Browsing by Author "Lee, Hock Beng"

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Open Access
Dialogic regulation for OTC derivatives in Dodd-Frank: a suggested legal principle
(Te Herenga Waka—Victoria University of Wellington, 2016) Lee, Hock Beng
The purpose of this paper is to consider whether the regulatory measures on over the counter (OTC) derivatives under Article VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 (Dodd-Frank), introduced in the United States of America are able to address the problems posed by the said OTC derivatives instruments. The financial instruments engineered by OTC derivatives prior to the financial crisis of 2008 were and are still widely deployed for the purported purpose of hedging against risk. Examples of such risks are: fluctuation in currency rates or commodity prices or default risk in loans payment. However, such financial instruments are also employed for speculation on the fluctuation of the currency rates or the commodity prices or any other indices in the financial market. Its purpose is for higher financial yield. It is this latter aspect of the trade that OTC derivatives are more popular than exchange traded (ET) derivatives because the former is not subjected to regulatory control. They are therefore more flexible and tailored to the needs of the customers. And the costs of entering into OTC derivatives are less than ET derivatives because the latter are subjected to administrative and margins costs imposed by the exchanges. The popularity of the OTC derivatives market with the investors and speculators coupled with increasing new financial products - embedded with OTC derivatives elements, resulted in OTC derivatives to be traded at a phenomenally high level at the time of the crisis. According to Bruce Carruthers, in the United States, in 1986 the total value of ET derivatives was more than OTC derivatives. By 2008 the total value of OTC derivatives had become ten times greater than the ET derivatives even though the latter had increased by one hundred fold. Lynn Stout provided the numbers in the growth of OTC derivatives as follows: according to the Bank for International Settlements, at the end of 1999 the total notional value of OTC derivatives was approximately US$88 trillion. By 2008 the OTC market value had a value of about US$600 trillion. Major financial institutions and banks held a disproportionate amount of such instruments and their value could not be determined. They became a liability as opposed to instruments which provide insurance to risk. These factors which relate to the excesses of the trade, amongst others, brought about a systematic risk to the financial market.
Open Access
The English courts' view of financial derivatives
(Te Herenga Waka—Victoria University of Wellington, 2016) Lee, Hock Beng
In 1997 the International Swaps and Derivatives Association (ISDA) sought legal opinion from an English barrister, Robin Potts QC, on whether a financial transaction known as credit default swap (CDS) was likened to be an insurance or wager. His opinion was it is neither insurance nor wager. The concern of ISDA is telling as it bespeaks the ambiguity of the purpose of CDS and derivative transactions in general - whether they are designed for hedging or speculation. But the predominant concern is their speculative nature. If their sole purpose is for speculation, they are opened to the charge that their purpose is wagering. It is inevitable that such a legal problem would find its way to the courts for determination. In this paper I shall consider the decisions of the English courts on derivatives based on some of the decided cases and discuss the implications of the decisions on the subject. Interestingly, also drawing on the common law courts for an answer on the subject is Lynn Stout. Her view is that the common law rule against contracts for differences is the most prudent way to distinguish hedging from speculation in derivatives. I shall therefore consider her view on the subject.
Open Access
The Yam Seng case and its aftermath: Possible directions of good faith in contract law
(Te Herenga Waka—Victoria University of Wellington, 2016) Lee, Hock Beng
The purpose of this paper is to consider the influence of the Yam Seng case on the reception of good faith in English contract law. The Yam Seng case is a landmark case because the principle of good faith is considered eminently suitable for implication in the performance of a contract. Whilst the principle of good faith is considered a fundamental principle in the civil law system in Europe, it has not been so accepted in English common law. In the Yam Seng case good faith is fully discussed for the purpose of including it in English contract law. The concluding remark of the Judge is that ‘the traditional English hostility towards a doctrine of good faith in the performance of contracts, to the extent that it still persists, is misplaced.’ The case is considered by Hugh Collins as an overt reference to the notion of good faith and fair dealing as the third ground for implied terms under Article 6:102 of the Principles of European Contract Law (PECL). In other words, the Yam Seng case is relevant in European contract law. The case is also perceived to have established a firmed basis towards reception of good faith; the Chief Justice of Singapore, Sundaresh Menon, CJ who was comparing the Singapore courts response to good faith with the English courts, said that in the light of the Yam Seng case, ‘the English courts seem poised to take on a more absolute position.'