<TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR>Credit-linked notes: 'Ironically, the broker who sold me those notes did not invest in this product. How I wish he could have told me that when he was selling it to me.'
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to letters by Mr Jag Kuo last Thursday, 'Ultimately it's buyer beware' and Mr Stanley Jeremiah on Saturday, 'Instances where 'buyer beware' is unfair'.
As an investor in several Minibond series and Jubilee Notes Series 3, which was affected by a credit event, I want to relate several observations supporting Mr Jeremiah's view. These pertain to the way such financial products are distributed.
As an investor in Minibond Series 1, I had the opportunity to attend a launch briefing by Lehman Brothers representatives and facilitated by OCBC Securities. The briefing addressed risks associated with the investment if credit references fail but little was highlighted on other risks related to the arranger or the swap party. I could also recall an answer to the question, 'What happens when there's a credit event?': 'The securities would have to be unwound and investors will get back less than the principal amount invested.' This response oversimplifies the content in prospectus, and the fact that the resulting amount, after adjusting for the sale of collateral and termination of swap arrangement, may be negative or zero. Interestingly, a high proportion of investors present at that briefing were retirees. As this was the first launch of a credit-linked instrument to retail investors, there was significant coverage in major newspapers, including the Chinese media, on April 4, 2006. Quotes from interviewees included:
'The bonds are linked to entities which are solid, stable and very large. This product will target those overly invested in equities.'
'Some observers believe the recent run of interest-rate rises may soon stop, this may be a good time to lock in rates.'
The product rationale was described by a distributor of Minibond:
'These Notes are designed for defensive investors seeking exposure to high-grade assets that provide steady coupons and enhanced yields. Investors can gain exposure to the credit risks of the reference entities without directly holding the debt obligations of the reference entities and without involving any reference entity in the transaction.'
In a nutshell, these credit-linked derivatives were marketed like fixed-rate bond (even the name Minibond tends to mislead) instruments targeting small investors looking for a stable and modest return higher than fixed bank deposits. The rate of return of 5 per cent, a maturity term of five to six years and relatively affordable minimum subscription size of $10,000 are attractive for investors with little appetite for equity investments. Were they specifically told they might lose their entire investment?
At a recent gathering of Minibond investors and investors affected by Lehman Brothers, in the National Library foyer on the evening of Sept 24, I had the opportunity to hear about experiences of other investors:
'My mother was persuaded to invest her fixed deposit in High Notes when her fixed deposit matured. She invested her entire savings."
'I bought Minibond last year through MayBank and the prospectus was posted to me only after my application was submitted.'
From this feedback, I have several thoughts about what the authorities should consider in regulating the distribution of such financial products:
- Are customer relationship managers qualified or independent to advise retail investors on high-risk products?
- If retail investors make full investment of their fixed deposits in certain high-risk products, does this amount to inappropriate advice from customer relationship managers?
- Is risk-profiling mandatory for customer relationship managers advising retail investors? How can these bank officers offer their clients products without knowing their financial background?
- Should derivative instruments like credit-linked notes be made available to retail investors? Or, should these be made available to investors with appropriate financial advisory from a qualified third party other than the distributors?
Ironically, the broker who sold me those credit-linked notes did not invest in this product, his reason being its returns are low. How I wish he could have told me that when he was selling it to me. So, investors beware, it is easy for bankers to tell you all the good stuff when they sell, and turn their back on you when something goes wrong. Chua Meng Teck
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to letters by Mr Jag Kuo last Thursday, 'Ultimately it's buyer beware' and Mr Stanley Jeremiah on Saturday, 'Instances where 'buyer beware' is unfair'.
As an investor in several Minibond series and Jubilee Notes Series 3, which was affected by a credit event, I want to relate several observations supporting Mr Jeremiah's view. These pertain to the way such financial products are distributed.
As an investor in Minibond Series 1, I had the opportunity to attend a launch briefing by Lehman Brothers representatives and facilitated by OCBC Securities. The briefing addressed risks associated with the investment if credit references fail but little was highlighted on other risks related to the arranger or the swap party. I could also recall an answer to the question, 'What happens when there's a credit event?': 'The securities would have to be unwound and investors will get back less than the principal amount invested.' This response oversimplifies the content in prospectus, and the fact that the resulting amount, after adjusting for the sale of collateral and termination of swap arrangement, may be negative or zero. Interestingly, a high proportion of investors present at that briefing were retirees. As this was the first launch of a credit-linked instrument to retail investors, there was significant coverage in major newspapers, including the Chinese media, on April 4, 2006. Quotes from interviewees included:
'The bonds are linked to entities which are solid, stable and very large. This product will target those overly invested in equities.'
'Some observers believe the recent run of interest-rate rises may soon stop, this may be a good time to lock in rates.'
The product rationale was described by a distributor of Minibond:
'These Notes are designed for defensive investors seeking exposure to high-grade assets that provide steady coupons and enhanced yields. Investors can gain exposure to the credit risks of the reference entities without directly holding the debt obligations of the reference entities and without involving any reference entity in the transaction.'
In a nutshell, these credit-linked derivatives were marketed like fixed-rate bond (even the name Minibond tends to mislead) instruments targeting small investors looking for a stable and modest return higher than fixed bank deposits. The rate of return of 5 per cent, a maturity term of five to six years and relatively affordable minimum subscription size of $10,000 are attractive for investors with little appetite for equity investments. Were they specifically told they might lose their entire investment?
At a recent gathering of Minibond investors and investors affected by Lehman Brothers, in the National Library foyer on the evening of Sept 24, I had the opportunity to hear about experiences of other investors:
'My mother was persuaded to invest her fixed deposit in High Notes when her fixed deposit matured. She invested her entire savings."
'I bought Minibond last year through MayBank and the prospectus was posted to me only after my application was submitted.'
From this feedback, I have several thoughts about what the authorities should consider in regulating the distribution of such financial products:
- Are customer relationship managers qualified or independent to advise retail investors on high-risk products?
- If retail investors make full investment of their fixed deposits in certain high-risk products, does this amount to inappropriate advice from customer relationship managers?
- Is risk-profiling mandatory for customer relationship managers advising retail investors? How can these bank officers offer their clients products without knowing their financial background?
- Should derivative instruments like credit-linked notes be made available to retail investors? Or, should these be made available to investors with appropriate financial advisory from a qualified third party other than the distributors?
Ironically, the broker who sold me those credit-linked notes did not invest in this product, his reason being its returns are low. How I wish he could have told me that when he was selling it to me. So, investors beware, it is easy for bankers to tell you all the good stuff when they sell, and turn their back on you when something goes wrong. Chua Meng Teck
