THERE are three important errors of omission in the prospectuses of linked notes. These do not apply to other structured products like structured deposits.

1) The issuers took money from customers in five ways:

(i) mark-ups in the initial pricing,

(ii) early surrender charges,

(iii) market-making margins,

(iv) initial commissions and

(v) management fees.

How high were the charges? No one knows. They were not disclosed in the prospectus.

Key question: Would disclosure have made a difference in the purchase decision?

2) Risk of the reference entity defaulting:

Take DBS' High Notes 5. Its prospectus shows that one reference entity, like Lehman Brothers, has a 0.75 chance of defaulting during the product's five-year life.

The proper way to evaluate the risk, however, is to add default risk for all 8 reference entities. I did. It becomes a whopping 7.9 per cent.

It means the risk of a total loss in High Notes 5 is nearly 8 per cent.

Key question: Would investors have bought if they had known this?

3) Undisclosed risk of the underlying assets:

Linked notes invest about 90 per cent of the money in bonds, including a risky type called CDOs. The prospectus, however, says only that the issuer purchased CDOs rated AA or higher.

Nowhere does it mention that CDO ratings are unique. They are not comparable to standard credit ratings.

For example, bonds rated Baa have an average default rate of 2.2 per cent. CDO bonds with the same Baa rating have a 24 per cent default rate.

Key question: Would disclosure have made a difference in the purchase decision?

This article was first published in The New Paper on October 27, 2008.