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Coffee Shop Talk - Banks may bring forward minibond buyback</TD><TD id=msgunetc noWrap align=right>
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FINANCIAL MELTDOWN
Maria Chan and Joyce Man
Oct 24, 2008
Hong Kong banks may need to buy back some of the minibonds issued or guaranteed by bankrupt US bank Lehman Brothers before December to avoid the value of the underlying assets declining further.
A source said the Hong Kong Association of Banks would meet Secretary for Financial Services and the Treasury Chan Ka-keung and representatives of the Hong Kong Monetary Authority today to look for ways to solve some technical issues regarding the buy-back.
Investors, who claim the minibonds were mis-sold as low-risk products, are pressing for full refunds on their investments, but banks - under prodding by the government - have only offered to buy the minibonds back at their current value.
Despite their name, minibonds are not corporate bonds but high-risk, credit-linked derivatives. They are marketed as a proxy investment in well-known companies.
A source said the collateral of some series of Lehman-related minibonds were sensitive to the market price of their underlying assets, collateralised debt obligations (CDOs) - securities backed by a pool of bonds, loans and other assets. Once the value of certain CDOs hit a pre-set trigger point, the value of the underlying assets could drop substantially, the source said.
"We need to find a solution to avoid a further drop in value amid current market conditions," he said.
One option would be to buy back the notes from investors and unwind the CDOs as soon as possible.
"We don't know if any decision will be made today," he said.
Meanwhile, DBS Bank, which did not sell minibonds but related derivatives called structured notes, denied reports its compensation would amount to only 20 per cent of the notes' face value. It would decide compensation on a case-by-base basis and would fast-track cases of customers in "difficult financial circumstances", it said.
The Singapore-based bank announced on Wednesday it would pay up to HK$414 million to some of the 4,700 DBS clients in Hong Kong and Singapore who bought the products.
The bank will send letters to investor today and staff will begin meeting them next week.
Representatives of a group of DBS investors said last night that none had received compensation proposals yet. Democratic Party legislator Kam Nai-wai, who met DBS representatives yesterday to clarify details, said they reiterated the bank's intention to give a full refund in cases with evidence of mis-selling.
Although one representative called it "a step forward", the group is joining a rally by investors in non-minibond, Lehman-related financial products at the Monetary Authority headquarters today to call for more government intervention.
DBS says 6,901 Hong Kong people bought retail structured notes worth HK$2.18 billion issued by a "special-purpose vehicle", Constellation, set up by the bank. Of these, about 3,000 bought the notes from DBS.
The Securities and Futures Commission urged banks and stockbrokers to look into investors' claims of mis-selling rather than wait for the commission to finish its inquiries.
That would allow quicker resolution of the cases, reduce costs and avoid multiple legal claims, said Mark Steward, the commission's executive director of enforcement.
Julia Leung Fung-yee, undersecretary for financial services and the treasury, urged banks to communicate with the investors and offer compensation if they found the conduct of their sales staff did not meet company standards.
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FINANCIAL MELTDOWN
Maria Chan and Joyce Man
Oct 24, 2008
Hong Kong banks may need to buy back some of the minibonds issued or guaranteed by bankrupt US bank Lehman Brothers before December to avoid the value of the underlying assets declining further.
A source said the Hong Kong Association of Banks would meet Secretary for Financial Services and the Treasury Chan Ka-keung and representatives of the Hong Kong Monetary Authority today to look for ways to solve some technical issues regarding the buy-back.
Investors, who claim the minibonds were mis-sold as low-risk products, are pressing for full refunds on their investments, but banks - under prodding by the government - have only offered to buy the minibonds back at their current value.
Despite their name, minibonds are not corporate bonds but high-risk, credit-linked derivatives. They are marketed as a proxy investment in well-known companies.
A source said the collateral of some series of Lehman-related minibonds were sensitive to the market price of their underlying assets, collateralised debt obligations (CDOs) - securities backed by a pool of bonds, loans and other assets. Once the value of certain CDOs hit a pre-set trigger point, the value of the underlying assets could drop substantially, the source said.
"We need to find a solution to avoid a further drop in value amid current market conditions," he said.
One option would be to buy back the notes from investors and unwind the CDOs as soon as possible.
"We don't know if any decision will be made today," he said.
Meanwhile, DBS Bank, which did not sell minibonds but related derivatives called structured notes, denied reports its compensation would amount to only 20 per cent of the notes' face value. It would decide compensation on a case-by-base basis and would fast-track cases of customers in "difficult financial circumstances", it said.
The Singapore-based bank announced on Wednesday it would pay up to HK$414 million to some of the 4,700 DBS clients in Hong Kong and Singapore who bought the products.
The bank will send letters to investor today and staff will begin meeting them next week.
Representatives of a group of DBS investors said last night that none had received compensation proposals yet. Democratic Party legislator Kam Nai-wai, who met DBS representatives yesterday to clarify details, said they reiterated the bank's intention to give a full refund in cases with evidence of mis-selling.
Although one representative called it "a step forward", the group is joining a rally by investors in non-minibond, Lehman-related financial products at the Monetary Authority headquarters today to call for more government intervention.
DBS says 6,901 Hong Kong people bought retail structured notes worth HK$2.18 billion issued by a "special-purpose vehicle", Constellation, set up by the bank. Of these, about 3,000 bought the notes from DBS.
The Securities and Futures Commission urged banks and stockbrokers to look into investors' claims of mis-selling rather than wait for the commission to finish its inquiries.
That would allow quicker resolution of the cases, reduce costs and avoid multiple legal claims, said Mark Steward, the commission's executive director of enforcement.
Julia Leung Fung-yee, undersecretary for financial services and the treasury, urged banks to communicate with the investors and offer compensation if they found the conduct of their sales staff did not meet company standards.
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