Risky business
Investors who used accumulator structures
to buy cheap shares are paying the price
By Naomi Martig
hen global equity markets
plunged last year, many
investors succumbed to
a selling frenzy. The sudden market
downturn has left even some of Hong
Kong’s wealthiest tycoons and listed
companies badly burned, as many were
making investments through the use of
“accumulator” structures, which allowed
them to purchase shares or currencies at
an originally discounted price.
One example was CITIC Pacific
Ltd., a Hong Kong-listed conglomerate
that is 29 percent owned by CITIC
Group, a state-owned investment
company. CITIC Pacific reported an
HK$808 million loss in October as
a result of an accumulator bet on the
Australian dollar, which slid in value
against the U.S. dollar as financial
markets seized up. The company later
announced a further HK$14.7 billion
mark-to-market loss on those currency
transactions and the total losses were
more than three times its HK$4.4 billion
profits for the first six months of 2008.
Market analysts say prior to the
financial fallout, CITIC Pacific had
planted accumulator land mines in
foreign exchange trade, many of which
failed to include a floor for losses.
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May 2009
The Hong Kong securities regulator
has estimated that US$23 billion
worth of these contracts were sold,
The Economist reported. Because the
contracts are private, it’s hard to tell
the exact amount of money lost, but
Hong Kong tycoons who reportedly
suffered losses included Robert Kuok,
head of Kerry Holdings, Joseph Lau,
chairman of Chinese Estates Holdings,
Lee Shau-kee, who controls Henderson
Land, and Wu Man-san, chairman of
Hopewell Holdings, according to
Next magazine.
J. Wong, a CPA who specializes
in financial and risk assessment, is
well aware of the risks of accumulator
contracts and will be giving a CPD
seminar on the topic this month.
“Accumulator contracts are not very
stable. They drive down the market
and the result can be horrendous,” says
Wong, who has more than 10 years’
financial and risk assessment experience
for leading international banks.
A typical accumulator contract
involves an investor agreeing to purchase
a fixed number of shares per day at a
pre-agreed price. That price is usually
set at 10 to 20 percent below the market
price of the shares at the time the
contract was made. The contract usually
lasts three to 12 months.
If the price of the stock or currency
rises slightly or stays flat, the investor
can benefit from being able to snap it
up at a discount. But if the share price
rises above a pre-specified level known as
the “knock-out price” – normally 2 to 5
percent above the original market price –
then the contract effectively ends.
The extreme downside to an
accumulator contract is when the market
falls below the discounted price of the
shares and the investor is still obligated
to buy them at the pre-set price. “Say,
for example, that I’m obliged to buy a
company’s shares at HK$40.5, but it’s
now only worth HK$30 in the market.
Under the accumulator contract, I am
required to buy those shares, which clearly
results in an ongoing loss when the
markets remain down,” Wong explains.
In short, an accumulator contract
offers an investor limited gains when
the market is going strong, but
Photo: AP Photo
Larry Yung resigned as chairman
of CITIC Pacific Ltd. in April amid a
foreign exchange investment scandal
that cost the company billions of
Hong Kong dollars and prompted an
investigation by the Commercial Crime
Bureau and the Hong Kong Securities
and Futures Commission.
potentially massive losses when share
prices start plunging. “The notion that
the market will be flat is ridiculous,
because the market will always move
and you will eventually pay,” he says.
So why did so many companies
and tycoons still end up investing in
such volatile contracts? Wong says
accumulators are appealing when the
market is stable and they can offer
significant returns. Most investors are
betting that the market will not decline
enough to seriously damage their
investment. But nobody can predict
where the markets are heading and as
the global economy has demonstrated
during the last six months, such bets can
be extremely risky.
Indeed, over the past 12 months,
China and Hong Kong share prices
have fallen around 60 percent and 40
percent respectively in terms of local
currency, MSNBC.com reported.
Wong says a plunge in share prices
is not only disastrous for investors with
accumulator contracts, but they have a
vicious cycle effect on the market.
“When investors have to continue
buying shares at a price that is above
its current worth, they can only take
so much before they have to cut their
losses and get out of the game. So
they sell their shares, all of them, and
in doing so, further drive down the
prices. Of course, other investors with
accumulator contracts are eventually
forced to sell out in similar fashion.
“This snowball effect has helped
create much of the volatility that we are
seeing today in the markets. There’s a
reason why an accumulator contract
is called, ‘I’ll-kill-you-later contracts,’”
he says.
In South Korea, a number of
companies have filed a collective lawsuit
against a number of banks, including
Standard Chartered and Citibank Corp.,
for damages caused by accumulator
contracts, MSNBC.com reported. In
Taiwan, WSF (Asia) Ltd., an offshore
trading company, sued Chinatrust
Commercial Bank for allegedly
misleading the company into setting up
two euro- and Australian dollar-linked
accumulator contracts in October.
The company demanded termination
of the contracts and compensation of
US$143,000 from the bank, according
to Ming Pao.
Wong advises accountants to pay
extra attention to ensure the contracts
they help draft are not accumulators.
“These days there are a number of
different names used to describe
accumulator contracts. Some call it an
‘FX target redemption swap,’ others call
it currency derivative contracts,” he says.
Wong believes accountants who
know the ins and outs of how accumulator
contracts work can help their clients
and companies better deal with the
complex investment issues amid today’s
volatile markets.
Understanding accumulators for
Time: 9:30 a.m. – 1:00 p.m.
Date: 16 May
Language: Cantonese
Speaker: J. Wong
Programme code: W090516
May 2009
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