Impact of the financial crisis leads to regulatory changes

PUBLISHED : Tuesday, 02 March, 2010, 12:00am
UPDATED : Tuesday, 02 March, 2010, 12:00am

Professor Kalok Chan is head of the finance department at Hong Kong University of Science and Technology and academic director of the HKUST-NYU Joint Master in Global Finance programme. He gives us his views on the impact the financial crisis has had on derivatives and other financial products.

In the wake of the credit crisis the Security and Futures Commission (SFC) has implemented regulatory changes regarding financial products. What are the main changes and what effects are they intended to have?

The regulatory changes in Hong Kong have not been related to exchanged-traded derivatives. Instead, they have focused on the sale of unlisted structured products. The SFC has released a consultation paper to enhance investor protection, which includes the pre-sale process (e.g. advertising guidelines), the sale process (e.g. information disclosure), and post-sale process (e.g. whether there is continuing disclosure and the possibility of a cooling-off period allowing investors to cancel the sale).

Do these changes go far enough?

Hong Kong uses the disclosure-based approach, and the SFC has to make sure the right information is provided to investors. The SFC, however, is not in a position to determine whether the risk of the products are too high for clients - this is the job of financial advisers. It is important to protect people who do not have sound financial knowledge, as they should not be tempted into undertaking investments that are too risky. The SFC should penalise financial advisers who do not give proper advice.

How will it be possible to police the changes that have been imposed? Other than protecting individual investors, global regulatory agencies are concerned about counterparty risk in over-the-counter derivatives markets (e.g. AIG defaults on the credit default swap (CDS) with other financial institutions). There are two major moves here. The first is to introduce central clearing houses, so the positions of the participating parties would be netted out and monitored. The second is to standardise the CDS contracts, and have them traded in the exchanges.

Has enough been done to ensure situations such as the minibond saga in Hong Kong do not happen again?

The measures in the SFC consultation paper are there to provide better protection to investors. However, it will also require rounds of discussion with industry practitioners. Also, besides the regulatory agency, both investors and agents of financial institutions have to act diligently.

Since the earliest corporations and allocations of common stock, investors have speculated on profit from products or projects which must find favour with consumers or their communities in order to succeed. What social or consumer benefits do derivatives deliver?

Derivatives can be used for speculation, but are useful for hedging. For example, CDS can protect bondholders from company's defaulting as they will receive compensation from the counterparty who sells CDS (which is effectively selling an insurance contract to them).

Can you give some examples of how programmes such as yours teach complex financial systems? How do you ensure that what you teach is directly relevant to the fast-changing financial climate outside the classroom?

This master's programme is designed to balance the technical and global dimensions of finance in a way that is not generally achieved in MBA programmes. Modules, updated periodically reflecting the latest trends and covering related topics - including derivatives, banking reforms, credit risk management, fixed income, etc - are taught by faculties from both Hong Kong University of Science and Technology's Business School and New York University Stern School of Business. Participants in the programme dramatically enrich their knowledge of finance and develop a deep understanding of the latest trends in the global financial markets. While the programme kicks off in Hong Kong, two intensive learning modules in New York give participants the opportunity to experience two world financial centres. The learning module in Beijing provides a superb learning experience in the largest emerging market in the world.