SFC and HKMA welcome Lehman progress

On 14 June 2011 the SFC and HKMA reported that they are pleased by PwC’s announcements concerning the distribution of the underlying collateral for the Minibond series 10 to 12, 15 to 23 and 25 to 36 (the Relevant Series) to the nominal holders of the Relevant Series via the Clearing Systems in accordance with the terms of the settlement agreement with Lehman Brothers.

The SFC and the HKMA are also pleased to note that the recovery percentages on a weighted basis are on average 1.6% higher than the indicative recovery percentages stated in the announcement by the Receivers dated 28 March 2011. The recovery of collateral at a higher level, together with the additional ex-gratia payment by the 16 Lehman Brothers' Minibond distributing banks, will increase the level of recovery of eligible customers to between 85% and 96.5% of their initial investment.

Further details and regulator comments are available here.

OTC regulation coming to Hong Kong

The following annoucement was made by the HK SFC today.  As expected and despite there being no evidence in Hong Kong of concern in the OTC market, the Hong Kong regulators are aligning themselves with the global movement to regulate the OTC space.  The only good news is timing, the consulation process will not begin till 3Q 2011 and therefore any new legislation is unlikely to be in place until mid 2012.  Having said that it this is sure to mean more cost and more legal expense for those involved.

Regulatory regime for OTC derivatives markets

The Securities and Futures Commission (SFC) welcomes the announcement by the Hong Kong Monetary Authority (HKMA) and Hong Kong Exchanges and Clearing Limited (HKEx) to respectively establish a trade repository (TR) and a central counterparty (CCP) for over-the-counter (OTC) derivatives transactions in Hong Kong (Note 1). These key financial market infrastructures aim at enhancing the transparency of and reducing overall counterparty risk in the OTC derivatives markets.

To provide the legal framework for the development of these market infrastructures, the SFC will work with the Government, the HKMA, HKEx and relevant stakeholders to build a regulatory regime for OTC derivatives markets. The regulatory regime would cover the reporting of OTC derivatives transactions, particularly those which are relevant to the Hong Kong market, to the TR and the clearing of standardised OTC derivatives transactions through an authorized CCP.

At the initial stage, the reporting and clearing requirement will be applied to interest rate swaps and non-deliverable forwards. Consideration will be given to extending the requirement to other appropriate OTC derivatives asset classes after the initial roll out, having regard to local and overseas market developments including any further guidance from international regulatory bodies.

The SFC plans to consult the market on the regulatory regime by the third quarter of 2011, so that there is sufficient time to prepare for the roll out of the TR and the CCP by end 2012 (Note2).

“Establishing a regulatory regime for OTC derivatives markets is an important move for Hong Kong to keep pace with international initiatives on this front,” said Mr Martin Wheatley, the SFC’s Chief Executive Officer. “As the regulation of OTC derivatives markets internationally is still evolving, the SFC will closely monitor overseas developments with a view to bringing the local regulatory regime appropriately in line with those that are taking shape in other major markets.”

The initiatives represent a major step for Hong Kong to implement the commitment agreed by the G20 leaders to regulate OTC derivatives markets.

The SFC will maintain a close dialogue with HKEx regarding the OTC derivatives CCP to ensure that its operations will be orderly, fair and expeditious, and its risks are managed prudently.

End

Notes:

1. Please refer to the press releases today issued by the HKMA and HKEx for details.
2. The September 2009 G20 communique called for (i) all standardized OTC derivative contracts to be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end 2012 at the latest; and (ii) OTC derivative contracts should be reported to trade repositories.



HKMA update on Lehmans minibond cases

The following was on the HKMA website on 5 February:

Progress of the HKMA's investigations in Lehman-Brothers-related cases

The Hong Kong Monetary Authority (HKMA) announced today (Friday) that up to 4 February 2010, there were 12,903 complaint cases concerning Lehman-Brothers-related investment products which have been resolved by a settlement agreement reached under section 201 of the Securities and Futures Ordinance (Notes 1 & 2) and 787 cases through the enhanced complaint-handling procedures required by the settlement agreement. Together with the 2,750 cases closed because insufficient prima facie evidence of misconduct was found after assessment or no sufficient grounds and evidence were found after investigation, the handling of 16,440 complaints received have now been completed.

Currently, 1,039 Lehman-Brothers-related complaint cases (including minibond cases) are under disciplinary consideration after detailed investigation by the HKMA. Proposed disciplinary notices are being prepared in respect of 740 such cases and proposed disciplinary notices or decision notices have been issued in respect of another 299 cases (Note 3). Adding these 1,039 cases to those the handling of which has already been completed, investigation work has finished for 81% of complaint cases received.

(A table summarising the progress of the disciplinary and complaint-resolution work in respect of Lehman-Brothers-related complaints is attached.)

Table

For further enquiries, please contact:
Alice Lo, Communications Chief, at 2878 1480 or
Yokee Wong, Manager (Communications), at 2878 1213

Hong Kong Monetary Authority
5 February 2010

Notes:

1. On 22 July 2009, the SFC, the HKMA and 16 distributing banks reached an agreement under section 201 of the SFO in relation to the repurchase of Lehman Brothers Minibonds from eligible customers and the HKMA has informed the banks that, since the agreement contains detailed arrangements for settlement of claims and the implementation of robust systems for selling unlisted structured investment products and dealing with related customer complaints in future, it is not the intention of the HKMA to take any enforcement action in relation to Minibond cases that involve eligible customers who accept the repurchase offer.

2. Since 7 August 2009, 16 minibond distributing banks have begun issuing repurchase offer letters to eligible customers (about 25,000 customers) under the Lehman-Brothers Minibonds Repurchase Scheme (the Scheme) announced on 22 July 2009. Up to 3 February 2010, 24,737 customers have responded to the repurchase offers, of whom 24,471 customers or 98.9% have accepted the offers. As of 31 January 2010, for customers who had accepted the offer, 99.96% of them already received payment from the banks concerned, while the remaining payments will be settled soon (in any case no later than 30 days after having received the duly completed acceptance forms from these customers). Separately, about 4,800 customers who had reached settlements with the banks prior to the introduction of the Scheme are eligible for the voluntary offer made by the banks, with a view to bringing them in line with the eligible customers who accept the repurchase offer under the Scheme. For customers whose previous settlement amount was less than 60% (for customers aged below 65) or 70% (for customers aged 65 or above) of the principal invested, 99.5% had already received top-up payments from the banks concerned on 31 January 2010.

3. These are cases in respect of which (a) proposed disciplinary notices have been issued and representations were pending, (b) representations have been received and are being reviewed, or (c) disciplinary decision notices have been issued and the persons concerned have been given 21 days to consider whether to appeal to the Securities and Futures Appeals Tribunal.



HKMA Reports on Lehman Mini Bonds

The most high profile issue in the financial industry in Hong Kong over the last year has been the fallout from the collapse of Lehman Brothers in relation to either securities issued by that firm or securities where Lehman was a referenced entity and thus the value of the security was related to the value of Lehman.

Following a massive public outcry due to the sudden loss in value of these securities, the Hong Kong SFC and the Monetary Authority commenced investigations into sales practices and other issues arising.  A short while back the banks involved entered into a settlement with the regulators.  However there are ongoing investigations.

On25 September the HKMA issued a report on its website on the status of the Lehman Mini Bond investigations:

Progress of the HKMA's investigations in Lehman-Brothers-related cases

The Hong Kong Monetary Authority (HKMA) announced today (Friday) that there are currently 522 Lehman-Brothers-related non-minibond cases under disciplinary consideration.  These are cases which have gone through detailed investigation by the HKMA.

Since 17 October 2008 the HKMA has referred a total of 334 Lehman-Brothers-related non-minibond cases to the Securities and Futures Commission (SFC) for further action.  These cases have been reviewed by the HKMA, which has determined that there are sufficient grounds for referring them to the SFC to facilitate its investigations into banks.

The HKMA has, up to 24 September 2009, received 21,708 complaints concerning Lehman-Brothers-related products, of which 7,779 relate to non-minibond products.  In respect of the Lehman-Brothers-related non-minibond complaints, 7,680 cases have gone through the preliminary assessment process and, as a result, the HKMA is currently investigating 2,806 cases and seeking further information on 2,645 cases.  A total of 1,707 Lehman-Brothers-related non-minibond complaints have been closed as there was not sufficient prima facie evidence found after the preliminary assessment process or no sufficient grounds and evidence found after detailed investigations.  Of the minibond complaints, 13,007 cases are eligible for the Lehman-Brothers Minibonds Repurchase Scheme ("the Scheme") or the voluntary offer made by the distributing banks to customers with whom they had reached settlements before the Scheme was introduced.  Eight hundred and seventy-one minibond complaints involving customers who are not eligible for, or have indicated that they do not accept, the repurchase offer under the Scheme or whose cases require clarification from the banks will continue to be handled by the HKMA if the complaints cannot be resolved by the enhanced complaint handling system introduced by the distributing banks as agreed by the regulators.  (A table summarising the Lehman-Brothers-related complaints received so far is attached.)

Since 7 August 2009, 16 minibond distributing banks have begun the issue of repurchase offer letters to eligible customers (about 25,000 customers) under the Scheme.  Up to 23 September 2009, 22,152 customers have responded to the repurchase offers, of whom 21,937 customers or 99.0% have accepted the offers. 

"The repurchase offer is open for 60 days from the date of the offer letter.  Depending on the date of individual offer letters, the offer period will start to expire from 6 October 2009.  Nevertheless, eligible customers should consider carefully the terms of the offer and his or her personal circumstances before deciding whether to accept the offer from the distributing banks," added the HKMA spokesperson.

A set of questions and answers has been prepared to provide further details on the Scheme.  It can be found at http://www.info.gov.hk/hkma/eng/new/lehman/lehman.htm.
 

Table

Progress of the HKMA's investigations in Lehman-Brothers-related cases

The biggest issue in financial services in Hong Kong over the last 12 months has been the collapse of Lehman Brothers and the knock on effect it had in relation to various structured notes purchased by members of the public in Hong Kong. After street demonstrations, formal inquiries and various investigations a process of settling the claims of disgruntled investors and referring specific cases of alleged misselling to regulators is well underway. The following press release from the HKMA (who regulate banks in Hong Kong) was released on 21 August:

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Hong Kong updates

10 July 2009 SFC to further study proposal to allow remote participants to access futures market On 27th February 2009, the SFC issued a consultation paper inviting comments on whether the definition in futures contracts should be changed to allow overseas participants to participate in that market without an SFC license provided certain preconditions were met. The SFC received 16 written submissions with mixed response and is hence going to further the study before a decision can be made.

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