RMB sets record straight

2008-10-09 19:23

Johannesburg - Despite making a recommendation that JSE-listed Rand Merchant Bank (RMB) should be investigated for its role in the collapse of online derivates trader Dealstream, the Financial Services Board (FSB) did not meet with representatives from the bank.

"Over the period, they requested some data from us regarding Dealstream trades, but they never met with us," said RMB CEO Alan Pullinger in an interview with

The FSB made a recommendation that RMB's role in the Dealstream collapse be further investigated. The regulator said that Dealstream had been in default of its margin call with RMB for three weeks from the 2 September.

Pullinger also pointed out that Dealstream had not been in default of its margin for the entire period. He said: "On the ninth [of September], Dealstream had fully remedied its open positions and RMB in fact held more margin than was necessary for the open Dealstream positions."

According to Pullinger, market conditions over the following weeks displayed extreme volatility which was to ultimately prove the undoing of Dealstream and when it became evident that the company would not meet its margin call, RMB placed the derivatives trader in default.

RMB has been criticised by the FSB and the public for allowing the positions to remain open over this period time. Pullinger said: "It's a process we follow. It is the same as when a client's cheque bounces, we don't just repossess their house. We meet with the client and assess the problem."

Pullinger is also somewhat bemused by the fact that all the criticism has been piled on RMB pointing out that there were other institutions who were involved in Dealstream's transactions including Investec.

Lessons learnt

"The volatile market conditions of late have taught us as a clearing member a couple of important lessons," said Pullinger.

Among these, he said, RMB would need to look at market volatility around single stock futures (SSFs) as well as concentration of large positions in individual stocks to better assess risk.

One of the ways that clearing members could reduce risk would be to ask for additional margin.

Prior to entering into futures contracts trades, a client is expected to place some 'initial margin' (around 12.5% according to Pullinger) with the JSE. The aim of this is to reduce risk or losses around open positions.

One of the key problems in 'unwinding' these trades that Dealstream held open was concentration in two stocks - AltX-listed telecommunications company Vox Telecom and mining house Simmers & Jack. If RMB had elected to dump all of the stock on the market, they would have decimated the respective companies share prices.

The lesson for RMB, said Pullinger, is that additional margin could be charged when clearing houses find themselves with large concentrated exposure to smaller illiquid shares.

'We didn't sink Vox'

Vox Telecom has seen its share price decimated since confirming that Dealstream held approximately R30m of its cash.

"I don't know what it is about Vox but the punters seem to love it and there are a number of people with exposure to the company in the futures market," said Pullinger.

The company has seen its share price more than halve from 230c to close on Thursday at 105c since September 22 2008 and much of the share price depreciation has been blamed on traders unwinding trades around the Dealstream story.

Pullinger confirmed to that RMB had not been a seller of Vox shares.

He said that currently RMB held R742m in listed equities; approximately 90% of this portfolio comprised Vox and miners Simmer and Jack mines.

Of the remaining portfolio it was roughly split evenly between the two companies.

This gave them a sizeable equity stake in both businesses which was not ideal for RMB. In a Stock Exchange News Service announcement on Thursday RMB, said it would now hold these as strategic long-term stakes.

Pullinger said: "Normally we get to investigate potential businesses before investing in them. Now we've ended up with sizeable stakes in businesses we don't know much about."