Minibond in Hong Kong

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4 Oct 2008
South China Morning Post
Joyce Man and Dennis Eng

Minibond issuers were told by the securities watchdog yesterday to “exercise their duty more diligently” in explaining the risk to investors.

The call came from Securities and Futures Commission chief executive Martin Wheatley, as interest payments ceased on two minibond series linked to bankrupt US investment bank Lehman Brothers, putting them at risk of liquidation.

HSBC, which is the trustee of the minibonds, is sending letters requesting distributors to determine whether clients who invested in the minibonds want to opt for early redemption, sources said.

“Recent events show that investors need to be presented with a clearer picture of product risks – they need to understand better how products will operate in extreme market conditions or in the face of bankruptcy,” Mr Wheatley said in a circular.

Issuers “must exercise their duty more diligently”, he said. Marketing materials must be clear, fair and present a balanced picture with adequate and prominent risk disclosure.

The two HSBC minibond series linked to Lehman Brothers have failed to make interest payments in an “event of default”, putting them at risk of being liquidated.

At least 20 per cent by value of the investors of the minibonds – reportedly series 21 and 27 – must agree in order for the liquidation to go ahead. Proceeds that can be distributed to investors depend on the value of the underlying assets less the cost of terminating Lehman’s involvement and other legal costs.

Although there are widespread fears other minibonds will succumb to Lehman’s troubles, action to liquidate them cannot be taken as long as interest payments continue.

Minibonds are not corporate bonds, but consist of high-risk creditlinked derivatives. They are marketed as a proxy investment in well-known companies.

Hundreds of investors in minibonds and other complex derivatives issued or backed by Lehman Brothers have been demanding refunds and accusing the banks that sold them the products of not fully disclosing the risk involved.

A Hong Kong Association of Banks taskforce met for the first time yesterday and decided to form subgroups to analyse each kind of investment product.

The taskforce will help banks handle issues related to the products, collect information from Lehman’s liquidators and trustees to pass on to investors, and communicate with regulators, the association said.

The Civic Party said the taskforce would not solve the problem and had no timetable.
“ You need a tiger with teeth,” Civic Party legislator-elect Margaret Ng Ngoi-yee. “The Hong Kong Monetary Authority has teeth.”

Audrey Eu Yuet- mee, another party legislator-elect, said the Legislative Council might form a select committee when it reopens for session if the Monetary Authority does not react faster and more forcefully.

The authority should instruct banks to fast- track their investigations and appoint independent parties that act as a one-stop service for complaints, Ms Eu and Ms Ng said.

The authority should conduct disciplinary proceedings where complaints are justified and undertake a reform based on the independent parties’ investigations, they said.

Investors who purchased minibonds from the Bank of China (Hong Kong), Mevas Bank, and Dah Sing Bank will rally again today.