The Monetary Authority of Singapore (MAS) has been discreetly compelling stock brokers in Singapore to impose trading restrictions on certain foreign stock counters, particularly Exchange Traded Notes (ETNs). Affected counters can no longer be purchased.
ETNs are senior, unsecured, unsubordinated debt securities issued by an underwriting bank. Their value is tied to a certain benchmark, which could be the price of a commodity or precious metal such as gold, or a stock index such as the United States S&P 500 index. ETNs can be structured so as to allow the investor to either go long or short, and can also employ leverage. All ETNs have a maturity date. On maturity, the underwriting bank promises to pay the investor the amount reflected in the index, less management fees. ETNs can be traded on regular stock exchanges just like shares of listed companies.
Since ETNs are debt securities that are backed only by the credit-worthiness of the underwriting bank, and not by any tangible assets, they are subject to risk of default and can become worthless in the event that the underwriting bank goes under.
Examples of ETNs that have had trading restrictions imposed on them include the PowerShares DB Gold Double Long ETN and PowerShares DB Gold Double Short ETN (which allow the investor to go long or short gold with a leverage factor of 2), as well as the Barclays iPath GSCI Crude Oil Total Return ETN which tracks the price of West Texas Intermediate crude oil futures.
These trading restrictions however have not been publicly announced by MAS, causing inconvenience to some investors who rely on them either for portfolio management or for speculation.
Worse still, the brokerage houses also have been not forthcoming in disclosing the trading restrictions to their clients. For example, the brokerage firm I personally deal with has refused to disclose to me the exact list of all restricted securities even though I can see no reason why it should be kept a secret.
Apparently, these trading restrictions were instituted by MAS a few months ago as part of its efforts to impose more stringent regulation on structured products in the wake of the fallout from the Lehman minibond scandal.
However, the opacity with which MAS has imposed these trading restrictions must be called into question. Why has MAS not been forthcoming in disclosing to the public the existence and rationale of these trading restrictions? Surely members of the public who have been badly burnt by mis-selling of structured products will welcome enhanced regulation to ensure that a similar fate does not happen to other investors.
Investors require free and unfettered access to publicly traded financial instruments in order to effectively manage their portfolios. Such opacity and lack of disclosure sabotages effective portfolio management and leads to investor uncertainty and loss of confidence.
The motives behind the trading restrictions imposed by MAS must also be called into question.
The instruments concerned, namely Exchange Traded Notes, are not usually traded by the mom-and-pop investors who bought into the failed structured products like the Lehman minibonds sold by over-the-counter sales representatives. They are usually traded only by professional investors who understand the nature of these instruments as well as the risks involved.
While I acknowledge there is a urgent need for tighter regulation of structured products, I fail to see the logic of regulating ETNs, and worse still, imposing unconditional trading restrictions on them without considering the financial background or knowledge of the investors.
But possibly the most disturbing fact surrounding the latest slew of measures by MAS is that the trading restrictions are apparently imposed only on brokerage firms, which require financial advisory licenses, but not on the banks, which are exempt from this requirement as they are directly regulated by MAS in a separate legal framework.
In the wake of the financial and credit crisis of 2008, there has been a global outcry for greater financial regulation on the part of central banks and government authorities, as well as greater disclosure on the part of financial institutions.
The latest action by MAS however seems nothing more than misdirected regulation which serves no apparently useful purpose whatsoever.
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By Ng E-Jay
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Wow.. impose trading restrictions without informing investors? What type of “trading restrictions” exactly?
Ah Seow:
trading restrictions: cannot buy the counters. Only existing investors are allowed to sell their holdings.
E-Jay:
Why should anyone buy ETN’s when ETF’s are clearly much superior alternatives?
Have you tried asking MAS about the restrictions on ETNs? What was their response?
How can they make it public, the issuer will screw MAS.Singapore will not look like a free financial market.
Furthermore, the Singapore issued ETNs,(if any) will suffer the same consequences overseas.
Are they just ignorant or do they have some inside info.
MAS after having allowed the Exchange Traded Notes to list may now have some misgivings.
If it come out with a public statement now banning the ETN or suspending the counter, It will lead to a lot of investors kenna stuck with their ETN with their money frozen.
Better to force the issuer bank to provide liquidity and let the investor sell their investments but not allow gullible investors to buy any more.
I do not think that the buyer of ETN are professional investors as they will have used futures to achieve a similar position. The ETN have been advertised in the newspaper to appeal to ordinary gullible investors. MAS is now trying to reduce their losses.
Typical of MAS, take action only when investors lose money, in trying to keep up with Hongkong, they allow kampong companies to list in SGX without even analysing or scrutinizing them in detail.
All these officials care about is their bonuses at the expense of the gullible
investors.
Singaporeans must never trust MAS or SGX.
E Jay,
I assume you are talking of non-SGX-listed ETNs because there is only one ETN listed on SGX.
FYI by yr definition all but two or three of the ETFs on SGX (over 70) are ETNs.There are only two ETFs (the STI ones)in the traditional sense. I’m not sure abt the DBS bond ETF. The DBXT, IS and Lyxor ETFs are all structured products.
http://www.fisca.sg/financial_education?mode=PostView&bmi=272219
As to the dangers of leveraged ETFs
http://atans1.wordpress.com/2010/05/25/leveraged-etfs/
Even if its true that there is Opacity, singaporeans generally accept the situation right?
If the people are happy to accept opacity, then, who can be blamed? no one.
In the last 50 years, the people quite happy to accept status quo right?
No need ask MAS. Ask the People. yes, you.
Ah Beng & Ah Seow:
Pros of ETNs:
(a) Little or no tracking error, unlike ETFs which occasionally trade at a significant discount or premium to the underlying asset. An example of such an ETF is the central fund of canada (CEF) which is based on gold and silver holdings. ETNs can also be structured to provide leverage, and when they do so, there is still no tracking error. In contrast, leveraged ETFs have huge tracking error due to end of day rebalancing.
(b) Tax efficiency — for investors from countries that impose capital gains taxes, not applicable to singapore investors
(c) enable access to hard to reach markets and ability to employ novel trading strategies that go beyond the usual plain vanilla long or short positions
Cons of ETNs:
(a) subject to counterparty credit risk
(b) commodity ETNs which track futures rather than spot prices suffer frequently from contango problems which tend to erase value
prettyplace:
You may have a point here. The ETN issuer will not view MAS favourably if they find out their product is placed under restricted list.
MAS is scared people won’t want to call Singapore a “financial hub” — hub as in hubris, that is.
i feel that the only problem is that people generally have indifference about this issue, like many many other issues for half a century.
Agree with Loong, even if citizens aware of this issue, mostly will not be bothered to talk about it. They will not question, generally. Who would say i am wrong?
It remains to be seen if investors would fault MAS if the ETNs collapse and trigger a crisis in Singapore. Anyone want to place a bet on it?
If there is opacity, I am sure the MSM would have reported on it right? erm, i am right , am i right? our news is unbiased, totally. Its totally independent thanks to reporters we have. Sons and Daughters of singapore to serve us well with good intensions.
There is no issue as long as people accept.
So long as the “silent majority accept” for good or no good reasons? Your ideas don’t matter. So long as lky is around, his “passed down ‘lky legitimate” conduct” fitting lky pap govt suffices right? “Majority” in the citizenry is “always right” As also “minority in lky pap is “always correct too” right? THAT! IS just lky ethos and “pragmatism” to hum the GDP and self-righteous pappy kingdom where democracy & freedom HAS BE BE “clouded” by lky means right or no?
actually, i think it is not the intention of MAS to ‘restrict’ ETN.
what happened was, these brokers were barred by the 12 months no-structured-product sales rule imposed on them for their mistake in lehman minibonds. as ETN falls within the list of structured products, they are hence unable to offer these to clients anymore.. even if its a reverse enquiry by client.
i don’t think this is the intention of MAS.. but the brokers being kiasi, prefers to take this approach.
on another note, the reason why ETN is used instead of ETF, because ETN is more flexible and it allows higher concentration of risk. ETF are subject to concentration risk (e.g. 1 company name cannot have more than 10% exposure) so they are usually not able to provide some of the exposure the gamblers want!