Written by Ng E-Jay
28 May 2010
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.