Asian local currency bond trading portal, Bonds in Asia is facing extinction thanks to the intransigence of one of its shareholders. The bond trading platform stopped trading yesterday, and many traders have been wondering what is going on.
The Hong Kong regulator, the HKMA is also said to be wondering what has happened to the Hong Kong based company that as recently as March had 15% of the local bond market turnover. With Hong Kong scarcely able to deal with another PR blow after a 2003 barrage of bad news it wil be sensitive to the issue and will probably come down hard on the bank that is set to force the platform's closure.
The institution in question is one of six major shareholders in Bonds in Asia and on Friday exercised a right of veto that existed in the original shareholders agreement (signed by original shareholders - HSBC and Citigroup) to block the sale of a majority stake in the platform to a technology-related investor who was willing to inject the requisite capital.
The need to bring in a new investor was necessitated in part by the SARS crisis that hit Asia. As of March, the platform was going well in Hong Kong and was seeking to sign up local banks in Singapore. It was also set to launch a Taiwan business, and looking at establishing a G3 business.
After beginning trading in earnest one year earlier, it had captured 15% of Hong Kong volumes, and had become a favoured means of conducting business thanks to the anonymity it offered bond traders. It had put about $48 billion worth of trades through its system.
However, of the six shareholders, one was less active in Hong Kong (for regulatory reasons) and was upset that the Singapore platform was not moving as fast as the Hong Kong one. Given this fact it resented paying the monthly charge that all shareholders bore and made it clear it would like to be bought out by the other five shareholders.
The six main shareholders are: BNP Paribas, Citigroup, CSFB, Deutsche, HSBC, and HkEx.
This acrimonious situation was made worse as SARS hit and by May and June Bonds in Asia was hitting a cashflow problem. Volumes were affected and with so many banks setting up back-up emergency trading rooms it suffered from not being able to install its service in these new locations (such as Kowloon).
The discussions with new investors were hampered by SARS too, since no one could travel to Hong Kong or were willing to see senior management elsewhere.
Meanwhile the protests by the single disgruntled shareholder became louder and finally when a deal was brought to all the shareholders last Friday, egos came into play. The five other shareholders felt confident the disgruntled individual at the firm in question would agree to the terms. Instead, the individual (a trader) had scoured through the original shareholders agreement and realised there was a right of veto for all major shareholders over situations involving new shareholders.
Four nights last week, the shareholders convened meetings to patch things up.
Everyone assumed - in spite of the intransigence of the single party - that a deal could be done. But brinksmanship went too far, as the other five shareholders failed to size up their opponent until it was too late. Indeed, with so much bad blood spilled in the previous months, the individual from this institution used Friday's vote to veto the deal - and minus the cash injection it would bring - consign Bonds in Asia to closure, an event that will probably happen by Friday unless some semblance of sanity intervenes.
Adding a twist to this bizarre tale is the fact that no one in true seniority at any of the shareholdings firms has been around to intervene because they have either been constantly travelling, or on holiday. The vacuum this has left, created a situation whereby in 10 days the descent into chaos was prompt.
The fact that none of the shareholders had committed more than $5 million to investing in Bonds in Asia probably also meant that this was not the highest priority on many of the firm's radar screens.
However, as it escalates into a further embarassment to Hong Kong as a financial centre, some pointed questions look sure to emerge. Indeed, as senior figures gradually return from holiday, a post-mortem on why a individuals of limited seniority were able to wreck a trading system may prove interesting.
For the key individual who exercised the right of veto (did his bosses know?) they could prove even more interesting times.