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SFC, HKMA and DBS Bank (Hong Kong) reach agreement on
Lehman Brothers - related Constellation Notes

The Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA) announced today (Wednesday) that an agreement has been reached with DBS Bank (Hong Kong) Limited (DBSHK) in relation to the bank's distribution of the Lehman Brothers related Constellation Notes (LB-related Constellation Notes) (Notes 1&2).

Following an investigation by the SFC, DBSHK has agreed, without admitting any liability, to propose a resolution scheme in respect of the LB-related Constellation Notes. Under the resolution, DBSHK will:

  • offer to pay in total approximately $651 million to its customers who purchased LB-related Constellation Notes and who were classified by DBSHK, at the time of purchase, as having a low to medium risk profile, i.e. those customers designated as level 1, 2, or 3 customers under DBSHK's investment profiling system (low risk customers) (Note 3);
  • pay the low risk customers a resolution amount equal to the total value of their investment in the LB-related Constellation Notes plus an amount equal to the interest that would have been payable on that amount if it had been placed with DBSHK in a fixed term deposit between the date of the investment and today's date less the amount of coupon payments already made to them (Note 4);
  • pay top up payments to those low risk customers with whom DBSHK has entered into settlement agreements to the extent that such payments are needed to ensure those customers are treated in the same way as other low risk customers;
  • review complaints regarding the LB-related Constellation Notes transactions of customers who were classified as having a higher risk profile (i.e. those customers designated as level 4 or 5 customers on a case by case basis, using an enhanced complaint handling procedures) (Note 5); and
  • review the customer complaints in relation to the distribution of unlisted structured products other than the LB-related Constellation Notes sold prior to today's date under the enhanced complaint handling procedures.

During the course of the SFC's investigation, the SFC raised concerns that:

  • in selling LB-related Constellation Notes to both high and low risk customers, DBSHK rated LB-related Constellation Notes as a low to medium risk product (under DBSHK's rating system, they were rated as a level 2 product on a scale of 1 to 5: low risk to high risk);
  • a different division in DBSHK had assessed the same product as having a higher risk level;
  • the relevant prospectuses had stated that the prospective investors may lose all or substantially all of their investment in the Constellation Notes; and
  • LB-related Constellation Notes may not have been suitable for low to medium risk customers whose risk profile favoured the conservative, moderate and balanced end of the investment spectrum.

The effect of this agreement is that approximately 2,160 accounts of the low risk customers who accept the resolution scheme will receive their investment back, together with interest less the coupon payments they have already received as note holders and complaints from high risk investors obtain the benefit of a full review of their case under the enhanced complaint handling procedures.

In entering into the agreement under section 201 of the Securities and Futures Ordinance, and in particular, in considering the resolution scheme offer to be made by DBSHK, the SFC has taken into account a number of differences between the sale of LB-related Constellation Notes and the sale of Lehman Brothers Minibonds, which accounts for the different resolution terms in this case. Those considerations include the following significant factors:

  • unlike Lehman Brothers Minibonds, there is no distributable collateral for the LB-related Constellation Notes;
  • there is no need for DBSHK to fund action to expedite the return of any collateral as has occurred under the Minibond Agreement in which the 16 banks committed to disgorge the commission they received on the sale of Minibonds to create a fighting fund; and
  • unlike Minibond customers who accepted a repurchase offer under the Minibond Agreement, there is no chance that holders of Constellation Notes will receive any additional or top up payment or dividend so the payments from DBSHK will be the only possible return payable to the low risk customers.

In considering the terms of the agreement, the SFC also took into account:

  • Constellation Notes were a sound product likely to have been suitable for customers with a higher tolerance of risk and with the necessary experience and knowledge of trading in derivatives;
  • the case by case enhanced complaint handling procedures for the customer with level 4-5 risk profile should address any other possible irregularities in the distribution of the LB-related Constellation Notes to customers with higher risk tolerance under DBSHK investment profiling system;
  • DBSHK has undertaken to conduct an independent review of its distribution systems and controls to ensure that distribution of unlisted structured products to customers is appropriate in the future;
  • the agreement will bring the case to an appropriate end for the benefit of DBSHK and its customers;
  • a result like this could not have been achieved through disciplinary action by the SFC against DBSHK and/or its officers and employees, if such action was successful; and
  • this outcome will guide other distributors of LB Constellation Notes in resolving complaints from customers who purchased them.

The SFC and the HKMA consider that DBSHK's resolution scheme is reasonable and appropriate in light of their regulatory concerns and the agreement is in the public interest.

In view of the resolution scheme, the SFC will not take further enforcement action against DBSHK and its employees in relation to the distribution of LB- related Constellation Notes save for any acts of dishonesty, fraud, deception or conduct that is criminal in nature. The HKMA also informed DBSHK that it is not its intention to take enforcement action against DBSHK in relation to LB-related Constellation Notes cases that involve low risk customers who accept the offer.

"This agreement provides an outcome to all customers who bought LB-related Constellation Notes from DBSHK and will serve as useful guidance for other banks and intermediaries who also sold this product in the resolution of complaints from lower risk customers," the SFC's Chief Executive Officer, Mr Martin Wheatley said.

"Giving investment advice to customers requires a great deal of skill and professionalism. The SFC's experience in the investigation of LB-related structured products has underlined the value of the SFC's Code of Conduct as the guide for what is important. Knowing the product, understanding the customer and giving clear, accurate information to the customer are key components that will not only ensure the customer's interests are paramount but will also protect the selling intermediary," he added.

"The SFC is determined to reduce the risk of mis-selling in our market. Resolutions like this reinforce the high cost to everyone if we don't get this right in the future," Mr Wheatley said.

"The HKMA welcomes the resolution scheme which is considered to be appropriate and reasonable. It is a practical solution taking into account all the circumstances and is in the interest of investors," Deputy Chief Executive of the HKMA, Mr Arthur Yuen said.

Securities and Futures Commission
Hong Kong Monetary Authority
14 July 2010



  1. DBSHK is a registered institution under the Securities and Futures Ordinance (SFO) to carry on business in Type 1 (dealing in securities), Type 4 (advising on securities), Type 6 (advising on corporate finance), and Type 9 (asset management) regulated activities.
  2. The Constellation Notes were issued by Constellation Investment Ltd and arranged by DBS Bank Ltd, an associated entity of DBSHK. Between 2004 and 2007, DBSHK distributed about 77 series of Constellation Notes denominated in HK$ or US$ to the Hong Kong public.

    Among the Constellation Notes, series 34-37, 43-46, 55-58, 59-62, 63-66, 67-70, 71-74 and 78-81, were credit linked notes having Lehman Brothers as one of the credit reference entities. DBSHK distributed the LB-related Constellation Notes to approximately 3,400 customer accounts in approximately 4,380 transactions involving about $1,316 million.

    After Lehman Brothers filed for bankruptcy protection in September 2008, DBS Bank Ltd announced that the LB-related Constellation Notes, which were subject to the Lehman Brothers credit event, had become worthless.

    One of the key elements of Constellation Notes was that investors who bought them essentially took on the risk that none of the credit reference entities, including Lehman Brothers, would suffer a credit event, like bankruptcy. In return for taking on this risk, DBS Bank Ltd paid those investors a premium over the term of the Constellation Notes. If there was no credit event for any of the credit reference entities at the end of the Notes' term, investors would get back their investment principal. On the other hand, if there was a credit event, investors would receive the so called "Credit Event Redemption Amount" which was equal to the value of Lehman Brother's reference debt obligation that traded close to zero after Lehman Brothers filed for bankruptcy. This is what happened when Lehman Brothers filed for bankruptcy protection in the U.S.A.
  3. In the distribution of the LB-related Constellation Notes, DBSHK by way of its investment profile questionnaires categorised its customers into five levels of investment profile, i.e. level 1 = conservative, level 2 = moderate, level 3 = balanced, level 4 = growth, and level 5 = aggressive.

    On the product side, DBSHK assigned risk rating to the investment products it distributed on a scale of one to five, i.e. level 1 = low risk, level 2 = low to medium risk, level 3 = medium risk, level 4 = medium to high risk, and level 5 = high risk.

    DBSHK considered an investment product to be suitable for a customer if the product risk rating was less than or equal to the customer's level of investment profile.
  4. The calculation of the interest is based on the full notional amount of each low risk customer's investment in the LB-related Constellation Notes using interest rates actually paid by DBSHK on a 12 month fixed term deposit, which are the highest rates across different maturities for fixed term deposits, for the period between the date of issue of the relevant LB-related Constellation Notes and today's date. DBSHK has calculated that the difference between the coupon amount already paid to each low risk customer and the interest payable on the notional amount is approximately $13 million.
  5. The enhanced complaints-handling procedures were designed by the SFC to ensure that an intensive review is conducted by DBSHK into relevant transactions by high risk customers to ensure complaints are resolved in a fair and reasonable manner. The enhanced process is the same one that was implemented in the Minibond Agreement.
  6. Please follow this link for a set of questions and answers about the proposed resolution scheme by DBSHK.
  7. For enquiries, please contact:

    Securities and Futures Commission
    Ernest Kong at 2840 9335 or Jonathan Li at 2283 6808

    Hong Kong Monetary Authority
    Anissa Wong at 2878 1802 or Natalie Wu at 2878 8246
Last revision date: 1 August 2011
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