SFC Coverup for Minibond prospectuses?

證監會行政總裁韋奕禮表示: “證監會角色並非要監察投資產品價格是否穩定, 而是要確保所批核之投資產品, 有全面市場披露”.

Does SFC consider the Issuer Prospectuses & Program Prospectuses meet the above “全面市場披露” requirement? Does SFC consider the Issue Prospectuses meet SFC's claimed "clear, non-leading, adequate disclosure" standard ? (SFC may use Series #19 (2005) or #27 (2006) or #35 or #36 (2007) as examples).

From SFC CEO's testimony in Oct.13, 2008 Legco Meeting, (http://www.legco.gov.hk/yr08-09/chinese/hc/minutes/hc20081013.pdf).

SFC CEO 韋奕禮先生 seemed to be fooled by misleading statements in Minibond Issue Prospectuses, and was fooling the public by quoting the misleading statements from the Minibond Issue Prospectus.

1. SFC CDO 韋奕禮先生 said tthat “These products were backed by triple A collaterals and the likely cumulative historical rate of failure for triple A collaterals over the past 25 years between 1981 and 2006 is 0.09 percent for the first three years.”
The SFC CEO seemed to quote the historical default probability data in the Issue Prospectus of Minibond Series #36 (page 54). Such data obviously intended to show that Minibond was backed by collateral with such default historical data. However, such data does not apply to the Minibond (synthetic) CDO collateral at all! Because the quoted 25 year data was based on the default performance of all conventional AAA-rated debt issues. The Minibond (Synthetic) CDO collateral (Series 36 and many earlier Series) were Synthetic CDO which does not even have a 10-year historic data for data/record tracking.
Was SFC CEO fooled by such misleading data and considered the Minibond was ‘backed by’ ‘triple A collateral’ that had similar characteristics (in terms of default rate) as to the triple A conventional bond/debt?
Or: Was SFC CEO trying to fool the public by quoting the above misleading data ?

2. SFC CEO used "backed by triple A collateral" (in his speech quoted in #1 above).

"backed by" was a totally wrong or misleading descriptions here. The Minibond (money) was really INVESTED into triple A rated Synthetic CDO that sold credit protection on a basket of between 97-194 underlying reference entities to Lehman Brother. That is, the so-called "triple A collateral" was itself credit-linked to over 100 reference entities in its true nature, It was not a a conventional bond/debt by any definition,

By using 'backe by', SFC CEO was suggesting that the Minibond value was dependent on the (synthetic CDO) collateral, and effectively hinted that the synthetic CDO collateral had the similar quality as of a triple A conventional bond/debt.

Either the SFC CEO was misled by the Minibond Prospectus or was trying to mislead the public on the truth of Minibond.

In fact, If sufficient credit events occur within the Synthetic CDO basket's credit obligations, the resulting loss will be taken up by the Synthetic CDO through reduction of the Synthetic CDO principal. This leads to an "underlying securities default event" at the Minibond-level.

Was the Mr. SFC CEO aware of this?

It was the synthetic CDO that was secured by Collateral which was the Lehman USD (Money Market) Fund. The intention was probably to ensure the payment to the credit-protection buyer Lehman for the basket reference entities of 97-194 included in the Synthetic CDO.


3. [SFC CEO韋奕禮先生： Series 36. There are a number of different series. Generally, each series will have something akin to the statement in series 36, which said they are not suitable for everybody. They are suitable for people who want a fixed rate quarterly interest in US Dollars or Hong Kong Dollars and are confident that none of the seven named referred entities will be affected by a credit event and they are willing to accept the risk that our notes are not principal-protected and if a credit event happens to any one of the referred entities, you will only receive back in a credit event an early redemption amount which could be significantly less than the principal amount of our notes. That is a fairly typical disclosure of each of the documents.]

韋奕禮先生 was quoting from the Section "Who should buy our Notes? Are they suitable for everyone? ", which can be found in the Issue Prospectus (page 10, Series #27) as below:

[“Who should buy our Notes? Are they suitable for everyone?
Our Notes are not suitable for everyone. (...)
Our Notes are only suitable for investors who are:
- looking for fixed rate quarterly interest income in USD or HKD;
- confident that none of the 7 named reference entities will be affected by a credit event (that is, “Bankruptcy”, “Failure to Pay” or “Restructuring”, which include events such as a major borrowing default, bankruptcy or adverse debt restructuring) between the issue date and the second business day prior to the maturity date of our Notes and who are able to take the risk that they may lose their investment if one of these events does happen;
- willing to accept extension of the maturity date for our Tranche A Notes (...)
- willing to accept early repayment of principal (...). ]

Above statements in plain English clearly suggested (to retail clients) that, although it was not suitable for everyone, IF you were confident on the 7 reference entities, the Notes was for you! SFC CEO seemed to be content with the above misleading statement, and was fairly happy about the disclosure of ‘confident that none of the seven named reference entities will be affected by a credit event.". SFC CEO AGREED with such misleading statement, and was quoting it to defend the Minibond prospectuses.

After all, the key risks of the Minibond is the default-event with the 7 reference entities, is that right, MR. SFC CEO ?

Don’t we also need to be confident on the MANY never-mentioned & undisclosed reference-entities hidden in the Minibond CDO collateral, along with our confidence on the 7 well-known companies? Minibond CDO collateral was in fact credit-linked to many (over 100) reference entities, but not to the same 7 well-known companies. Use Series #19 as an example. Don’t we need to be confident that there would be less than 9 default event out of 125 reference entities? Because, out of 125 entities in Minibond CDO Collateral, the 9th default event would cause collateral principal loss, and the 10th default event would cause 100% collateral principal loss. Confidence on the 7 reference entities would catch us total surprise in seeing the 100% principal loss caused by the 10th default event out of the 125 reference entities which was mentioned nowhere in the prospectuses.

Was SFC CEO fooled by the Minibond prospectuses as HK retail minibond-buyers?

or: Was SFC CEO trying to fool the public in order to defend Minibond prospectuses?