Structured settlements

This Free Resource Will Help to Educate and Facilitate Communication Within the Structured Settlement Industry

Stone Street Capital, LLC, a leader in the lump sum industry, announces a new free online resource for the structured settlement industry.

DBS Group Holdings Ltd., one of 14 banks in Hong Kong that have agreed to compensate investors in structured notes linked to Lehman Brothers Holdings Inc., has been accused in a lawsuit of failing to comply with securities laws while selling the products.

The complaint, filed in Hong Kong’s High Court by a retired couple now living in California, claims Southeast Asia’s biggest bank failed to comply with the code of conduct for financial institutions under the city’s Securities and Futures Ordinance, including “failing to make accurate and not misleading representations.”

The Hong Kong units of DBS, Bank of China Ltd. and Citigroup Inc. and 11 other banks have compensated more than 60 investors, after lobbying from the city’s Democratic Party, its chairman Albert Ho said. Lawsuits including a proposed class action in the U.S. and a Hong Kong legislature investigation into the banks and structured financial products may encourage more, the lawyer and lawmaker added.

“The threat of litigation is one of the most effective tools in forcing settlement,” Ho said. Some of the banks became more willing to settle in case litigation exposes them to “more embarrassment,” he said.

DBS, which said Oct. 22 it expected compensation to Singapore and Hong Kong customers to amount to as much as S$80 million ($54 million), said it could not comment on the Hong Kong lawsuit. “If there are cases where our standards are not met, DBS will not hesitate to make compensation,” it added. read more

Today the SEC resolved charges against Citi and UBS alleging that the two firms misled investors about liquidity risks related to auction-rate securities. The $30 billion settlement is the largest in SEC history and restores liquidity to ARS investors at par value of their holdings.

According to the SEC’s release, Citi will offer to purchase ARS at par from all current or former clients that bought them—even if the customer moved accounts—restoring approximately $7 billion in liquidity to Citi customers who invested in the securities. UBS will do the same, restoring $22.7 billion to its customers. Importantly, “eligible” customers at these firms who have already sold their ARS below par will be eligible for reimbursement as well, according to the release. The SEC’s complaints against the two firms stated that between late 2007 and early 2008, both firms misrepresented the liquidity risks inherent in the securities market by comparing them to highly liquid money market funds, and failed to inform clients that their own growing balance sheet constraints may prevent them from supporting future auctions.

The auction rate-securities market—the obscure corner of the bond market that municipalities, student loan organizations and other institutional investors used for raising capital—was a popular cash storage investment vehicle for wealthier investors. That is, before they froze up in early February of this year. (Read Registered Rep.’s May cover story, A False Sense Of Security, for details of the collapse.) The ensuing liquidity crisis not only caused a lot of pain for investors and institutions that relied on the market for short-term liquidity needs, but it also revealed more problems and conflicts of interest in the market’s structure (despite SEC attention to similar issues in 2005 and 2006). read more

Troubled midcap miner Metorex on Friday staunched its share-price haemorrhage with the announcement of far-reaching restructuring that would see the stepping down of growth-era CEO Charles Needham, the exiting of founder Simon Malone, the creation of an all-nonexecutive "board oversight committee", and the disposal of cash-consuming assets to pay for a new bank loan.

Metorex, once a boom-time JSE darling but hit now by project delays, commodity price collapse and a shareholder revolt, said it had mandated the newly created oversight committee to review the company's key performance indicators and focus particularly on the completion of the Ruashi copper project, which was being built in the Democratic Republic of Congo (DRC).

Metorex said that the oversight committee would also see to structural changes and the recomposition of the board.

This followed an earlier announcement of a R922-million debt and equity finance plan to complete the production and ramp up of its Ruashi copper/cobalt project.

New executives would be introduced to assist with company management, the reduction of borrowings and the disposal of noncore and cash-consuming assets "in the short-to-medium term", in order to repay the new Standard Bank term-loan facility.

The oversight committee would also address the future of Metorex's investment in Copper Resource Corporation (CRC); monitor Ruashi's hedge, and secure "longer-term and appropriately structured financing" to improve the project pipeline. read more

According to the Bank for International Settlements ("BIS"), the global market size for over-the-counter ("OTC") derivatives, as of June 2008, exceeded $683 trillion (yes trillion) or $683,725 billion. (These numbers reflect notional amounts outstanding.) Notably, an expanded use of interest rate swaps helped to push non-exchange traded interest rate derivative product outstandings above $450 trillion, a rise of 17% over the last half-year. It would be helpful to know whether, and to what extent, pensions' use of Liability-Driven Investing strategies influenced the numbers. Click to access "Table 1: The global OTC derivatives market."

Since June, a lot has happened in the global market place. Until BIS reports updated figures, it is hard to quantify how various players have responded to increased volatility with respect to their use of OTC instruments such as swaps, options and structured products. One might logically assume that valuation and liquidity concerns will reflect themselves in lower numbers for H2-2008. On the other hand, uncertainty could encourage hedging, in which case both OTC and exchange-traded activity might see a boost.

In the meantime, I asked a few financial market participants for their feedback. Here is what they had to say in answer to the following query.

Do You Think More Regulations Will Inhibit the Use of OTC Derivatives by Institutional Investors?

• A director at a non-U.S. financial organization advises regulators not to throw the baby out with the bath water, adding that "Regulation should be framed to drive generic flows into more efficient 'plumbing' systems, while allowing custom-built trades to proceed when standardized terms don't make sense. Unless the market volunteers solutions, one must fear that knee jerk regulation will fail to differentiate, and therefore deprive end-users access to these undeniably valuable risk management tools."

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