Revelations of Lehman's mini-debt turmoil

Revelation from the disturbance caused by Lehman Minibond/Wang Fei Chen Xingzheng last September, the world's fourth-largest investment bank Lehman Brothers filed for bankruptcy protection, a round of "Lehman mini bonds" The investigation into the responsibility of retail structured products and the aftercare process have been conducted in Hong Kong and so on.　　Until recently, the Hong Kong HKMA and the SFC have put forward a series of reform proposals on the incident and the existing regulatory system in Hong Kong.　　In the mainland, although there is no bank to sell "Lehman mini-bonds" and similar structured products, but in the current bank's personal finance business in general exposure to similar problems, timely adjustment of regulatory thinking and ways to further strengthen the supervision is also imperative. The "Mini Bond" event is rooted in "mini bonds" by Pacific International Finance Corporation (Pacific Analysys Finance Ltd, registered in Caimas, Is.. Issue。 Since entering the Hong Kong market in 2003, "mini-bonds" have been continuously issued in 32 series, the remaining balance of HK $12.6 billion, involving about 34,000 investors.　　"Mini-bonds", though labelled as "bonds", are essentially a structured debt product that includes CDOs (collateralized distressed OBLIGATION,CDO), interest rate swaps, and credit default swaps (SWAP,CDS). The Pacific International Finance Corporation (SPV), a special purpose agency affiliated with Lehman, issued "mini bonds" to the public, the funds were raised through the purchase of CDOs (AAA) by Lehman's Asian company as collateral for "mini-bonds" and the cash flows generated through CDOs (including interest, sale value, etc.) for "Mini bond" debt servicing.　　In order to keep the interest rate of the CDO in line with the "mini Bond", the Pacific International Finance Corporation (IFC) has entered into a rate-swap contract with Lehman's special financial company and secured the interest-rate swap contract by the company. With a low return on AAA-rated CDOs, to raise the nominal interest rate of "mini bonds" and also to package "mini bonds" as products linked to high credit ratings to investors with "Low-risk products", the Pacific International Finance Corporation (IFC) and Lehman Special Financial Corporation (IFC) signed a package of high credit rating subjects (i.e. "Reference company", CDs, which include CNOOC, HSBC, Hutchison Whampoa, and so on, agreed to pay the premium to Pacific International finance company on a regular basis for the extra proceeds to be paid to "mini bond" holders, while the Pacific International Finance Corporation secured several credit entities,　　and Lehman Brothers provided guarantees for the swap. Multi-Link risk of "mini bond" although there is no inevitable link between the complexity of the product and the investment risk, the design of the complexMiscellaneous "mini bonds" do have risks in multiple links. The first is counterparty risk. This is the most direct and prominent risk that has led to the "mini bond" incident. The bankruptcy of a swap guarantor Lehman Brothers falls under the "termination" of the swap deal, triggering a "mini bond" to redeem ahead of time.　　In fact, the same counterparty risk involves both Lehman Special Financial Corporation and Pacific International Financial Corp., any of them defaulting on interest-rate swaps or credit default swaps, triggering early redemption, and investors can only recoup the issuer's sale of the CDO and deduct the principal after the cost is incurred. The second is credit risk.　　From the design of CDs, when any of several credit reference companies appear "credit events" (such as bankruptcy, failure to repay the debt and restructure it will trigger early redemption and the CDO will be delivered to the Lehman Special Financial Corporation, and investors will only be able to recover the principal value of the reference company's bonds, which are equivalent to the "credit event". Again, market risk.　　Whether the "mini bond" expires or triggers a "termination event" leading to early redemption, the principal that investors can recycle depends on the market price of the CDO, and in the case of a "credit event", it is clear that the value of the reference company's bonds will be seriously affected, exposing investors to market risk altogether. Finally, the related party-led design framework intensifies the asymmetric information, hidden high moral hazard and the fragility of product structure. Perhaps this is the biggest risk of "mini bond", which, by contrast, is merely a fortuitous event triggered by a once-in-a-century financial crisis. One noteworthy fact is that, throughout the product design framework, Lehman and its wholly-owned subsidiaries played the role of issuers, organizers, swaps, and guarantors, and even the trustee of the CDO, the Bank of America, which was also a link to the company.　　For such a complex product, this association undoubtedly exacerbated the information asymmetry between the issuer and the investor, and some seemingly independent risk events may become interrelated and even overlap because of the special relationship between the counterparties, thus increasing the exposure degree of the investors. In fact, some of the disputes arising from the aftermath of the "mini bond" incident are pertinent. What exactly are those CDOs selected by Lehman's Asian companies? Is it issued by it? How does HSBC, the trustee of "mini Bond", explain its role conflict and fulfill its fiduciary duties? How will HSBC deal with the scramble for mortgage assets by Lehman's liquidators and "mini-bond" holders?　　Hong Kong's HSBC has not been involved in the sale of "mini bonds" for the time being, but is it really safe to wait? False sales are the real root cause of mass incidents in "mini bonds" compared to other investment products sold in Hong Kong, "the root cause of the mass incident in Hong Kong is the" bank's improper way of selling products to retail customers ", that is, false sales have caused investors to be difficult to accept the fact of loss。 According to the SFC, 7,799 of the 8,055 "mini-bond" complaints received were targeted at 96.82% per cent of affiliates (banks) and their staff. "In the case of banks, the most common charges include: frontline staff who actively lobby the complainant to invest the expired deposit in the Lehman-related product, and do not take into account the complainant's risk-bearing capacity and personal circumstances in the sale of the product, especially the retirement, the elderly, the lower education level,　　Customers who are not familiar with the investment and are unwilling to take risks, do not provide product information such as the terms of reference and Articles of association, nor do they indicate product characteristics and risks at the point of sale.　　The two major regulatory authorities in Hong Kong have conducted reviews and reflections on the adequacy of the Hong Kong system to protect retail investors, although the public's main focus has been on "the possibility of banks selling products to retail customers in an improper manner". The first is the review and recommendations on the regulatory framework. The HKMA proposes to reform the "one industry, two pipes". As retail investors have complained about improper sales of Lehman's investment products in countries or regions that adopt different regulatory models, therefore, "the choice of regulatory framework does not appear to be a factor in preventing improper sales allegations", but given that the Lehman incident demonstrated the complexity of the dual arrangement in the operation of the law, the HKMA recommended that　　All regulatory matters in the institution's securities business (including registration, standard setting, supervision, investigation and disciplinary actions) shall be the responsibility of the HKMA and the co-ordination between the SFC and the Commission should be strengthened. The SFC proposes to refer to the "Shuangfeng regulation" model whereby one institution oversees safety and soundness while the other regulates business ethics, citing the Treasury's blueprint for a modern financial regulatory framework (Blueprint for a modernized Financial　　Regulatory businessesflat-out) on the objective-oriented mode of regulation, it is proposed that the SAR government should examine whether the existing regulatory framework is most conducive to the further development of Hong Kong as an international financial centre. Secondly, the review and suggestion on the "disclosure-oriented" mode of supervision. Under the "Disclosure-oriented" (disclosure-based) regulatory approach, neither the SFC nor the HKMA has the right to directly prohibit the sale of specific investment products. Many other areas that are routinely referred to in the study of international standards in Hong Kong, for example, the United States, the United Kingdom and other European Union countries, Australia and Singapore continue to implement the disclosure system, and the HKMA tends to maintain the existing disclosure system, taking into account that the ban is actually depriving a large proportion of investors of reasonable investment opportunities. The SFC is of the view that in order for the financial market to develop vigorously and healthily, it is necessary to provide investors with a wide range of products with different risks, and it is therefore recommended that Hong Kong should continue to adhere to the principle of disclosure-oriented supervision, supplemented by supervision of the conduct of intermediaries and investor education. In addition, publicity materials that allow products to be named "Bonds" and reviewed by the SFC are not statedRelated to the risk of complaints, the SFC in accordance with the existing legislation and regulatory procedures for review after the proposed amendments to the published guidelines on promotional materials to establish general principles, supplemented by specific provisions to assist the market to produce a correct, fair and misleading promotional materials. Again is about the sales point and Sales behavior management review. The HKMA proposes that appropriate segregation measures should be taken to place the same type of business personnel, identification and other aspects of the customer risk assessment should be independent of the sales process, by the sales-independent staff, and mandatory for the evaluation process recordings, by the HKMA (and the registration body itself) regular unannounced inspection.　　In addition, the HKMA and the SFC have proposed the setting up of a "cooling-off period", which is similar to the "hesitant period" right given to customers by the insurance industry, so as to reduce the possibility of high-pressure sales practices, so that customers can have sufficient time to reflect on their investment decisions. The Chinese Banking Regulatory Commission regulates the financial business of commercial banks in mainland China, which is different from China's national conditions and the regulatory system of Hong Kong. In the access to the implementation of financial products prior to the report, and through unannounced visits, on-site inspection and off-site supervision of the implementation of continuous supervision; for financial personnel qualification certification and access, the CBRC has not specified the specific assessment criteria, to the internal management of commercial banks. As a result of the implementation of the separation management system, combined with the strict interest rate control of commercial banks and prohibiting commercial banks from carrying out securities and trust business, the personal finance business of commercial banks should be differentiated from the types of savings, funds and trusts in order to reduce the related legal risks.　　Therefore, the personal finance business of the Inland Commercial Bank is embodied as a combination bank product which is based on the principal-agent relationship, designs and develops and sells to a specific target customer, and the customer undertakes some or all of the investment risk.　　To this end, the author suggested that the following aspects should further strengthen the supervision of the mainland financial management business. First, the establishment of the "Information disclosure" as the basis for strengthening the Bank's internal control management of the financial services supervision system. In recent years, a number of complaints against the bank propaganda materials with false, misleading content of the complaint, the ex-post-reporting access system may not be in line with the current national conditions. For reference to international experience, our prior review should focus on whether the product related materials objectively and completely to the product risk-return characteristics of the disclosure, fair and reasonable in terms of the relevant matters, and in a clear and understandable, accurate language and form of expression, that is concerned about the full and effective information disclosure. In the financial products sales process to standardize, from the mechanism to prevent improper sales. The reason why the "improper sales" is repeatedly banned is to investigate and collect evidence, especially if the oral publicity is misleading.　　The most direct and effective way is to force audio and video recordings. There is to strengthen the bank's own supervision and checks and balances, if the request establishes the unannounced inspection system, by the third party staff (not the sales line personnel) to the sale process customer's main question and the answer carries on the record, and as the customer appraisal material's constituent, by the customer signature confirmation, to make up the scoring System appraisal table too general and the pattern notFoot。 In addition, the "hesitant period" system of the insurance industry can be gradually piloted. The Supervision department focuses on the unannounced inspection of the selling point and the evaluation of the internal control mechanism and risk management ability of the bank, and forms a significant positive incentive supervision feedback. The supervision of personal financial management should be to motivate the banks to strengthen their own internal control and risk management, the supervision departments should be in the form of unannounced visits to strengthen the inspection, and the inspection results and the entry of the business link. In addition, the overall risk management capacity of banks should also be considered.　　Due to the significant differences in the functions of the SFC under the "one industry, two pipes" framework, our prior reporting system, or whether the regulatory authorities accept prior reports from financial institutions, should be premised on prudent conditions such as their internal controls and risk management capabilities. Second is to strengthen research, further draw a clear line of business, to prevent regulatory arbitrage behavior. At present, the inland personal finance business has certain regulation arbitrage phenomenon. First, through financial management business Breakthrough Trust laws. The term "mini" in "mini bonds" stems from the fact that 1 million dollars of investment has been split down to HK $ tens of thousands of to facilitate the sale of retail customers to banks. At home, part of the trust program through the bank's personal financial products in the form of customers to the threshold from 1 million yuan to a minimum of 50,000 yuan, at the same time evade the relevant trust law "qualified investors" audit and "individual customers should not exceed 50 people" regulatory requirements, to achieve a similar "mini-bond" of "split" retail. In the world are generally oriented to professional investment institutions or high-end customers of private investment, but through the trust of financial products sales to the starting point of 50,000 ordinary customers, facing a larger risk of false sales. Second, through financial management business to avoid the credit business supervision. Since 2008, the mainland financial market has a large number of investment in bank sales of credit assets and financing projects of trust products, in essence, banks through the sale of financial products for enterprises to finance credit. Although the bank can choose the financing object according to the loan approval procedure, even has carried on the loan management, but the bank's implicit guarantee support to this part of the loan is not reflected in the table, on the one hand avoids the credit business supervision, on the other hand avoids the capital regulation. Because of the major differences in the nature of personal finance business with Hong Kong, the mainland's commercial banks must make a clear division of personal finance business and other financial business. For the current "personal wealth management products" in the name of a variety of bank credit cooperation forms, to in-depth research, establish standards, differential treatment, to prevent the risk of regulatory arbitrage.　　At the same time, strengthen the coordination with the securities, insurance, improve the management of financial services to prevent the Trans integrated management of other types of regulatory arbitrage. Again, strengthen the supervision and punishment, enhance the role of supervision and warning. The sales volume of personal finance products of mainland commercial banks rose from nearly 200 billion yuan in 2005 to 3.65 trillion yuan in 2008 years, and the annual compound growth rate was as high as 263%. With the intensification of market oscillation last year, customers ' complaints about bank product design, marketing, information disclosure and so on are more and more clearly exposed in recent years, the personal finance business in the bank has been controlled by internal control, process controlling, human, however, so far few banks have been subject to substantial penalties by the regulatory authorities for personal financial transactions.　　Therefore, in order to standardize the long-term healthy development of personal finance business of commercial banks, the supervision should be strengthened vigorously, and the effect of supervision warning should be strengthened through the comprehensive use of various supervision methods. Finally, gradually start personal finance business practitioners qualification access work. Qualification issues for personal finance professionals, although the "Commercial Bank personal financing business Management interim measures" stipulates some basic conditions that must be met, but does not specify the relevant business qualifications of the examination, identification procedures and methods, at present, mainly by the Chinese Banking Association and the banks themselves to organize training and accreditation.　　Therefore, it is recommended to carry out special investigation on the implementation and effect in time, and gradually start to standardize and strengthen the relevant work of qualification admittance of employees. (Wang Fei units for China Banking Regulatory Commission, Chen Xingzheng unit for the capital Economic and Trade University Finance Institute)