The sale of Penson should usher in caution over concentration risks
Adele Ferguson September 19, 2011 - 12:00AM Advertisement
AUSTRALIA'S biggest third-party clearer for retail stockbrokers and shadow brokers is about to get a new owner after its Dallas-based parent Penson Worldwide hawked it around after getting itself into financial strife by investing in dodgy illiquid bonds.
Penson Worldwide's financial mess and its need to sell its global businesses to reduce debts has created high anxiety for the many brokers that rely on it to clear their trades.
Not surprisingly, it has put the spotlight on Australia's third-party clearing arrangements and the potential systemic risk that has been created by the ASX's decision during the global financial crisis to crack down on brokers, particularly those that self-clear.
Tenders for Penson Worldwide's wholly owned Australian operation, Penson Financial Services, closed on Friday night, attracting bids from the world's leading clearing house Pershing, BNP Paribas, which has been expanding into third-party clearing and settlement globally and private equity operators believed to include Archer Capital and Yarra Capital Partners, Pacific Equity Partners and possibly CVC Asia Pacific.
JPMorgan is handling the tender process but Penson's local boss, Craig Mason, has been trying to structure a management buyout bankrolled by private equity.
Any management buyout would include allocating 10 per cent of the shares to Mason and another 5 per cent to key management.
It is not known how much Penson is worth but its US parent wants its money back, which is estimated to be between $17 million and $20 million.
Penson Australia has net assets of $20 million so any sale would need to be at a minimum of $20 million to enable it to meet its capital obligations to the ASX from January 1. Third-party clearers currently need liquid capital of $10 million but from next year this will double to $20 million.
The decision by Penson Worldwide to sell most of its global operations, including Australia, came after it suffered a massive loss in the June quarter and its credit rating was reduced to junk bond status.
Shareholders dumped the stock, reducing its market capitalisation to $US54 million ($A52 million), leaving hedge funds to punt on its survival. In the past few weeks the stock has gone up and down like a yo-yo, sometimes going up 10 per cent in the last few minutes of trading, then plunging the next day.
On Friday shares rose 28 per cent, closing at $US2.03, which is still a far cry from its $31 a share high in 2007.
Penson entered Australia in October 2009 when there was a lot of competition, particularly in the retail space. But between then and now, the biggest third-party operator, Berndale, has been withdrawing from the retail clearing space and is now only doing clearing for fewer than five operators, including its owner Merrill Lynch.
The upshot is that in less than two years Penson has signed up more than 20 market participants, which is the bulk of retail brokers, and more than 50 shadow brokers. In dollar terms this is equivalent to clearing $65 billion of trades a year.
Penson's rapid growth can be attributed to two events: a decision by the ASX to increase capital liquidity requirements for stockbrokers who clear their own trades from $100,000 to $5 million, which made it too expensive for many smaller retail brokers to continue to clear themselves; and the biggest third-party clearer, Berndale Securities, announced its withdrawal from the retail clearing market.
Indeed, in a circular on May 4, the ASX announced that four more market participants - Petra Capital, D2MX, Prescott Securities and Veritas Securities - had shifted from Berndale Securities to Penson Financial Services Australia. Others have since gone across.
It comes as the global equities and debt markets have taken a drubbing in recent months as the euro zone debt crisis intensifies and the US lost its AAA credit rating. This has put unprecedented pressure on investors, brokers, shadow brokers and clearers.
An ownership change at Penson in Australia should give the ASX, the corporate regulator Australian Securities and Investments Commission and the federal government cause to reflect.
While an ownership change in this instance is a good thing, having one dominant third-party clearer handling so much clearing and settlement of shares on behalf of retail brokers carries a risk.
The risk is this: if the third-party clearer fails, or several of its clients fail, it could threaten the entire settlement system. It is called concentration risk.
It explains why the ASX decided to extend the deadline to 2013 before retail brokers have to stump up $10 million in core liquidity. At present it is $5 million, but before the GFC it was $100,000.
Clearing is an important function of markets and when Treasurer Wayne Swan announced earlier this year he would review the clearing and settlement system, the expectation was that it would include third-party clearing.
So far there has been radio silence on the matter, leaving the market integrity open to question.
This is quite an irony given the decision by the ASX to lift core liquidity ratios was to minimise risks surrounding stock settlement, following the disastrous delay in settlement by Tricom Equities in 2008, which wreaked havoc on the stockmarket and culminated in its bankers forcing it to liquidate $1.5 billion of stock.
By doing this it caused self-clearers to move to a virtual monopoly and others to move into shadow broking, which has a lot less regulation.
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