Futures pain: Margin not to blame

Johannesburg - A major blowout in the SA single-stock futures (SSF) market that saw Absa take delivery of shares in listed companies totalling R1bn is not the fault of increased margining requirements.

This is according to Absa Group's chief financial officer Jacques Schindehütte. He was responding to Fin24.com enquiries following the default of clients holding large SSF positions in Pinnacle Point Group, Sekunjalo, Blue Financial Services and ConvergeNet.

This resulted in Absa taking a stake in these firms.

Schindehütte said: "Market conditions have changed and riskier stocks need to carry greater margining requirements."

In contrast, directors of JSE-listed companies, including Michelle Krastanov of Pinnacle Point and ConvergeNet and Marius van Tonder of African Dawn have pointed out that increased margin requirements have made SSFs an onerous tool to hold.

In the last 18 months, many directors of JSE-listed companies have thrown their weight behind SSFs as a trading tool. When markets were kind to share prices, many saw SSFs as a way to make large sums of money from upward movements in their share price.

However, when markets turned against them, directors found themselves facing increasingly large margin calls.

When investors takes out SSF positions, they are required to place an "initial margin" on call with SA Futures Exchange (Safex) - simply put, it is a "good faith" deposit against the contract. On top of this, a variation margin is charged which a trader would be expected to pay (or receive depending on which side of the contract they were), when the shares are marked-to-market on a daily basis.

As markets have become increasingly volatile, the initial and variation margin requirements have increased sharply.

According to ConvergeNet directors, who were recently on the wrong side of the margin call, initial margin increased by 420% from October to end-December.

Allan Thomson, the director of trading for the JSE, doesn't agree with the assertion that increased margin requirements are forcing traders into defaults. He points to recent market volatility as one of the main challenges facing institutions trying to price risk in the contracts.

Schindehütte told Fin24.com that Absa had also increased margin requirements on the trades that went into default.

He said: "Margin was adjusted depending on the particular share involved. In the fourth quarter of 2008, certain clients of the client broker [Cortex Securities] defaulted in their obligations to pay variation margin." These defaults forced the closing of the various single-stock future positions and the take-on by Absa of the underlying stocks in December and January.

A large-scale default of this nature has all parties involved in the transaction seriously questioning risk management processes across the board.

This was confirmed by Schindehütte who said: "Absa has intensified its scrutiny of the risk management practices of its non-clearing agents."

- Fin24.com