Renée Bonorchis
10 October 2008
Johannesburg — RAND Merchant Bank (RMB) moved quickly yesterday to say it was not complicit in the collapse of derivatives trading firm Dealstream and would co-operate fully with the Financial Services Board (FSB) throughout any investigations into the matter.
RMB knew three weeks ahead of Dealstream's collapse that the brokerage was in a cash flow crunch and was unable to meet its margin calls. A margin is like putting down surety - a broker using a bank to clear its trades will give that bank a certain amount of cash to cover any shortfalls that might occur as trading goes on.
But one source said RMB might have stood to gain the most by allowing Dealstream to fall short of its margins in September and not reporting Dealstream's imminent collapse.
Dealstream used RMB to clear its trades in single stock futures on the JSE. One person has contended that a fair portion of Dealstream's investments were in commodity stocks. If so, this would have paid off handsomely for the brokerage until the bottom fell out of the market in June this year.
But RMB sidestepped these contentions when it said yesterday that it was not "common" to immediately place a customer in default following a breach. The bank said in the three weeks ahead of Dealstream's demise, the brokerage had managed to raise more money and had been up to date with its margins at one time during that period. "In general, a customer is placed in default only as a last resort," RMB said.
Dealstream went under owing a number of companies a lot of money. RMB was owed R214,4m while clients Vox Telecom and Control Instruments also lost weighty sums.
RMB had been left holding the futures positions of Dealstream worth more than R1,14bn. But despite volatile, mostly depressed markets, RMB had already managed to sell the portfolio down to R742m. But it was still overseeing significant holdings in Vox and Simmer and Jack Mines, and both shares have been hammered in the past month. Being able to close out Dealstream's positions without losses might prove impossible in the short term.
But as the FSB this week pointed a finger in RMB's direction, many investors have pointed fingers at the JSE and the FSB. Both parties knew Dealstream was dealing in contracts for difference (CFDs). These financial instru-ments are over the counter and not guaranteed. As Allan Thomson, head of derivatives trading at the JSE, said, "It's like two guys taking a bet in a pub."
An investor who goes into CFDs takes on all the risk inherent in the entity they are taking the bet with and any other people that the entity may be trading with.
While CFDs are not regulated nor guaranteed by the JSE, Dealstream's single stock futures contracts were overseen by the JSE. The JSE was aware Dealstream was dealing in CFDs and was not being entirely clear about this with its clients. The stock exchange had been sending letters to Dealstream, but to no avail.
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