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Thursday, 10 December 2009

Pledging Shares As Collateral for CFD trades or for Loans?

Read this news on:

Signs of irregularities for Sino Environment first appeared in March this year when it was discovered that their CEO, Sun Jiangrong, had defaulted on his personal loan of S$120 million. This would usually not be a direct problem of the company, but the CEO in this case had pledged his own shares in Sino Environment as collateral for the personal loan.

This was actually a smart way of monetizing one’s own shares without actually selling them. Yet, no disclosure of the pledge of shares was needed to be made to SGX at the point when the loan was taken.

Sun’s shares were subsequently seized and sold off to pay for the loan. This triggered a potential early redemption of the company’s own S$149 million convertible bond, which the company might have problems paying. Auditors expressed concerned on the company’s going concern at this point.


Pledging shares as collateral for CFD trades or loans are a highly sharp, double-edged sword. During good time, the borrowers make tons of money laughing on the way to the banks; but, when times are bad, even they drop their pants also not enough.

Especially, those who pledge shares as collateral for CFD trades, have not seen their coffins yet and they think that their CFD brokers are so kind to them let punt the market without having them to put up hard cash.

Didn't they realize how destructive can pledging shares as collateral can be as shares can plunge more than 50-60% in a single trading day.

Wishing them well!

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