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Options tip stockbroker over edge - The Australian Financial Review
by Joyce Moullakis, Anthony and Macdonald and Sarah Thompson
Mid-sized BBY placed in administration
AIMS Financial Chairman George Wang’s rescue bid unravelled on Sunday.
Photo: Louise Kennerley
Stockbroker BBY was placed into voluntary administration on Monday morning, reverberating through the financial markets an leaving clients and its partner financial firms in limbo.
BBY could not post sufficient capital to cover the options trades of its clients, triggering an unstoppable chain of events over the past week. A proportion of capital needs to be put aside as a buffer for equities and options trading by stockbrokers.
BBY accounts for 1.1 per cent of total trading volumes across the ASX and Chi-X Australia, is among the largest home-grown independent broking firms and manages IPOs.
Administrators were called in after an 11th-hour rescue deal led by AIMS Financial chairman George Wang unravelled late on Sunday night. AIMS was going to tip in capital and secure up to 80 per cent of BBY.
The decision on Monday had a far-reaching impact for several trading firms that are not market participants and use BBY to clear trades.
Many of those, including Quay Equities, were in talks to find an alternative clearer on Monday, as options clients were issued a 1.30pm deadline to ensure that rival firms in the process of taking their positions provided the Australian Securities Exchange with their details ahead of positions being transferred or closed on Wednesday.
BBY’s lender, St George, gave BBY an intraday loan to meet its exchange-trade-option margin requirement but the firm was unable to stump up the $6 million to re-pay the bank, sources told The Australian Financial Review.
BBY subsequently had restrictions imposed by the ASX over its options clearing business after it fell short of capital requirements. The restrictions spurred the closing of BBY’s options clearing unit, which accounts for almost 8 per cent of that market, and clients and the firm was seeking to transfer positions elsewhere.
The BBY voluntary administration comes after CIMB closed its Australian operations and Japan’s Nomura drastically scaled back its local equities business, shrinking the size of the local industry.
BBY may join the likes of MF Global as having failed as a financial markets trading business if the company is unable to be salvaged. In the wake of the global financial crisis, Tricom Equities survived a number of near-death experiences and was in eventually rebranded Stonebridge and acquired by BBY in 2011.
The Australian Securities and Investments Commission released a statement saying it was in “close contact” with the ASX on BBY, and noting the regulator would further consider BBY’s compliance with laws on governance, disclosure and conduct.
“Under the law, including the Corporations Act and Market Integrity Rules, licensees such as stockbrokers must keep client money separate from their own,” it said.
BBY executive chairman Glenn Rosewall, son of tennis legend Ken Rosewall who was a non-executive director of BBY, told employees of the decision on Monday morning.
“I regret to inform staff that despite exhaustive efforts by the BBY board to secure investors to inject additional capital into BBY we have been unsuccessful. Consequently, we had no option last night but to appoint administrators from KPMG to manage the firm, effective immediately. Ian Hall and Stephen Vaughan from KPMG have been appointed as voluntary administrators of BBY and a number of its subsidiaries.
St George appointed receivers PPB and a meeting of creditors is scheduled for May 27.
BBY’s 170 local employees were briefed on a matter on Monday, but few questions were answered in detail, and uncertainty remained about payments to contractors and whether a transaction with interested parties would be secured.
“They weren’t able to answer anything… it’s just wait and see,” one employee said on the basis of anonymity. “The concern is also what is happening with clients, and there are a few parties that are interested (in buying BBY).”
In an email to market participants the ASX said: “ASX Limited and ASX Clear Pty Limited have suspended the participation of BBY Limited with effect from 18 May 2015 as a consequence of the appointment of receivers and administrators to the company.”
If other firms that clear options are to take the positions they must also ensure they meet the capital requirements. Last week BBY was talking to clearers including Pershing and the Commonwealth Bank about transferring the positions.
If clients lose money as a result of the failure of BBY, they may look to draw on the National Guarantee Fund, which was established to compensate the clients of brokers forced to default.