Did it have to get this bad?

And could the JSE have done more?

Finweek English Edition - - Creating Wealth - SHAUN HAR­RIS shaunh@fin­week.co.za

WHEN­EVER THERE’S se­ri­ous fi­nan­cial fall­out – as with the cur­rent rout over Sin­gle Stock Fu­tures (SSFs) – a blame game ensues. So far, most crit­i­cism has been lev­elled at stock­broking firms that wrote the prod­ucts (es­sen­tially, fu­tures con­tracts) for clients and banks that acted as the clear­ings agents.

Per­haps the crit­i­cism, at least most of it, is jus­ti­fied. But what about the role of the JSE? Some broking firms feel they’ve had to face the flak while the JSE should have played a greater role in try­ing to pre­vent the build up that led to in­vestors be­ing un­able to meet mar­gins calls.

As it turns out, the JSE was very ac­tive. But much of it was be­hind the scenes as they called in and dis­cussed po­si­tions that looked po­ten­tially danger­ous with the bro­ker and the clear­ing mem­ber (the bank).

“We be­gan to see some of those po­si­tions early in 2008,” says Al­lan Thom­son, di­rec­tor of trad­ing and head of de­riv­a­tives trad­ing at the JSE. “Large po­si­tions had been taken and we knew if there were a se­ri­ous down­turn in the mar­ket, the holder would be in trou­ble.”

Thom­son says meet­ings were held with bro­kers and banks in such cases. “We had a watch list. We dis­cussed the risk. But at that stage in­vestors were meet­ing their mar­gin pay­ments. We couldn’t force them to close a po­si­tion – even if we were con­cerned about it – if they were meet­ing their fi­nan­cial obli­ga­tions.”

It seems much of the dam­age was caused by Cor­tex Se­cu­ri­ties ( Fin­week , 12 Fe­bru­ary). Absa took the fi­nan­cial hit as the clear­ing mem­ber. But there were ear­lier ca­su­al­ties the pub­lic was largely un­aware of.

Says Thom­son: “Lehman Broth­ers de­faulted last year. They were our sec­ond big­gest client. Po­si­tions were closed out in 48 hours – and not a sin­gle mem­ber of the pub­lic lost money.” Thom­son be­lieves that was an ex­am­ple of the mar­ket “work­ing as it should”.

When de­faults be­gan on mar­gin calls late last year, the JSE had to reg­u­late. Thom­son says: “Ear­lier, we had em­bar­goed SSF on small cap shares. Then in some cases we raised mar­gins.” That’s been ques­tioned, with claims that by rais­ing mar­gins as in­vestors be­gan to fail to meet mar­gin calls, the JSE was ef­fec­tively push­ing them over the edge.

“We didn’t take a blan­ket ap­proach to rais­ing mar­gins. It was done on a case-by-case ba­sis. We met the de­fault­ing mem­ber. If pru­dent, the mar­gin was raised. In cases where the in­vestor was in se­ri­ous fi­nan­cial dis­tress and rais­ing the mar­gin would have just closed them out ear­lier we left the mar­gin where it was.”

It’s also been asked where the JSE’s risk con­trol was through­out the SSF saga. Says Thom­son: “We don’t im­pose our risk con­trols on clear­ing mem­bers. The banks should know the risk. But as soon as we be­came aware of large risky po­si­tions we spoke to the clear­ing mem­bers any­way.” Thom­son says most of the large po­si­tions un­der de­fault were closed in De­cem­ber. “There could be more. But all the big po­si­tions seem out of the mar­ket now.”

He wryly notes that if the mar­ket had kept go­ing up last year, the me­dia would prob­a­bly be car­ry­ing all the suc­cess sto­ries now. “I think it’s the old syn­drome of hu­man greed. The mar­ket was go­ing up and some peo­ple wanted to make even more money through geared po­si­tions.”

It also looks as if a sin­gle firm did most of the rep­u­ta­tional dam­age to the broking in­dus­try. And a sin­gle fi­nan­cial ad­viser ag­gres­sively push­ing clients into SSFs.

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