- Patrick Young
- IG’s value plummets by 27% after spread bets on bank shares cause £12m of bad debts in one month
- business.timesonline.co.uk
Summary
Debt issues often follow major periods of market volatility and all brokers with activities in leveraged products have some degree of risk. With market confidence fragile in the wake of various risk management issues in the brokerage world this year, investors are going to remain very nervous about companies in this sector, particularly those with a principal risk of any kind.
Analysis
IG have continued to offer considerable credit to their customers in recent times and the simple fact is that with markets as volatile as they currently are, some credit accounts/margins are not keeping up with the speed of market falls.
The suspicion remains that some horror stories of large client losses (and broker’s suffering defaults) may come to light in the near future, particularly in specialist retail products such as spread betting and CFDs.
Risk management practice ought to mean that such problems have not arisen on a widespread basis. However confidence in brokers of specialist products with significant retail customer bases has been shaken this year. For example, when MF Global announced its rather significant internal grain losses due to a rogue staffer this year.
The business model of retail derivatives companies remains a strong one. The problem is that asset values have been in collapse and liquidity in many assets is now rare (qv property or luxury, sports and classic car values where prices are declining and even “quality” assets are not selling currently.
The problem for IG now is to ensure that it does not see a crazed rush for the exit amongst those clients with financial collateral in the company’s coffers during the next few weeks, even if initially the stock may bounce back.
Brokers need to ensure they have significant collateral on call and that their client leverage assessment is not based on outmoded portfolio asset values. Moreover, the extent of leverage may need to be reviewed. No broker can really afford not to institute significant credit and risk management reviews – if only to assure their client base and their investors that they are in control.
In this marketplace, only third party validation is really likely to assure investors that a brokerage has a clear approach to managing their risks. Right now management assurances have been downgraded by many investors to junk status.
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