Toward A Theory of Bubble Economics

In our recent article for the Lincoln Institute of Land Policy, we calculate the changes in real estate prices needed to trigger an economic crisis. For China, we find that a 30% real estate price drop should bring economic growth to a complete stand-still.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2785503

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More importantly, we describe a model which takes into account economic phenomenon which only occur during the collapse of a bubble. To calibrate our model, we data from real estate price collapses from other large economies.

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Solar Company Finance and the Financial Services Development Council’s Business Plan

 Taken from: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2495259

What can the Financial Services Development Council do to encourage the development of solar securitisation financial services? Throughout this paper, we have argued for five roles for Financial Services Development Council — assuming the Council becomes the private company it has always intended to become.[1] First, it can set up and maintain a Mosaic-like website. Second, the Council can help syndicate local English-language versions of sites like Seeking Alpha (HK) and Motley Fool (HK). Third, it can set up a harmonised webcasting platform like the NASDAQ offers so internet users can see investor day presentations, earning calls, annual meetings and other presentations online. Fourth, it can help underwrite the Bauhinia solar fund (which sells pooled solar assets) and participate in the origination of other solar-backed securities. Fifth, it can maintain a database about disputes involving asset-backed securities (and particularly solar-backed ones). These revenue-generating activities supplement its normal role, providing advice on the development of Hong Kong’s financial services sector.

 

The FSDC should provide public goods which make solar securitisation possible

 

The Financial Services Development Council (FSDC) represents the organisation best placed to provide many of the public goods needed for the development of a solar-securitisation centre in Hong Kong. Promoting sunrise industries – and the securitisation of photovoltaic assets and liabilities in particular – represents a public good in three ways. First, once a vibrant market for solar asset securitisations exists, private market actors will face lower costs in establishing their own services. Second, information disclosure represents both a first-mover disadvantage and an experience good (service). Third, investments in English-language services can help reduce switching costs as current local (non-international) financial institutions target ASEAN, US and EU markets. Initial funding for the Council helps pay for initial costs that would be unprofitable for private sector actors to pay in the short-run, but which profit all parties in the longer-run.

 

 

Establishing and updating the web portal about investments in solar assets

 

Why can’t Hong Kong copy Mosaic? Mosaic has emerged as the result of a public-private partnership.[2] In the text, we described how displaying asset-backed securities the way Mosaic does can help deepen Hong Kong’s solar securities markets and make investments safer. The Financial Services Development Council — through a Secretariat — could help crowd-in investments for asset-backed securities by setting up a Mosaic-HK as a pilot project.[3] Like Mosaic (and other similar sites), the site can list Mainland solar asset (and liability) securities on offer once the Financial Secretary’s Office pushes through the regulatory framework needed for their offer.[4] The site can show advertisements – both “persuasive” and “informative” (to the extent allowed by law). The site can also charge serious investors for accessing information on a premium basis not visible to the general public. Work on this activity would likely be a part-time job. Once the software is up and running and initial projects are identified and displayed, the site should take care of itself. Specialist staff would need to address complex issues that arise, like tax issues, whether a particular asset can be listed, and so forth. Figure A2 provides the initial budget for this activity.[5]

Figure A2: Example Budget Plan for Solar Web Portal

 

Item Estimated Number Amount

(HKD)

Totals

(HKD)

Revenue      
Project listings 80 listings $10,000 $800,000
Number advertisements 450 ads $2,000 $900,000
Investor registrations 750 regist. $500 $375,000
     Sub-total     $2,075,000
Expenses      
Project staff 40 days $5,000 $200,000
Due diligence and specialised staff 20 days $10,000 $200,000
     Sub-total     $400,000
Expected annual gain     $1,675,000

 

The Financial Services Development Council has a particular role to play in setting up a Mosaic-copy cat. First, its contacts allow it to source these projects and offer them on a non-discriminatory basis to both institutional and retail investors. Second, the Council would have more leverage (prestige) than a local company if negotiating with a company like the California-based Mosaic for rights to use the trade name. Third, because this project does not require a full person (and won’t generate significant profits), the activity should be done by the quasi-public sector.

 

Syndicating data to third-party users (like Yahoo) and developing online infomediaries

 

A vibrant market for information can help promote the liquidity of solar-backed securities, as well as a range of other securities. Yet, Hong Kong’s financial sector lacks far behind in producing data usable by investors and others. A simple search on Yahoo Finance, Google Finance, and even paid services like Reuter’s Eikon produces far less information about Hong Kong’s companies (and asset-backed securities!) than for their US or UK counterparts. By making initial investments in developing platforms like Seeking Alpha or Yahoo Finance, the Financial Services Development Council can help crowd-in other market actors. Unlike markets for rice or shoes, markets for information goods become deeper and more profitable as they become more widespread.

 

The economics of establishing a top-tier infomediary echo those of creating a Mosaic-like platform. Figure A3 shows a back-of-the-envelope estimate of the relevant costs and benefits (revenues) of providing information about security prices and investor talk-chat services like Seeking Alpha. The business model shown in the figure differs from the Mosaic-clone site in its scope. The wide scope of this service can help crowd-in demand for solar-backed assets as well as other assets.

 

 

 

Figure A3: Creating English-Language Infomediaries Generates about HKD$14 million

 

Item Number Amount

(HKD)

Totals

(HKD)

Revenue
Paid content 600 placements $25,000 $15,000,000
Pay of click ads 450,000 clicks $0.1 $45,000
Commissions on referrals for analyst reports etc. 700 referrals $2,500 $1,750,000
     Sub-total     $16,795,000
Expenses
Project staff 250 days $5,000/day $1,250,000
Data purchase plans 365 days $10,000/day $3,650,000
     Sub-total     $4,900,000
Expected annual gain     $11,895,000

 

The Financial Services Development Council’s Secretariat could sign syndication agreements with the relevant data and platform providers in order to get these services off the ground. Seeking Alpha only has a US-focused service (so far). The Council could sign a licensing agreement to use the name and HTML code (giving the site its look-and feel). The Council could also enter into a similar agreement with Yahoo (and possibly Google) to set up English-language Yahoo Finance and Google Finance sites with data fed from the Hong Kong Stock Exchange, HKMA and SFC. Similar agreements with the Exchange, HKMA and SFC would need to obtain access to such information in the first place.

 

Working with the Hong Kong Stock Exchange on webcast syndications

 

Webcasts represent an important way that investors (institutional and retail) can interact with the companies they invest in. They also help ensure that institutional investors do not have access to privileged information – as webcasts provide investors of all incomes and locations the same chance to hear the same information. Corporate-IR.net – the platform that many companies use to put their webcasts online – ranks 2,280 out of all websites in the US (and 7,770 in the world).[6] Nasdaq OMX – which offers corporate services like webcasting – ranks 5,640 in the US and 12,315 in the world.[7] Nasdaq OMX’s technology segment earned about $400 million in revenue in 2013 – sufficient revenues if a Hong Kong copycat earned even half of that amount.

 

The Financial Services Development Council can work with local companies and service providers in three ways. First, the Council’s Secretariat — through its participation in a limited liability company – can start offering rudimentary webcasting with simultaneous English-language translation in one central location.[8] Second, the Council can generate content as well as simply act as an intermediary. Indeed, having a Mosaic-like portal, an arrangement with a service-provider like Yahoo for an English version of its Hong Kong finance site, and its own propriety content can develop such information markets. We do not have enough information to cost out this option.

 

Underwriting the Bauhinia Solar Investment Fund and other securities

 

Asset-backed securities sales in Hong Kong require public investment in order to jump-start this market. As we have shown, securitisations remain low in Hong Kong – and many of the structured products existing in the market focus on speculative (rather than productive) investment. The Financial Services Development Council could work with a financial institution like HSBC (or another) to securitise assets and liabilities of these organisations.

 

By bearing most of the expenses in the first underwriting of the securities we propose in this paper, the Council could also dictate the structure and targets of these financial services. At present, Hong Kong’s financial institutions might be “locked in” to their existing profitable segments. By moving first, the FSDC can sort out the regulatory and market issues of offering solar-backed securities – making marginal market entry less expensive (and thus more profitable). After the Council oversees the first successful securitisations, their marketing and sale, the Council would stop this activity. In that way, the Council does not crowd-out private market actors.

 

Mainland solar companies hold enough assets and liabilities to create a vibrant market for asset-backed securities in Hong Kong. As we have previously showed, the value of these assets and liabilities come to about $90 million. If financial institutions can generate 1% on the value of these securities in commissions, revenue from this activity would come to about $900,000 (before expenses). In all likelihood, expenses would completely dissipate these revenues. However, the security could be advertised on web portals and in other venue – deepening the market for these services.

 

Maintaining the database about sunrise industry disputes

 

Disputes represent the way that laws and institutions develop.[9] As we described in the main paper, without public knowledge about these disputes (and the outcome of these disputes), sunrise industries have difficulty developing. Public knowledge about disputes in the solar energy sector will have three impacts.[10] First, a database about these disputes will show how the industry is developing. Second, it will help assure solar companies and investors that an active mechanism is in place for resolving disputes – thus encouraging participation in solar company securitised assets and liabilities. Third, the collection of these disputes (and their solutions) will help create a type of jurisprudence which never arrives at the courts. Legal scholars and analysts can analyse the types of disputes occurring – and propose policies which resolve the underlying factors causing the disputes in the first place. Naturally, the exact information disclosed would need to be agreed with potential users of the system in the first place.

 

The FSDC can offer three products aimed at promoting the dissemination of information about conflicts in the solar securitisation industry. First, it can help collect such information in a database it could charge money to access. The Council could work with the Financial Dispute Resolution Centre (FDRC) on ways of encouraging people to complain. Such assistance to the FSRC Public assistance can help attract attention to the Council’s information products. If the Council is allowed to participate financially in the Centre’s profits, sending business to it could also help its bottom line. Second, the Council can sell this information to infomediaries like Westlaw or Lexis-Nexis. Naturally, the information sold would only be what the disputing parties agree to. Third, the market may be big enough to support revenue earned from sessions at Hong Kong’s various investors and compliance conferences. The Council can help find speakers, participants and “sub-contract” sessions on solar-industry development and dispute resolution. Revenues from this area – while probably barely recovering costs – would probably also help attract attention to the Council’s other information offerings.

 

Serve as an anchor for Sunrise Industries Promotion Policy

 

Part of the Financial Services Development Council’s work would consist of promoting certain public policies. The Council needs to earn profits to survive. Yet, as a public-private partnership, the Council could lobby for market-friendly policies. We have previously argued that the Council should be a public body – with the ability to raise revenue (and without a bail-out guarantee by the Government). What policymaking functions would the Council have in the areas of solar-backed securitisation? Frankel provides 9 suggestions for reforming securitisation markets in general.[11] We provide these suggestions below – explaining what the Council can do to address this policy area.

 

  1. Provide loan-level information that investors, ratings agencies and regulators can

use to evaluate collateral and its expected economic performance, both at pool

underwriting and continuously over the life of a securitization.

 

If the Council helps find money Hong Kong versions of a Mosaic, Yahoo finance and other information intermediaries, these intermediaries could provide such information. We show in Figure 50 what such information might look like. We describe in Appendix II the regulations the Council can lobby for — which would require this kind of security-level disclosure.

 

  1. Make deal documents for all asset-backed securities and structured finance

securities publicly available to market participants and regulators.

 

Ditto (see 1 above).

 

  1. Develop, for each asset class, standard pooling and servicing agreements with model representations and warranties as a non-waivable industry minimum legal standard.

 

The Council would have a role to play in such stardardised securitisation documents. As we argue in the main paper, the US represents a very heterogeneous securitisation market. In theory, Hong Kong financial institutions could even set up the international template for such agreements — with leadership from the Council.

 

  1. Develop clear standard definitions for securitization markets

 

By encouraging all securitised assets to appear online (and by encouraging public discussion of these products in fora like a Seeking Alpha-HK), the Council could encourage the market to create such definitions. All asset and liability-backed securities appearing on these websites would clearly comprise the market. Thus, instead of sitting in an Ivy-Tower and dreaming up a definition using legal theory, the Council’s information products could encourage markets to develop these definitions for themselves.

 

  1. Directly address conflicts of interest of servicers that have economic interests

adverse to those of investors, by imposing direct fiduciary duties to investors and/or

mandatory separation of those economic interests, and standardize servicer accounting and reporting for restructuring, modification or work-out of collateral assets.

 

The Council has two roles. First, the Council would lobby for disclosing such conflicts of interest (using rules which we propose in Appendix II). Second, the Council would encourage the development of the infomediaries (like Mosaic-HK) where conflict of interest declarations could appear along side the offer of the securities themselves.

 

  1. Just as the US Trust Indenture Act of 1939 requires the appointment of a suitably

independent and qualified trustee to act for the benefit of holders of corporate debt

securities, Hong Kong model securitization agreements could contain substantive provisions to protect asset-backed security holders.

 

The Council could encourage the development of these provisions through legal advice to the SFC (as we describe in Appendix II). With vibrant and critical discussion of individual securities on websites like a Seeking Alpha-HK or Motley Fool-HK, such provisions would become less important. Market actors themselves could police the managers of securitisation trusts. Economic incentives would far more

 

  1. Asset-backed securities should be explicitly made subject to private right of action

provisions of anti-fraud statutes in securities law and to appropriate Sarbanes-Oxley-like disclosures and controls.

 

The Council could take the lead in gathering opinions from market actors (both in Hong Kong and abroad) as well as providing a forum for debate/discussion. The Minibond scandal shows the way government activity can work with (and substitute for) private right of action.

 

  1. Certain asset-backed securities could be simplified and standardized so as to

encourage increased trading in the secondary market on venues, such as exchanges, where trading prices are more visible to investors and regulators.

 

The Council can encourage the sharing of information (through the websites it helps set up) which makes such exchange-based trading efficient. The Council – through setting up a Mosaic-HK like website and encouraging the legal changes which allow for its operation — can also help create new exchanges.

 

  1. Ratings agencies need to use loan-level data in their initial ratings and to update

their assumptions and ratings as market conditions evolve and collateral performance is reported.

 

The Council’s work on developing infomediaries would help supplement the problematic rating agencies ratings. These websites would also contain information and debate about the assumptions and information the rating agencies use to arrive at their rankings. Many critical articles appear on Motley Fool, Seeking Alpha, and other websites of rating agencies’ reports. The Council can encourage such analysis — without necessarily participating in it itself.

 

Conclusion

 

The Financial Services Development Council can expect to make almost US$5 million in profits from the activities we describe in this appendix. These funds show that the Council can promote the development of a sunrise securitisation market while still making a profit. Without the Council’s participation, these activities seem highly unlikely to develop. Using the Council also fits with the “contingency” approach we describe in the paper — by finding a need in Hong Kong’s financial markets and addressing it at a profit.

Appendix II: Regulatory Provisions Implementing a Sunrise Industries Promotion Policy

 

In recent years, many financial centres have focused on modifying their law to encourage the development of new and innovative industries. The US had its JOBS Act – focusing narrowly on new and innovative industries. The UK’s Financial Services and Markets Act (FSMA) establishes a principles-based approach to regulation – letting markets rather than financial law take the lead. Hong Kong’s Financial Secretary has convened a Task Force looking at how to make Hong Kong’s financial services more internationally competitive.[12] However, no serious policy initiatives have aimed at promoting returns – as well as managing risks – of Hong Kong’s financial services sector.

 

In this paper, we have argued for several policies aimed at promoting the securitisation of assets used in sunrise industries like solar energy. First, we have argued for a pro-active policy promulgated by the Financial Secretary’s Office for encouraging the development of Hong Kong as a securitisation centre. Second, we have argued for improving the availability of public information about stocks, bonds and asset-back securities offered and traded. Third, we have argued for relaxing SFC requirements – especially governing funding portals and around the “informative” advertising of asset-backed securities in sunrise industries. Fourth, we have argued for increasing information about disputes and about the 2006 Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters and sharing information about financial disputes. To keep our appendix short, we omit discussing the final point.

 

Outlines of the Policy

 

The Financial Secretary’s Office needs to promulgate an administrative order (either formally or informally) putting in place provisions of a Sunrise Industries Promotion Policy (SIPP).[13] Numerous academic authors argue that for a special prudential regulatory scheme for renewable energy – and in our case specifically solar investments.[14] Moreover, the Financial Secretary’s Office (through such a Policy) should coordinate the activity of the HKMA and SFC for several reasons. First, these two institutions are sub-ordinate to the Financial Secretary’s Office. Because of their risk adverse nature, they will not take action on the reform-minded proposals we have outlined in our paper without specific instructions from the Government.[15] Second, the cross-institutional nature of the policy requires the participation of the Financial Services Development Council, the Hong Kong Stock Exchange, private sector and the regulators (HKMA and SFC). Only the Financial Secretary’s Office has the legitimacy and authority to engage in such a broad-sweeping activity. The HKMA and SFC have extensive delegated rulemaking powers. Thus, only an administratively superiour organisation – like the Financial Secretary’s Office – can engage in such coordination.

 

The Sunrise Industries Promotion Policy should consist of broad instructions to agencies “depending” on the Financial Secretary’s Office. Figure A4 shows the major areas contained in the policy document.[16] The Financial Secretary’s Office should define a Hong Kong equivalent to the US JOBS Act’s “emerging growth companies” – called sunrise industry companies in Hong Kong (and defined differently). Such a definition would focus attention on these companies – and serve as a pilot for broader coverage. In keeping with the pilot, the easiest thing for the Financial Secretary’s Office to do is use the list from the Mainland’s 12th Five Year Plan. Such a list makes sense because many of the assets listed in Hong Kong (do and would) come from the Mainland. Second, the Financial Secretary’s Office can instruct the HKMA to modify the Central Moneymarkets Unit webpage. The instruction would likely contain instructions on the types of materials on the site and a requirement that independent evaluation find the site “good” or “outstanding”.[17]

 

Several other instructions can promote the rapid development of the Sunrise Industries Promotion Program. First, the Financial Secretary’s Office can require the HKMA to issue a guideline to all broker-dealers and asset managers requiring the electronic submission of asset trades in XBRL. This would allow the HKMA (and later by infomediaries) to report bond and securitised-asset and securitised-liability trades in real time. Again, if the HKMA reports such trades on its Moneymarkets site (and keeping with a “contingency” rather than “structuralist” approach), rulemaking should require “good” or “outstanding” assessments of any HKMA platform by a random sample of the portal’s users (or preferably an independent evaluation service).[18] Second, the Financial Secretary’s Office can request that the SFC develop a consolidated Rulebook on Sunrise Industries. The Rulebook provide rules for funding portals looking to become automated trading services and/or recognized exchange companies. The Rulebook would also provide new rules encouraging “informative” advertising and other provisions which we describe in the main body of our paper. Third, the policy would request the HKMA, SFC, and the Financial Dispute Resolution Centre to work with Mainland counterparts – as well as report information about disputes brought before the Centre. Because of the international nature of this work, the Financial Secretary has a key “diplomatic” role to play. Finally, the policy can encourage the Financial Services Development Council and the regulators (HKMA and SFC in particular) to work with the Department of Justice on improving the performance of the 2006 Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters. The Financial Secretary represents a political, as well as administrative, office. By using the standard channels for building and communicating political support for the policy, the Financial Secretary’s Office can help encourage participation by local banks and other financial services actors.

 

HKMA Statutory Guideline on Debt and Securities-Backed Instrument Reporting

 

Reporting on securities in Hong Kong follows the regulators’ current “structuralist” approach to regulation, rather than the “contingency” one we have argued for throughout this paper.[19] The HKMA’s current system for reporting trades is complex and poorly covers asset-backed securities like solar. Ideally, broker-dealers and asset managers should go to one page where they put in trades (or upload trades in a batch from their firm’s software) and even see the latest trade information.[20] Figure A5 shows the webpage for the trade repository – in effect Hong Kong’s central resource for reporting asset trades. Instead of providing a simple platform (and accompanying Guideline), the trade repository pages provide links to literally thousands of pages of manuals and instructions.[21] The products currently covered consist of interest rate derivatives and foreign exchange derivatives. The trade repository will require a complete redesign to deal with asset-backed securities like solar-backed bonds and pooled liabilities.

 

Figure A5: Trade Repository Layout Follows the HKMA’s Needs Rather than Market Participants’

 

The HKMA’s Trade Repository represents an important first step in gathering data about “hard to reach” trades. Its complicated approach follows the HKMA’s corporate style. As the SFC takes over some of the HKMA’s functions in this area, reporting may become simpler.

 

A Guideline governing a debt and securities-backed instrument reporting scheme would cover the general principles we describe in our paper. In some cases, the Guideline can consolidate the voluminous instructions currently provided on the trade repository website. In most cases, the Guideline would need to create new rules for reporting trades in securitised assets and liabilities (both in primary and secondary markets). Except in the case of government and corporate debt, stocks, bonds, and standard derivatives, the Guideline would define who, what, where, when and how to report on these assets.[22] Also, as shown in Figure A6, he Rulebook would also encourage the distribution of such data to third-party infomediaries. The Guideline would also need to cover how data gets imported from the CMU, CCASS and other exchanges (as relevant). The Hong Kong Stock Exchange’s own query tool for finding information about exchange-traded securities is very clumsy. The Trade Repository should not duplicate information contained elsewhere — unless it presents that information better (more clearly).

 

 

 

 

 

 

 

 

 

 

 

The relevant working groups on drafting the Guideline will need to tackle a number of issues. First, when registering securities, how to isolate the “bespoke” market from securities destined to be traded on markets. Originators make some asset-backed securities only for a particular buyer (or group of buyers). These securities are sold – but not meant for resale. In addition, as we have previously stated, the HKMA should hire an outside consulting firm to conduct an assessment of the Trade Repository. Figure A7 shows the terms of reference for such an assignment. Following the market-driven approach to regulation (what we call “contingency-based”), such an assessment should focus on users – rather than the needs of the HKMA. Clearly, having a centralised source of information about solar-backed securities can help deepen Hong Kong’s markets. An assessment which focuses on final users can only help in achieving that objective. A similar terms of reference can govern a similar assessment of the Moneymarket Unit’s website reporting bond trades.[23]

 

Figure A7: Model Terms of Reference for Independent Assessment of the Trade Repository Interface

 

The Consultant shall conduct a 20 day assessment of the HKMA’s Trade Repository page. The assessment shall focus on the user-friendliness, interactivity and “marketing mindset” of the repository. The assessment must be primarily based on current and potential users of the site and must rely on hard-data (such as surveys, interviews, references to the site and so forth).

 

Parts of the assessment may include:

 

  1. a) “look and feel” including how easy it is to use the site, its graphical interfaces, and use by a range of actors,
  2. b) explanatory materials – including their user-friendliness, clarity, helpfulness, and so forth.
  3. c) users’ perceptions of the current design – including complaints they have about any part of the service and their suggestions for improving the site,

 

As a market-friendliness study, the assessors shall not consider aspects like website security, integration with the HKMA’s other systems, the practicality of proposals in light of existing regulations and technical possibilities, difficulties in coordinating with the SFC, and other HKMA capacities. The assessor may have access to the website during the course of the assessment using a guest account which can not post data or access sensitive data on live trades. The HKMA also reserves the right to conduct the engagement in a way which minimises the possibility of using data for the consultant’s personal benefit.

 

Individuals and companies interested in the assignment should submit a short (1 page or less) description how they would conduct the assignment, their budget for this work, and CV(s).

 

 

SFC Code on the Electronic Offer of Asset-Backed Securities in Sunrise Industries

 

SFC work enabling market platforms for trading solar-backed securities can promote the development sunrise industry financing more generally. In the US, reforms aimed at improving reporting of securities transactions and allowing for greater participation in asset-backed securities investments was couched in terms of crowdfunding. Yet, as we described already, there is no reason why Mosaic needs to focus only on crowdfunding (and relatively small investments). One could just as easily imagine Mosaic containing sections for institutional investors and presenting very large investments in the same simple and clear way it presents small investments in single solar panel investments. While the US JOBS Act may inspire changes in SFC rules governing the offer of asset-backed securities, the Act needs not serve as a rigid model.

 

The new SFC Code governing investments in asset-backed securities (like solar-backed assets) focuses primarily on promoting “informative” internet advertising (solicitation) as well as the offer and sale of these investments. The Code would achieve two objectives — defining rules of funding platforms and for websites that advertise solar-backed (and other sunrise industry) securities, without offering them. Figure A8 shows the outlines of such a Code. We have provided detailed explanations about how to change existing SFC rulemaking in the main body of our paper.

 

 

Figure A8: Outline of the “Sunrise Industries Code”

 

Section 1:          Objectives

Section 2:          Definitions (Funding Portal, Crowdfunding Portal, Informative                                                       Advertising, Sunrise Industry)

Section 3:          Provisions related to the registration of automated trading services and/or                                     recognized exchange companies conforming to the definition of a                                          crowdsourcing portal

Section 4:          Types of warnings required on portals

Section 5:          Substantive information required on portals and about portals

Section 6:          Guidelines for advertising asset-backed securities

Section 7:          Definition of “qualified investors”

Section 8:          SFC database on funding portals and asset-backed securities

Section 9:          Regulations of portal infomediaries

 

 

Each section would enable Mosaic-like websites (and the websites like Seeking Alpha-HK which make these websites more useful) to function effectively in Hong Kong. Section 1 — in keeping with Hong Kong’s principles-based regulatory structure — would define the Code’s objectives. As a general principle, securitised solar assets and liabilities should be advertised as clearly as shoes, computers and things consumers can actually tough. Section 2 would define “funding portals” in the context of the Securities and Futures Ordinance’s current definitions of “automated trading services” and/or “recognized exchange companies”. The section might also provide definitions for the infomediary sites — like a Seeking Alpha-HK – where investors would discuss publicly listed asset-backed securities. Section 4, in keeping with the SFC’s desire to provide warnings, would define the types of warnings that funding portals and infomediaries offering securitised assets and liabilities, would need to post online. Section 5, following the US example, would describe the kinds of information a Mosaic-HK and Seeking Alpha-HK would need to include. Section 6 would define the relaxed requirements for listing and advertising approved securities under the scheme we describe in our main paper. The Code would also provide guidance for providing “informative” rather than simply “persuasive” advertising. We have described the other sections in the main body of our paper.

 

Conclusion

 

Hong Kong’s financial institutions will not develop deep and innovative securitised products without help from the Government. In the previous appendix, we described the activities the Financial Services Development Council could undertake to “crowd-in” the development of market infrastructure needed to trade across borders securitised products. In this appendix, we describe the activities the Financial Secretary’s Office needs to undertake. Much of such work consists of cheer-leading the HKMA and SFC. The HKMA (and SFC) should revise the way it collects and reports data on securitised transactions. The SFC should create rules which allow for the operation of funding platforms and securitised products infomediaries.

 

 

 

 

 

[1] The original terms of reference for the Council envisioned it as a limited company with its own funding. See Cha et al., Preparatory Task Force’s Report on the Setting Up of a Financial Services Development Council, 2012, available online.

[2] The US Department of Energy put up $2 million and private investors put up about $3.4 million in first round funding. Unlike in the case we propose, Mosiac emerged mostly from private initiative. In Hong Kong’s case, we propose the public-part of the public-private partnership to go first.

[3] In Arner et al. (2014) we advocate converting the Council into a public body –albeit one still about to earn a profit. The Council would need a Secretariat in order to undertake much of the work we propose in that paper, and in the current paper you are now reading.

[4] Appendix II describes in more detail the complementary regulatory changes needed for legal and successful offer of many of the activities in this section.

[5] Most of the benefits accrue to Hong Kong’s banks — who then pay back part of these benefits as taxes. Yet, we do not calculate the social impacts (costs and benefits) of these activities – as such calculations would likely excite controversy and detract attention away from the business model itself. Thus, the benefits we estimate certainly and largely under-estimate the value of such a service.

[6] See Alexa.com at http://www.alexa.com/siteinfo/corporate-ir.net

[7] http://www.alexa.com/siteinfo/shareholder.com

[8] In practice, these events may be available only through the companies’ websites. Nevertheless, the FSDC can host the webcasts – either on its own site or through a company it participates in. We do not have an opinion about whether the FSDC should offer these services as a private company, exist as a public company while holding shares in a private company, or go it alone. Different models for the FSDC have been proposed.

[9] Readers familiar with the “conflict resolution” school of New Institutional Economics will recognise that institutions develop as the accretion of resolutions to previous conflicts. Law (and the institutions it governs) changes as the equilibrium outcome of these conflicts.

[10] We do not specify the amount of information disclosed or other details about such a disclosure regime in the main body of this paper. We leave it to regulators and the markets to work this out.

[11] See Alison Frankel, Reforming the Asset-Backed Securities Market, 2010, available online.

[12] We review these policies in Arner et. al. (2014). We refer the reader to this study so as not to repeat these arguments here.

[13] The Policy serves as an analogue to the US JOBS Act — with its focus on defining Emerging Growth Companies. We describe the Act and its special regime for sunrise industry companies in the main body of our paper.

[14] See Panagiotis Delimatsis, Promoting Renewable Energy Through Adaptive Prudential Regulation in Financial Services, TILEC DP 2010-017, 2010, available online.

[15] We describe the administrative dependence of the SFC and HKMA in Arner et al. (2014). To briefly recap, the HMKA is subordinate to the Financial Secretary. The SFC is highly attentive (though technically independent).

[16] Unlike other jurisdictions, Hong Kong’s financial law relies heavily on principles-based regulation. As such, the Financial Secretary’s Office probably needs not (and wants not) to issue very specific instructions. See Bryane Michael, Does Objectives-Based Financial Regulation Imply A Rethink of Legislatively Mandated Economic Regulation? The Case of Hong Kong and Twin Peaks Financial Sector Regulation, available online.

[17] Such a requirement allows the Financial Secretary’s Office to delegate decisions over the form, layout, structure and content of the site – while ensuring its market-oriented approach. Such a market-based approach toward defining the site also conforms with the “contingency-based” approach we argue for in the main paper. A “structuralist” view of financial law (a view we disagree with) would require the Financial Secretary’s Office to promulgate specific instructions about how the Moneymarkets website should look like.

[18] Their website is located at: https://www.cmu.org.hk/cmupbb_ws/eng/page/wmp0100/wmp010001.aspx

[19] The introduction to the HKMA’s Trade Repository webpage provides the general attitude toward such reporting. Following a structuralist mindset of adopting best practice, the HKMA notes, “the reform measures adopted by the international regulatory community include requiring all OTC derivatives transactions be reported to trade repositories (TRs) and all standardised OTC derivatives transactions be cleared at central counterparty (CCP) clearing facilities.” A contingency approach to regulation might start this text by saying, “In order to provide for more efficient markets and trading for investors and companies, the HKMA offers this Trade Repository service.”

[20] In practice, traders do not report on trades (given incentives for misreporting). Intermediaries (like superiors or clerical stuff) and independent staff make, confirm and report on such trades.

[21] These instructions revolve around reporting trades (as one major group) and matching/confirmation.

[22] The Central Moneymarkets Unit of the HKMA provides electronic clearing, settlement, and custodian services for Hong Kong dollar-debt instruments. The Hong Kong Stock Exchange’s Central Clearing and Settlement System (CCASS) provides clearing, settlement, and depository services for exchange-traded securities.

[23] We have already discussed the ways reporting about bond trades in Hong Kong can be improved. No rulemaking needs to be done to change the way the Moneymakers Unit reports about bond trades – as the Unit can engage in such work without an administrative diktat.

Calculating Political Support for Financial Law Reform

Did you ever write large-scale amendments to law — only to find your boss (or the Parliament) strike down all your hard work? The POLITICAL ECONOMIC ANALYSIS of financial law can help. Such an analysis consists of 5 steps:

1. identify the various groups affected by your legal draft,

2. estimate the financial impact on these groups (you will need to make some assumptions, like members are all homogeneous), etc.

3. assume that any positive change leads to votes for (and any negative change for votes against)

4. for executive rather than legislative analyses (looking at incentives for an agency head for example of head of ministry if administratively assigned), focus on the groups the agency serves.

5. start with a simple headcount measure and majority rule win (so if 2 groups [A and B] such that A=20 members, B=40 members, and benefit to each group of a policy results in A=$20 and loss to each B=-$4, then the policy FAIL politically (as 40 exceeds 20), but PASSES the design test (the policy generates a surplus of $240 dollar adjusted votes). In this situation, your goal consists of reorganising the Bill (Proposed Rulemaking) to get votes.

These are two illustrations from a recent paper of mine:

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Drafting Financial Law to Become a World Class International Financial Centre

What should places like Malta, Moscow, Istanbul, Dubai and Kuala Lumpur do to rise on the Y/Zen rankings? In this presentation, I review my experiences advising international financial centres. I use lots of concrete examples, showing how to write laws using data as a guide. I refer to peer reviewed research, so this isn’t just some guy’s random musings.