STI Futures

STI (Straits Times Index) Futures provide an opportunity for retail investors to profit despite the market direction [whether it is up or down]. Essentially, STI Futures are contracts between buyers and sellers to buy or sell the STI portfolio of 30 stocks at an agreed futures price, to be settled at a specific future date.

The value of each STI Futures contract is $10*the current STI index. Hewever, the buyer /seller needs only put up an initial margin deposit [$1,625 per contract subject to SGX's prevailing initial margin rate] with the broker to secure the contract.

To be continued.

Trading in US Stocks

Investors who wish to trade US stocks must fill in a W8-BEN form available from local broking houses. The transaction fee is typically US$15 to US$30 per transaction. Trades can be made via Internet portal also.There are risks involved due to the different time zone and the market is difficult to monitor.

The IRS generally subjects foreign people to United States tax at a rate of 30 percent on income they receive from domestic sources. IRS Form W8-BEN exists to allow certain persons to claim eligibility for reduced rates or exemptions from these taxes as residents of a foreign country with which the United States has an income-tax treaty.

i) Determine that Form W-8BEN is an appropriate form for you to use. The form establishes that you are not a United States citizen or an owner or foreign partner receiving a beneficial share in the income for which Form W-8BEN is being provided. You also can use it to claim a tax exemption or reduced rate of taxation due to a tax treaty between the United States and your foreign country.

ii)Review the list of filing circumstances at the top of Form W-8BEN that may require you to fill out and file a different form.

iii)Provide your individual or organizational name and your country of incorporation on lines 1 and 2.

iv)Check a single box on line 3 to indicate the individual, organizational or corporate form of the beneficial owner.

v)Provide your permanent address on line 4 and, if different, your mailing address on line 5. Do not use a P.O. box or an "in-care-of" address as a permanent address.

vi)Fill out your taxpayer-identification number, your foreign tax-identifying number and any useful reference numbers that may assist the payer or withholding agent on lines 6, 7 and 8.

vii)Fill in the applicable boxes on lines 9a through 9e to certify that you are eligible for tax-treat benefits as a resident of the foreign country that you name on line 9a.

viii)Follow Form W-8BEN's instructions to provide any additional information that applies to you and explanations on line 10.

ix)Check the box on line 11, and attach the appropriate statement if there are notional-principal contracts producing income that is not effectively connected with a business or trade conducted in the United States.

x)Sign and date the form, and file it with the withholding agent or payer of income.

Structured Deposits

A structured deposit is essentially a combination of a deposit and an investment product, where the return is dependent on the performance of some underlying financial instrument such as Straits Times Index or other market indices, stock prices, interest rates, foreign exchange rates,bond prices and even credit-linked events,etc.

Pursuant to MAS's directives in Oct 2004, the term Deposit indicates that :
- the Capital deposited shall be returned upon maturity subject to credit risk;
- Cash shall be returned; and
- If the Bank recalls the structured deposit early, full capital in cash shall be returned to the depositors.

The structured deposit agreement entered before the directives might not enjoy the protection as above.

Example 1: OCBC 3-Year SGD FX-Linked Structured Deposit.
Characteristics:
i) A fixed interest of 1.80% p.a. is payable at the end of Year 1 and Year 2 respectively.
ii) For Year 3, an interest of 1.60% p.a. to 4.80% p.a. is payable depending on the Absolute Up-Down Months.
iii)Participate in the absolute performance of the USD/SGD Exchange Rate.
iv)100% principal protected by OCBC Bank if held to Maturity Date.
v)The effective rate of return is 1.73% p.a. under the worst case scenario.
vi)May achieve a higher rate of return than ordinary time deposit accounts and principal protection with a 3-year investment horizon.
vii)Minimum deposit of S$5,000

Eample 2:Maybank Inflation-Rider Structured Deposit
Characteristics:
i) Guaranteed returns on investment against the value erosion effects of inflation.
ii) 100% capital guarantee when held to maturity
iii)Minimum payout of 0.90% (0.51% p.a.) Maximum payout of 17.50% (10% p.a.)
iv) Short investment period of 21 months
v) Denominated in Singapore dollars - No foreign exchange risk
vi)Launch date: 28 August 08
vii) Closing Date: 15 Septemer 08
viii)Deposit Start Date: 18 September 08
ix)Deposit End Date: 18 June 10
x)The Maybank Inflation-Rider Structured Deposit is designed to allow investment returns to move in line with inflation.
xi) Returns investment are linked to the price movements of commodities. Be able to participate in the robust growth of commodities.
xii)Minimum placement of S$10,000
xiii)For individual - Must be at least 21 years of age
ixi)Institutions - No set criteria

Structured Deposit is facing Credit Risk in that if the bank collapsed, the deposit would be gone also. It does not help even when the Government on 16 Oct 08 announced its decision to provide 100% guaranttee (up from previously $20,000) for all deposits including S$ and foreign currencies [Max 120 billion from Reserve till 2011) . Structured deposits and structured products are not covered as these are created under Financial Advisers Act.

In certain structured deposits, the max return could be capped by Cap Rate or Particiaption rate or both, depending on the Agreement.
For example, the return could be 15%(Cap Rate)*40%(Particiaption rate-> Sharing rate)=6% eventhough the reference financial instrument has a 50% return.

Minibond explained

The following is the summary of Minibond saga:

This structured product [Credit-linked Note with CDS]is a typical output of financial engineering. There are four parties involved: the investors (Minibond holders), the special purpose vehicle (Minibond), the Counterparty LBSF (LB special financing) and the Trustee (HSBC Institutional Trust Services (Singapore) Ltd). The working mechanism is described below.

i) LBSF has a pool of corporate bonds from a number of reference entities. These corporate bonds are of good investment grade by the rating agencies. To guard against the credit default risk, LBSF sought to transfer the risk to a 3rd party [in this case, Minibond was set up]by purchasing insurance from Minibond under a Credit Default Swap [CDS]Scheme in which, LBSF will pay regular premium [Credit spread] of say 1% of the total value of the bond pool to Minibond and the 1% premium is payable to the minibond holders for assuming the credit default risk of the reference entities.

ii) Minibond [the issuer] uses the CDO ( In case of Minibond Series 1, the underlying security is Series 2008-15 US$40,600,000 Synthetic Portfolio Notes due 2011 issued by Beryl Finance Limited SIN Code: XS0382664547. The security may be different for other Minibond series) as the collateral for the CDS agreement. This CDS is called funded CDS to mitigate CounterParty risk [i.e.in case of Minibond's (Counterparty, with respect to LBSF)inability to honour the CDS obligations]. The Minibond is linked to the credit rating of the reference entities.

iii) In case when a credit event happens, LBSF will seek physical/cash settlement from Minibond under the CDS agreement. Minibond will have to deliver physical CDO or dispose of the CDO to pay cash to LBSF as the case maybe under the CDS agreement. In exchange, the bond pool will be delivered to Minibond and disposed of. The recovered amount,if any,will be distributed among Minibond holders.

iv) Since Minibond is a SPV, it will need to raise fund from investors by selling notes with say 5% coupon payment. Minibond then uses the fund to purchase "low risk CDO" to provide regular cashflow [coupon] same as the coupon rate and maturity of the notes. In order to attract higher rating, the CDO is backed by Lehman Brothers Holdings Inc. as the swap guarantor. The CDO is rated investment grade by rating agencies.

v) The CDO also pays coupon to Minibond which has an interest rate / currency SWAP with LBSF to ensure coupon payments to investors are regular and fixed.

vi) If the Counterparty [LBSF] is in default, the trustee will dispose of the CDO and pay the investors. The amount will be marked to market However, in the credit crunch situation like today, the value is likely to be zero.

In effect, the Minibond has transferred the credit default risk of the reference entities to the Minibond holders. As Minibond holders have fully paid the investment, LBSF has no counteraprty risk [Minibond]. In addition, the Minibond holders have also assumed the risk of CDO being devalued or worthless under the current situation.

The following is the announcement in Businesss Times on 18 Nov 08 by HSBC International Trust Services pertaining to Minibond Series 1:

US $ Exchange Rate

The US $ has been strong against Asian currency in recent month. Some possible reasons could be due to the following:

i) The US $ had been weakening against major currencies since the sub-prime crisis started in 2007. The weaken US $ has facilitated US exports and improved its balance of payments which have helped shore up the US $.

ii) The financial turmoil has now affected other countries. The US has already cut its interest rate 6 times to 2%. Other central banks are only starting to cut the rates just a few weeks ago. There are a lot of catch-up for the other central banks to cut their domestic interest rates to prevent the collapse of their financial systems. Because of this, the US $ has become relatively stronger currency for now.

iii) The collapse of Lehman Brothers has created the credit crunch. The institutions who have borrowed heavily on leverage will now have to get the US $ from the open market and this push up the demand for US $ and the exchange rate.

iv) The global financial troubles have caused the exports of many countries to drop due to severe dips in demand of major western countries. There is capital outflow and US is seen as a relative save heaven for the time being. This capital inflow to US $ will shore up the US $.

v) The collapse of the commodity prices in other major currencies have indirectly strengthen the US $.

vi) The hedge funds and institutional investors have been dumping their holdings worldwide as they face margin calls and redemptions. Since most of the funds are US $ based, they need to convert the fire sales proceeds from local currencies to US $ and repatriate the money home to repay panicked investors and banks. This also causes US $ to soar. This is a dramatic unwinding of the carry trade in US $.

While the liquidity has improved some what, it is not expected that the present situation be reversed in the one year to come.

SGX Extended Settlement Contract

The ES Contract process is graphically represented as follows:

The Singapore Exchange (SGX) will launch Extended Settlement (ES) contracts on Jan 23 next year, aimed at expanding the range of equity products available to investors.

The contracts, previously called single stock derivatives, will be a new investment type on the exchange’s securities trading market. The derivatives allow investors to buy in at the price listed on the exchange on trade date and agree to a settlement date in the future. Ten local brokers are backing development and launch of the contracts.