not deposit. POSB is selling the latter.; July 09, 2009 6:48 PM
symmetrix said...: Can someone pls differentiate between Structured Notes and Structured Deposits?

Reading thru POSB Invest SingGrowth Account's features on their website at http://www.dbs.com.sg/posb/investments/singgrowth/Pages/default.aspx , it is also linked to performance of certain entities. Early redemption occurs upon certain events, and it appears advantageous to the investor when that happens.

What if any of the 4 reference entities goes bust during the tenor period? Will the product terminate (with bonus payout) or continue to maturity (without bonus payout)? Nothing is mentioned about this. Something is strange about this product. It sure isn't structured like Lehman Minibonds.; July 09, 2009 11:53 PM
Sanity said...: Very fishy. The best thing to do it not to buy. All these mind boggling terms are very hard to understand. But when things go wrong, they will be highlighted and used against us.

Personally after the "burnt n still burning experience", I rather sleep easy with my money (though earning very pathetic interest) than worry about another possible toxic bomb.

The 2.78% is definitely not worth the potential high risk.... I also understood that the interest dropped after the 1st year. So all the more, pls exercise extreme caution before buying. The "return" does not justify the known/hidden risks involved.; July 10, 2009 1:47 PM
dolphin_ice said...: there is a wide variety of financial pdts in the market. be v sure about the pdt u intend to purchase. if in doubt, nva make a rash decision.

STRUCTURED DEPOSITS are usually capital gtd. it is similar to fixed deposits but structured by the individual bank, in terms of maturity term, interest scheme etc. structured deposits generally have a maturity term of 3 or 5 years with capital gtd upon maturity or early closure by the bank. interest is usually higher but based on market performance (capital amount is unaffected). most structured deposits give a gtd 1st year interest of 2.5% and above, the following years' interest will depend on the market performance and may be zero interest in worst case scenario.

STRUCTURED PRODUCTS are an entirely different classification, offering attractive interest with a level of risk n product complexity. structured products are generally not capital gtd, even if u hold it till maturity. such products are viewed as investment products for better returns n should not be used as a savings plan. there are many types of structured products.

STRUCTURED NOTES are well-exemplified by DBS High Notes, Minibonds n Pinnacle Notes. They are usually moderate to high risk products offering attractive returns as compared to fixed deposits. It falls under the umbrella of structured products, given that it is definitely not capital gtd n can result in a total loss of capital in the worst case scenario.

The MAS ban was on structured notes. The banks n FIs are still able to continue selling other structured products, unit trust, insurance products, structured deposits, fixed deposits n savings etc.; July 10, 2009 4:02 PM
symmetrix said...: dolphin_ice,

Tks for explanation of the 3 types of Structured investments.

What is the true reason for POSB to launch Invest SingGrowth, now? Surely it does not need the cash as it is filthy rich. It does not say how it is planning to use the funds raised. Is POSB trying to make amends for the screw ups of DBS?

The only risk I see is when POSB goes bust (unlikely) in which case investors lose their principal. Failure of any of the 4 underlying entities also does not constitute a Specified Redemption Event. The annual Fixed Payouts are not subject to market nor performance factors. No other risk is mentioned. So, if one is happy with 7.7% interest over 5 yrs, isn't this "safe" product a good deal? Or is it too good to be true?

This is POSB's own product. Why would POSB want to pay more interest on this product when it is already paying paltry interest to millions of customers? I suspect there is an ulterior motive behind this product but I can't put a finger on it.; July 11, 2009 10:31 PM
Anonymous said...: Hi VS Lingam, For that kind of interest (7.7%/5 years =1.54% p.a), it does not seem like a good deal when you have to worry about all the what ifs for 5 years over the palty interest. why risk it?; July 12, 2009 9:24 PM