Making margin calls more manageable

Managing margin calls is an area of real focus for loan providers working in an increasingly competitive marketplace.

While gearing ratios and buffers may vary a little between providers, it is the way that margin lenders are managing margin calls that has really progressed during the past few years.

“There is a real push to really provide education and support for clients. It is becoming more prevalent in the industry as more people come through,” JB Were’s head of equity finance, Glenda Berry, says.

“It is something we really push, that it is critical to have a strategy early on how to deal with margin calls.”

And there are a few reasons why managing risk is the focus point for many margin lending providers, the most unpredictable of which was the events of September 11 and the ensuing fall in the market in the fourth quarter of last year.

A margin call is made when margin deposits fall below the required minimum level to cover an adverse movement in the market.

According to St George head of margin lending Andrew Black, over the September to December quarter 2001, 225 margin calls were triggered across the industry in Australia.

He says over this period, St George averaged 0.97 margin calls per day, a result he attributes to proactive management.

BT senior vice-president and head of margin lending Jason Flanagan says 90 per cent of its clients were not in margin call situations at this time, further reinforcing the extent of decline needed to induce a margin call.

“Margin calls can be scary but they can be easily managed,” he says.

Flanagan says in a margin call situation, the margin call contact is advised. The contact can be either the client, the adviser or both. After 24-hours, a notice is issued to alert both to the situation. If no notice is received by the loan provider on how to rectify the situation within three days, the equities will be sold to cover the margin call and the buffer.

He says giving the client monthly statements communicating their debt position is an important aspect of managing margin calls, as is BT’s dedicated team of 10 customer service consultants to handle adviser and client enquiries.

Internet accessability, so that clients can see their portfolio 24-hours a day, seven days a week, has also been developed.

Added functionality has been developed for advisers, so that they can sort their client portfolios by either client gearing levels, clients that are in margin call situations or those approaching their buffers.

Berry says over the past five years, technology has faciliated providing margin call information to both clients and advisers.

“It is a lot easier to give the information as it can be provided on the Internet,” she says.

Black says both before and after September 11, St George margin lending uses a market simulator to calculate what clients are likely to enter their buffer zones and to send the advisers and clients letters to advise them.

Currently, he says, in the case of managed funds with large international exposures, the Japanese and Asian market decline may have an effect on a client’s margin loan and so St George is alerting these investors to possible changes to their portfolios.

“It is about working out which customers to pre-warn and alerting them ahead of time,” Black says.

JB Were’s Berry says while they had a lot of clients in margin call situations around September 11, a lot of clients were prepared because it was so obvious what was happening in the market.

Table 1 and 2 give some indication of how far the market would have to fall before a margin call on a shares portfolio or managed fund would be made.

St George national sales and distribution manager margin lending Craig Mowll says effectively it shows that with a gearing ratio between 40 to 60 per cent, the market would have to fall by 42 per cent before a margin call was made.

He notes even in the tech wreck, the market only fell between 11 and 13 per cent.

“A margin call is a feature of margin lending and does highlight the need to address it with the appropriate management strategies,” Mowll says.

The average gearing ratios for both St George and BT range between 40 and 45 per cent. Black says two years ago, their average was at 48 per cent, this falling to its current gearing level of 40 per cent.

“It has varied over time. This reflects where we were in the economic cycle,” he says.

Black says as the market rises, gearing ratios increase because people feel more optimistic so they are confident to gear at higher levels.

However, Flanagan says while lending ratios have changed over time, this has not changed the behaviour of clients.

“With the average gearing ratios at 43 and 44 per cent, they are more conservatively geared. This reflects also of older portfolios, and while assets have grown, they haven’t necessarily increased their debt,” he says.

According to Mowll, clients and advisers do not make the decision on which margin lending provider to use based gearing ratios or buffers.

“We have never really been aware of being classified by this and the reason why they go ahead or not. It purely comes down to the service to manage risk,” he says.