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Rogue traders in Hungary
The EUR 1 bn scandal: history and lessons
Young financial market 150th anniversary of Hungarian stock exchange (2014) 25 years of modern capital markets (re-opening in 1990) Low general financial literacy (OECD, 2011/2012) Higher theoretical financial knowledge lower skills in practice No family budgeting More than half of the 10 million population doesn’t have any
savings and only ~5% put their money in investment products
Strong retail investor base at BSE: 25-30% of the equities turnover 40% of the retail flow is done through internet channels They hold 6-8% of the Hungarian listed companies
Young financial market in a few number
8% 9% 9% 9% 7% 5% 4% 4%
52% 52% 53% 52% 49%52% 55% 54%
29% 22%18%
19%27%
32%33%
34%
11% 16%20%
21%
17%
11%8%
7%
0
5
10
15
20
25
30
2008 2009 2010 2011 2012 2013 2014 Q1 2015
Breakdown of domestic investment products held by Hungarian households (values at end of periods, EUR bn)
OtherGovernment bondsMutual fundsShares
Source: NBH
10% 12% 17%
90% 88% 83%
0
5
10
15
20
Q4 2014 Q1 2015 Q2 2015
EUR
bn
Risk appetite of investors (retail and others): proportion of shares in the mutual funds of domestic fund managers
OtherShares
Source: BAMOSZ
BSE’s equity market in numbers: Average daily turnover: EUR 31 m Market capitalization: EUR 15 bn Yearly turnover velocity: ~55%
The importance of the stock exchange
0%
10%
20%
30%
40%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Equities' market capitalisation in proportion of the yearly Hungarian GDP
Source: KSH, BSE
Hungary’s place in the world (2014)
Source: World Bank, ECB, OECD, WFE 2014
-
20 000
40 000
60 000
80 000
100 000
120 000
0% 50% 100% 150% 200% 250%
GDP
per c
apita
(USD
)
Market Cap / GDP
CH
LU
US
NOR
AUS
CAN
UK
NL
JPN
B
FR
ESP
IRLDE
AUT
IT
GRSLO
MEXPL
TUR
CZSK
RO
HU
Saving structures (Q1 2014)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Other
Life and pensions insurance
Mutual fund
Quoted Shares
Other securities
Cash and deposit
Source: ECB
Scandal chronology 24 February – suspension of the license of Buda-Cash and its management is
taken over by National Bank of Hungary (NBH, the market regulator) 4 March – NBH revokes the license of Buda-Cash and initiates its liquidation 6 March – BSE terminates the exchange membership of Buda-Cash and NBH
partially suspends the license of Hungária Értékpapír 10 March – NBH partially suspends the license of Quaestor Értékpapír 16 April – New proposals (draft bill) to enhance Investor Protection Fund (e.g.
increased amount of compensation to EUR 100,000) 17 April – NBH revokes the license and BSE terminates the membership of
Quaestor Értékpapír 20 April – NBH revokes the license and BSE terminates the exchange membership
of Hungária Értékpapír 1 June – deadline of extraordinary contribution (EUR 4 m) to BEVA (Investor
Protection Fund) by members 5 June – deadline for victims of Quaestor to submit application for extraordinary
compensation (QKKA special fund) 23 June – amended version of Investor Protection Fund approved by the Parliament
Summary of the 3 brokerage houses
50
36
8 8 10 1
0
20
40
60
EU
R m
Assets Equity Assets Equity Assets Equity
Ranks by turnover at BSE’s markets
Equity Equity futures Index futures
FX futures
8 16 - 14 8 1
9 4 4 - 8 -
EUR 300 m EUR 700 m EUR 10 m
Value of assets ”stolen”
Number of victims
32,000 15,000 5,000
How could it happen? Why now? NBH overtook duties of Hungarian Financial Supervisory
Authority in 2013 New methodology introduced by NBH: banking supervisory
practice implemented
Spillover effects of Swiss National Bank’s decision (January) Immediate cause Domino effect
Wrong business policies and illegal activities
3 different cases revealed
Buda-Cash •EUR 200 bn of collateral disappeared •False trade confirmations to the clients for 10-15 years •Buda-Cash cleverly moved all money and other assets to show match with the theoretically correct numbers •In practice no one knows exactly what happened and where the missing money is
Quaestor •Promise of high returns on its corporate bonds •Illegal bond issuances (EUR 500 m) •Quaestor group had a diversified business portfolio the management financed long term investments from short term sources •In addition: corporate bonds were refund guaranteed •No one knows where the money is (similar to BC)
Hungária •Mysterious fraud with a lot of open question •It was a little, independent brokerage house with smaller damage (max EUR 10 m) •The firm has signed short term loan contracts (max 1 year maturity) with the clients for the last 20 years: 15-20% (or more) returns promised Hungária paid its clients from the payments of the others
Case of Buda-Cash
CCP CSD NBH
Mr. Karácsony Shadow back office
Clients Back office
Collateral
DRB
What it looked like on the surface…
How it really worked – the dark truth
execution
(fake) confirmations
orders
confirmation
Trade info
Case of Quaestor
NBH
Clients
CSD
Authorised Bonds
Unauthorised Bonds
EUR 200m EUR 500m
Quaestor Hrurira Ltd. (own equity only EUR 33k)
Mandate to organize bond issuance (no guarantee from Quaestor!)
PERMISSION
OFFICIALLY REGISTERED
IPF Indemnification for both types
Moral hazard?
Nobody cares if it’s under a Quaestor named firm
What’s happening now? Amended version of Investor Protection Fund (23rd June) to
enhance investor protection and facilitate the ongoing compensation processes The amount of compensation is raised to EUR 100,000 (5x raise) The operational management will be supported by the National Deposit
Insurance Fund of Hungary Members pay initial contribution + annual contributions + penalties Members may finance these contributions by loan
NBH to launch a new online web service: securities account holders can check their current balances (cash & securities)
Continuous liquidation and assessment of properties/damages Indemnification of victims
Impacts expected Decreased levels of investors’ confidence However, BSE experienced an increased activity of retail investors
(increasing turnover during the 1st trimester, while market share of retail investors went up to 30% from 23%) Fear of independent brokerage houses: retail investors may shift to bank backed
brokerage services (no sign of this at the moment) Tightened investor protection rules may enhance investors’ confidence
The way of indemnification process and the raised level of Investor Protection Fund may trigger moral hazard problems
More frequent on-site supervisions will be led by the NBH Consolidation of the brokerage industry Or worse: domestic brokerage houses may relocate their headquarters to
foreign countries because of the overregulated Hungarian market the excessive need of bigger compliance staff additional payment obligations to the Investor Protection Fund