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Legal showdown with Standard Chartered
WICHIT CHANTANUSORNSIRI & SOMRUEDI BANCHONGDUANG
The SME Bank will refuse to honour payments on a complicated derivative structure taken with Standard Chartered Bank as the state bank considers the original contract to be void, says Somchai Sujjapong, the executive chairman of the SME Bank.
In any case, the dispute is certain to end up in court, pitting the Finance Ministry and the SME Bank against one of the largest foreign banks in the country.
Dr Somchai said that collusion between SME Bank management and ''outside parties'' had resulted in the debt issue contracts being drafted in violation of the SME Bank's board rulings.
In 2006, Standard Chartered Bank (Thai) was mandated to arrange the issue of $300 million in floating-rate certificates of deposit for the SME Bank.
The SME Bank's board, in May 2006, agreed to issue the FRCD, equivalent to 11.4 billion baht, with the condition that a cross-currency swap and interest-rate swap also be taken to reduce foreign exchange and interest rate risks.
The interest-rate swap was to fix funding costs for the SME Bank at no more than 100 basis points over five-year government bond yields.
But the SME Bank's executives failed to comply with the board's ruling, and instead agreed to undertake an exotic interest-rate swap structure that significantly increased the potential risk and liability of the bank in case of market shifts in interest rates.
Dr Somchai said the actual interest-rate swap signed between the SME Bank and Standard Chartered was speculative in nature and in violation of the board's original mandate.
He alleged that the selection process for the FRCD issuer was also skewed, with the entire process distorted by collusion between the SME Bank's management and ''outside parties''.
The swap contract links the SME Bank's interest rate obligations with London interbank offered rates (Libor) under a ''range accrued'' structure.
Dr Somchai said the bank's interest liabilities from March 22 of this year were equal to 2.5 million baht per day, or three billion baht through 2011, assuming that Libor rates continue to stand outside of the range set under the swap contract.
Dr Somchai, who is chairing an investigative committee into the FRCD issue, added that the SME Bank had already notified Standard Chartered that it considered the interest-rate swap void and unenforceable.
The SME Bank has also filed criminal charges and asked the National Counter Corruption Commission to investigate fraud allegations against up to 10 of its executives responsible for the transaction.
Dr Somchai added that the SME bank was paying its interest obligations on the FRCD and fees under the cross-currency swap. But the SME Bank would not honour its obligations under the interest rate swap as it considers the structure void. ''The bank would like to stress that we consider this a legal dis pute, not a financial dispute,'' he added.
''The SME Bank has set provisions against payments for the interest-rate swap in case that the courts order enforcement of the contract.''
The SME Bank actually has already made a 44-million-baht first payment under the interest-rate swap to Standard Chartered, as at the time, officials had neglected to scrutinise the contract and had assumed that the swap was a ''plain-vanilla'' structure rather than an exotic one.
Standard Chartered has since notified the SME Bank of its obligation to pay the second 300-million-baht payment, which the state bank has refused.
Somchai Tantitanawat, an SME Bank executive vice-president, added that the bank had sent a copy of the May 2006 board decision regarding the FRCD issue to Standard Chartered as a reference in drafting the issue contract.
''Under the SME Bank law, management must comply with the board's ruling,'' Mr Somchai added.
He said the FRCD contract signed by the SME Bank's management and Standard Chartered was not sent back to the SME Bank's board for approval.
''[Standard Chartered] should know that the contract must be in compliance with the board ruling. If anything is done beyond the mandate given by the board, then notification must be made to the board,'' Mr Somchai said.
But observers question this argument, as it would appear to be the burden of the SME Bank's executives, not an outside counterparty, to ensure that a contract was in compliance with the bank's board mandate.
Standard Chartered Bank officials denied any allegations of wrongdoing and insisted that the transaction was ''legally valid, binding and enforceable.''
''In recognition of our longstanding relationship with SME Bank, we have continually provided opportunities to SME Bank to restructure the transaction in a way that is legally appropriate. SME Bank has not accepted these opportunities,'' said its spokesperson.
''We are disappointed by SME Banks decision to take the route it has taken today, and with its comments.''
Standard Chartered declined to comment on whether legal proceedings to enforce the contract had been taken.
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