M8A – Collective Investment Scheme II

Monetary Association of Singapore(MAS) had implemented two more modules namely M8A – Collective Investment Scheme II and M9A -Life Insurance & Investment-linked Policies II. MAS requires existing Financial Advisors to pass these modules latest by 1st July 2013.

I took my M8A on the 3rd Jan 2012 and was lucky to pass on my first attempt. I had initially thought that the difficulties I faced in preparing for this paper was either because I was the 1st in my company to take the exam and cannot seek any help or I was the 1st few in the nation to take and there are no past exam samples to try. But it proved that the difficulties in being the 1st to clear this paper in my company and one of the first few in the country to pass was that what I had studied and what I believed were different.

M8A is about structured products, swaps, hedge funds and other more complex investment products. I believe most of these products served a purpose in creating a more vibrant market. There are also some products which I think that should never exist regardless who is the targeted investor.

These are the products that caused the property crunch in US, the Lehman Brothers Bond to fail and almost causing some countries to collapse. On e such product is the swaps and it mainly transfer a third party risk to someone else.

For e.g. Ali lends Bala some money but Ali is worry that Bala has a possibility of default so he can buy a ‘Credit-default swap”(CDS) from a third party for a premium, Charlie. A CDS acts like an insurance such that if Bala defaults then Charlie will pay Ali.  Ali thinks he is well-cover because he will get the money back either from Bala or Charlie so he lend more money out to others than he would normally will do. It looks like a perfect plan! Ali gets the loan covered, Bala gets the money he needed and Charlie gets a profit for covering the loan.

But it turns into a nightmare when Bala also borrows from David and David also bought a CDS also from Charlie. In most cases, Charlie may not even know he is covering Bala for Ali and Charlie. When Bala goes bottom up. Charlie did not realise he is covering Bala for both Ali and Charlie.   He had expected to pay only either Ali or Charlie but not both at the same time so he lacks the funds to pay both of them so he goes bottom up too. Ali and Charlie did not receive the money from Charlie and both goes bottom up as well.

In my humble opinion, the logical thing to do when we are over-expose to certain risk is to avoid the risk and not to transfer the risk i.e. if Ali thinks Bala will default, he will not even lend the money. These risks are finally transferred to investors in one way or another.  I am comfortable with these products and I do not subject my client’s to such risk. You may ask why are these products available if they are so lousy? Why would anyone develop such a product? My answer would be  because the fat cats issue products base on what they can get out of it & never give a damn how they can get out of it 🙂