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Securities Lending Industry Distances Self from ANZ-Primebroker Fallout

Posted: 27 Jul 2011

As ANZ Bank prepares to go to court to defend itself against two lawsuits totalling AU$285 million over its decision to call in receivers on securities lending company Primebroker in July 2008, the securities lending industry continues to distance itself from the fallout.

ANZ Bank called in receivers on stock lending company Primebroker in July 2008 after conducting a review of its equity finance business. The review was prompted by the collapse of Opes Prime Stockbroking earlier in 2008. ANZ had provided Opes Prime, Primebroker and Tricom, another failed lending company, with cash that was used for margin loan purposes. Opes Prime was a stockbroker that provided margin loans to clients who put their shares up as collateral for the loan. Opes Prime used a standard securities lending and borrowing agreement as the contract between itself and clients, who were mostly retail individuals and fund managers.

When the results of the so-called Cameron Review came back to ANZ management, the bank closed down its equity finance business and called in receivers on Primebroker. In 2010, Primebroker’s liquidator, BDO, filed suit against ANZ, asking that the claim for receivership be set aside and that AU$86.2 million Primebroker repaid to ANZ be returned. Meanwhile, a second AU$200 million claim funded by Chimaera Capital, which controlled Primebroker, has also been filed. Chimaera Captial claims that ANZ “failed to clear share trades on behalf of Primebroker in three working days, as required by the Australian Securities Exchange. That alleged inaction, coupled with market rumours the company was insolvent, led to a ‘run’ on Primebroker by stockbroking firms,” according to media reports.

ANZ Bank refuse to comment on the ongoing lawsuit, with spokesman Stephen Ries saying that the bank today has changed its approach to securities lending after the Cameron Review.

“We’ve performed a review into securities lending and dealt with all the issue that have arose from that,” he says. “There was a document that was produced about a time that we had a very different management of the ban. We have a different CEO, a different chief risk officer, a different chief of institutional banking and we felt we’ve dealt with all the issues.”

BDO has declined to comment on the ongoing lawsuit as well.

But Australian Securities Lending Association (ASLA) Chair Peter Martin, of State Street, took pains to distance the securities lending industry from the ongoing legal woes ANZ Bank faces.

“Whether it be Opes Prime or the ongoing issues with Chimaera, that does not have any significance on the securities lending side of the things,” he says.

But, Martin says, the securities lending industry has seen a tighter focus on risk management and risk mitigation as a result of experiences during the global financial crisis.

“What you have had, and this goes from the lending clients through to the custodians to the brokers, is much more focus on risk management and risk mitigation,” he says. “It’s not necessarily the agreements that have changed, but more the credit limits, the assessment of counterparty risk and now, more time gets spent on credit analysis. The changes have been that lending agents are less likely to extend lines of credit to the smaller counterparties. … You’re now seeing that the credit department, an independent part of the bank, will refuse to do business with certain counterparties before legal negotiations even begin.”

Martin also noted that while the available pool of securities that Australian beneficial owners have put up for lending has recovered and even increased from pre-financial crisis levels to around AU$200 billion, borrowing has still lagged, with approximately AU$20 billion in securities borrowed at any given time, Data Explorers figures show. Prior to 2008, Martin says ASLA estimates that there was about AU$180 billion in securities out for lend and between AU$75-80 billion borrowed.

“The market hasn’t recovered to its historical highs in terms of transactions,” Martin says. “It’s not that they’re not being borrowed, but it’s more the impact of the high Australian dollar, the fact that the Australian hedge fund market is smaller than pre-GFC and there’s still regulatory risk. Plus the rules in place in Australia around shorting are more onerous than peer markets in Asia, which is directing flows away from Australia to centres like Hong Kong.”

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.