Did it have to get this bad?
And could the JSE have done more?
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.