Pressure grows on retail brokers
As the sharemarket continues to fall, putting pressure on the business model of retail brokers, two more stockbrokers have ceased trading with third-party clearer Berndale Securities, increasing the concentration of risk in the financial system.
In a circular to ASX participants, the ASX revealed that Baker Young Stockbrokers and Intersuisse ceased their clearing and settlement arrangements with Berndale Securities and moved to Penson Financial Services.
It comes hot on the heels of Petra Capital, D2MX, Prescott Securities and Veritas Securities announcing they had shifted from Berndale Securities to Penson. Investec Securities moved across last month.
The move comes a week after Penson Financial Services' US parent, Penson Worldwide sustained a massive 40 per cent fall in its shares after disclosing some troubles with horse-track-backed bonds.
The share price collapse, which left Penson Worldwide's shares at $3.45 — a far cry from the $31 high it traded at in 2007 — reflects concerns about the quality of collateral backing of non-accrual loans.
In less than two years, Penson in Australia has signed up 21 market participants, representing the bulk of participants in retail broking, or 3 per cent of the total trades that go through the market. Penson clears about $300 million through the ASX a day.
This dominance worries some segments of the stockmarket about the concentration of risk associated with having one dominant third party clearer handling so much clearing and settlement of shares on behalf of retail brokers.
In a letter to clients obtained by First Mover, Penson boss Craig Mason tried to calm any worries related to its US parent: “In terms of our parent, the US operating company (Penson Financial Services Inc) holds regulatory capital of $141million based on a requirement of $51 million and all other operating entities hold multiples of the required capital in each jurisdiction,”.
The letter, dated May 16, said Penson Worldwide was on plan to make a small profit in 2011 and continued to generate increased capital. “Our most recent financial statements for 31 December 2010 were filed with ASIC in March 2011 and showed net assets of over $11 million. These net assets have since risen to over $16 million.”
Instead of calming fears, it alerted some clients to how small Penson is globally.
Penson's rapid growth can be attributed to two events: the withdrawal of Berndale from the retail third party clearing market and a decision by the ASX to increase capital liquidity requirements for self clearers from $100,000 to $5 million (and rising to $10 million in 2013) following the disastrous delay in settlement by Tricom securities in January 2008, has forced some brokers to merge and more than 10 others to stop clearing themselves and use a third-party clearer.