Interesting development there. Compared to IB's total equity, this is still a relatively small amount, and will not lead to any problems at IB even if the total amount ends up uncollectible. However I would not have thought that IB allows customer credit concentration risk at this level, as it looks like these big accounts have been highly margined into only a few positions.
The following are excerpts from the CC transcript:
http://us.rd.yahoo.com/finance/exte...results-earnings-call-transcript?source=yahoo
From Thomas Peterffy on the conference call:
"Customers are not only drawn to our platform for best-in-class technology and industry low cost, but also because they understand the importance of selecting a well-capitalized broker with solid credit rating and sound risk controls for protecting their assets. This leads me to address the recent event that will likely result in a charge to the earnings in the fourth quarter. While we have a solid track record for minimizing customer and firm losses, thanks to our automated risk management controls, we are not completely immune to swift and unusual market movements.
A group of our brokerage customers took a large position in four stocks listed on the Singapore Stock Exchange. And in early October within a very short timeframe, these stocks lost over 90% of their volume. The accounts were margined and we were able to liquidate only a small part of the position. The accounts are currently in deficit to the extent of approximately $68 million.
We believe that the customers have substantial assets independent of the companies involved and we are currently organizing our legal team to collect on these debts. We are currently also in the process of modifying our margin lending methodology to limit the chances of similar events happening in the future."
...
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
Thanks for taking my question. Thomas, I'm going to go back to the potential charge and then thanks for giving us the heads up in here, but help me understand how could this happen with seven customers, was it all overnight? Did you let them kind of run the positions because usually, I mean, your risk controls is one of your strongest characteristics. So I'm trying to get comfortable at, it just won't happen again. And you've got so many customers 70 million almost from just seven. Now I know their extreme stock movements, but can you walk me through what happened and help me understand if it could happen again or what's changed in the sense, so it cannot happen again.
Thomas Peterffy
Right, so these seven customers have â were invested in four specific stocks, trading under Singapore Stock Exchange. The stocks on first Friday of October started to fall precipitously in price and the Exchange closed, suspended trading in them. So while they were trading around $2.70 or so, they fell to the region of around $0.80 and were suspended. And on Monday, the stocks were reopened and they immediately traded in around $0.10 to $0.15. So okay, where we made our error is that these stocks were at a fairly low levels similar to where they are today several months ago. They were running up in price over the last couple of â two or three months, and we have made the error of not noticing that. So suddenly â it basically â you know, they've always liked say tax law, all right? And as they rose, these customers were getting more and more margin and buying more and more of the stock. But we have now put in rules or are in the process of putting in rules that will not allow us to lend margin of the same extent on rapidly rising stocks. So I think that those rules will diminish the chances for something like this to happen again.
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
And what about â I guess you couldnât have stop them out earlier because it happened on Friday and it opened up lower on Mondayâ¦
Thomas Peterffy
No, we ran into liquidation, but they were all for a very short period of time, and we then did actually do that if our liquidation was pushing the price or not.
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
Yes, yes, yes. So, it's not like you sat on it for days or anything like that. You liquidated it pretty quickly, but there wasn't much left. These are kind of industrialists and they have other accounts with you, but you canât cutâ¦
Thomas Peterffy
No, they do not have other accounts with us. They do have other accounts with other brokers and they are known to the exchange. It's a different world. It will take us some time to figure out what is the best way of recovering these monies.
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
So right now the change you made against the kind of when there is a lot of volatility in the stock and a lot of price movement you're going to limit the margin and that's across the board, not just specific to that market?
Thomas Peterffy
Thatâs correct. This will go across all issues.
The following are excerpts from the CC transcript:
http://us.rd.yahoo.com/finance/exte...results-earnings-call-transcript?source=yahoo
From Thomas Peterffy on the conference call:
"Customers are not only drawn to our platform for best-in-class technology and industry low cost, but also because they understand the importance of selecting a well-capitalized broker with solid credit rating and sound risk controls for protecting their assets. This leads me to address the recent event that will likely result in a charge to the earnings in the fourth quarter. While we have a solid track record for minimizing customer and firm losses, thanks to our automated risk management controls, we are not completely immune to swift and unusual market movements.
A group of our brokerage customers took a large position in four stocks listed on the Singapore Stock Exchange. And in early October within a very short timeframe, these stocks lost over 90% of their volume. The accounts were margined and we were able to liquidate only a small part of the position. The accounts are currently in deficit to the extent of approximately $68 million.
We believe that the customers have substantial assets independent of the companies involved and we are currently organizing our legal team to collect on these debts. We are currently also in the process of modifying our margin lending methodology to limit the chances of similar events happening in the future."
...
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
Thanks for taking my question. Thomas, I'm going to go back to the potential charge and then thanks for giving us the heads up in here, but help me understand how could this happen with seven customers, was it all overnight? Did you let them kind of run the positions because usually, I mean, your risk controls is one of your strongest characteristics. So I'm trying to get comfortable at, it just won't happen again. And you've got so many customers 70 million almost from just seven. Now I know their extreme stock movements, but can you walk me through what happened and help me understand if it could happen again or what's changed in the sense, so it cannot happen again.
Thomas Peterffy
Right, so these seven customers have â were invested in four specific stocks, trading under Singapore Stock Exchange. The stocks on first Friday of October started to fall precipitously in price and the Exchange closed, suspended trading in them. So while they were trading around $2.70 or so, they fell to the region of around $0.80 and were suspended. And on Monday, the stocks were reopened and they immediately traded in around $0.10 to $0.15. So okay, where we made our error is that these stocks were at a fairly low levels similar to where they are today several months ago. They were running up in price over the last couple of â two or three months, and we have made the error of not noticing that. So suddenly â it basically â you know, they've always liked say tax law, all right? And as they rose, these customers were getting more and more margin and buying more and more of the stock. But we have now put in rules or are in the process of putting in rules that will not allow us to lend margin of the same extent on rapidly rising stocks. So I think that those rules will diminish the chances for something like this to happen again.
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
And what about â I guess you couldnât have stop them out earlier because it happened on Friday and it opened up lower on Mondayâ¦
Thomas Peterffy
No, we ran into liquidation, but they were all for a very short period of time, and we then did actually do that if our liquidation was pushing the price or not.
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
Yes, yes, yes. So, it's not like you sat on it for days or anything like that. You liquidated it pretty quickly, but there wasn't much left. These are kind of industrialists and they have other accounts with you, but you canât cutâ¦
Thomas Peterffy
No, they do not have other accounts with us. They do have other accounts with other brokers and they are known to the exchange. It's a different world. It will take us some time to figure out what is the best way of recovering these monies.
Niamh Alexander â Keefe, Bruyette & Woods, Inc.
So right now the change you made against the kind of when there is a lot of volatility in the stock and a lot of price movement you're going to limit the margin and that's across the board, not just specific to that market?
Thomas Peterffy
Thatâs correct. This will go across all issues.
