"I Read BusinessDay": Margin loans: Stockbrokers don’t owe banks a Kobo -Experts
Margin loans: Stockbrokers don’t owe banks a Kobo -Experts
•Incompetent bankers failed to apply margin facility rules
Against the widely circulated claim by some banks and regulators that stockbrokers owe about N180 billion in margin facility loans, it has now come to light that legitimate brokers who engaged in stock trading using margin loans may actually owe the banks nothing.
This is because the banks have access and control to all shares financed with margin facilities and are the sole signatory to all margin accounts through which the brokers got the money in the first place.
Indeed, the margin facility operates like a joint business involving both the banks and the stockbrokers with the brokers contributing between 30 to 40 percent (in some cases 50 percent) of the fund while the banks contribute the balance. Under this arrangement, stockbrokers often lose their contributions in the event of the shares dropping in value.
BusinessDay learnt that some incompetent bankers failed to apply the rules that guide the margin facility arrangement when the value of the shares which were used to collaterise the facilities began to fall.
According to some stockbrokers who spoke to BusinessDay, stockbrokers are supposed to maintain 120 percent coverage at all times to enjoy margin facility and anytime the value goes below 120 percent of the coverage, the bank is empowered by the rules to call for more funds or sell the shares.
In this case, a margin account is regarded as a self liquidating transaction and as such, the banks had all the opportunity to recover their money even as the market was on its way down. It has now become clear that bankers, hedging on the chance that prices would rise again, did not act and watched while the share value continued to erode.
Capital market experts are of the view that lack of knowledge on the modalities of operating margin accounts contributed largely to the problem of margin loans in the banking industry.
However, it was gathered that only IBTC Stanbic Bank, Ecobank and Guaranty Trust Bank (GTBank) understood the basis on which margin account is operated.
“Bankers who lacked the knowledge or for just sheer greed allowed the values of the shares to continuously fall whilst they were speculating on market direction and were unable to sell and recover their money in good time,” one analyst told BusinessDay. Now, the banks believing that they are bigger than the stockbrokers are said to be using all highhanded means and intimidation in the effort to get their money back.
The margin facility arrangement, one broker explained, is such that stockbrokers involved are allowed to just walk away from it as the banks hold all the cards since the share certificates are domiciled with them.
“Margin loans are a self liquidating transaction between banks and stockbrokers. In any bad situation, the stockbroker’s maximum loss is his margin contribution which in some cases in Nigeria ranges between 30 to 40 percent,” a capital market analyst said.
He added that margin transaction was not unique to Nigeria because “it is the same process that has continued to drive Wall Street and other developed markets.”
However, Nigerian banks in their quest to recover margin loans have been breathing down on stockbrokers’ necks and in some cases use security agencies, including the police and officials of the Economic and Financial Crimes Commission (EFCC) to intimidate the stockbrokers and make them pay up.
Indeed, the Securities and Exchange Commission (SEC) is said to have directed stockbroking firms to make provisions for margin loans in their monthly returns to the commission.
Experts, however, observed that this should not happen because banks have sole authority on all margin accounts and could have taken a reasonable decision before the stock market reached its lowest level so far.
It is believed that stockbrokers and banks should return to the table with a view to sort out the grey areas in the respective margin contracts and restore confidence into the system.
Wale Abe, chief executive officer of Financial Markets Dealers Association of Nigeria (FMDA), said the margin loan fault should not be looked at from one side alone. He explained that there was so much money in the system, and that made both stockbrokers and bankers thoughtless in their investment drive.
“The environment was different, nothing of such has been witnessed before, so every body was carried away. In my view every body was culpable”, he said.
According to him, the thing was so good that when foreign investors more akin to risk management and more matured were exiting, local investors filled the gap, buying toxic assets that later became worthless.
Adedotun Adebanjo, an investment analyst with a bank, said banks could not have made a margin call when the market was going up adding that the stockbrokers actually abused the margin account facility.
“The stockbrokers were over using the margin loans especially when the market was going up. When prices are going up, nobody places a call and the margin expands. On the contrary, when the banks eventually placed margin calls, it was the brokers that told them that the market would soon recover. They were busy trading and were not acting as brokers, a broker is not supposed to be a trader at the same time”, he added
Although, stockbrokers are wont to maintain that banks are culpable because they equally advanced funds to their subsidiaries (stockbroking firms) and other officers within the bank such as the treasury departments who were into proprietary trading on behalf of the banks.
“It is important that we separate the stockbroking firms that are owned by banks from the others because they were also given money by these banks and we were trading in the same market where the float is less than 25 percent,” said a senior stockbroker at the stock exchange.
Joseph Okus, a banker who has lost his job as a result of the fallout of the crisis, recalled to BusinessDay how they were forced to collect margin loans by management. His grouse is that some of them are now paying the price while others, especially stockbrokers, appear to be the winners.
Against the widely circulated claim by some banks and regulators that stockbrokers owe about N180 billion in margin facility loans, it has now come to light that legitimate brokers who engaged in stock trading using margin loans may actually owe the banks nothing.
This is because the banks have access and control to all shares financed with margin facilities and are the sole signatory to all margin accounts through which the brokers got the money in the first place.
Indeed, the margin facility operates like a joint business involving both the banks and the stockbrokers with the brokers contributing between 30 to 40 percent (in some cases 50 percent) of the fund while the banks contribute the balance. Under this arrangement, stockbrokers often lose their contributions in the event of the shares dropping in value.
BusinessDay learnt that some incompetent bankers failed to apply the rules that guide the margin facility arrangement when the value of the shares which were used to collaterise the facilities began to fall.
According to some stockbrokers who spoke to BusinessDay, stockbrokers are supposed to maintain 120 percent coverage at all times to enjoy margin facility and anytime the value goes below 120 percent of the coverage, the bank is empowered by the rules to call for more funds or sell the shares.
In this case, a margin account is regarded as a self liquidating transaction and as such, the banks had all the opportunity to recover their money even as the market was on its way down. It has now become clear that bankers, hedging on the chance that prices would rise again, did not act and watched while the share value continued to erode.
Capital market experts are of the view that lack of knowledge on the modalities of operating margin accounts contributed largely to the problem of margin loans in the banking industry.
However, it was gathered that only IBTC Stanbic Bank, Ecobank and Guaranty Trust Bank (GTBank) understood the basis on which margin account is operated.
“Bankers who lacked the knowledge or for just sheer greed allowed the values of the shares to continuously fall whilst they were speculating on market direction and were unable to sell and recover their money in good time,” one analyst told BusinessDay. Now, the banks believing that they are bigger than the stockbrokers are said to be using all highhanded means and intimidation in the effort to get their money back.
The margin facility arrangement, one broker explained, is such that stockbrokers involved are allowed to just walk away from it as the banks hold all the cards since the share certificates are domiciled with them.
“Margin loans are a self liquidating transaction between banks and stockbrokers. In any bad situation, the stockbroker’s maximum loss is his margin contribution which in some cases in Nigeria ranges between 30 to 40 percent,” a capital market analyst said.
He added that margin transaction was not unique to Nigeria because “it is the same process that has continued to drive Wall Street and other developed markets.”
However, Nigerian banks in their quest to recover margin loans have been breathing down on stockbrokers’ necks and in some cases use security agencies, including the police and officials of the Economic and Financial Crimes Commission (EFCC) to intimidate the stockbrokers and make them pay up.
Indeed, the Securities and Exchange Commission (SEC) is said to have directed stockbroking firms to make provisions for margin loans in their monthly returns to the commission.
Experts, however, observed that this should not happen because banks have sole authority on all margin accounts and could have taken a reasonable decision before the stock market reached its lowest level so far.
It is believed that stockbrokers and banks should return to the table with a view to sort out the grey areas in the respective margin contracts and restore confidence into the system.
Wale Abe, chief executive officer of Financial Markets Dealers Association of Nigeria (FMDA), said the margin loan fault should not be looked at from one side alone. He explained that there was so much money in the system, and that made both stockbrokers and bankers thoughtless in their investment drive.
“The environment was different, nothing of such has been witnessed before, so every body was carried away. In my view every body was culpable”, he said.
According to him, the thing was so good that when foreign investors more akin to risk management and more matured were exiting, local investors filled the gap, buying toxic assets that later became worthless.
Adedotun Adebanjo, an investment analyst with a bank, said banks could not have made a margin call when the market was going up adding that the stockbrokers actually abused the margin account facility.
“The stockbrokers were over using the margin loans especially when the market was going up. When prices are going up, nobody places a call and the margin expands. On the contrary, when the banks eventually placed margin calls, it was the brokers that told them that the market would soon recover. They were busy trading and were not acting as brokers, a broker is not supposed to be a trader at the same time”, he added
Although, stockbrokers are wont to maintain that banks are culpable because they equally advanced funds to their subsidiaries (stockbroking firms) and other officers within the bank such as the treasury departments who were into proprietary trading on behalf of the banks.
“It is important that we separate the stockbroking firms that are owned by banks from the others because they were also given money by these banks and we were trading in the same market where the float is less than 25 percent,” said a senior stockbroker at the stock exchange.
Joseph Okus, a banker who has lost his job as a result of the fallout of the crisis, recalled to BusinessDay how they were forced to collect margin loans by management. His grouse is that some of them are now paying the price while others, especially stockbrokers, appear to be the winners.