Sonray Capital failed a couple of days ago and the clients are likely to incur nasty losses. Strangely I first found out about this from US news sources. Only three weeks ago I wrote a letter to a blog reader who knew someone who worked at Sonray expressing my doubts about the organization.
For my global audience I should specify that Sonray commanded four-fifths of five-eights of not very much of the market. In no way is the failure of this broker a reflection of the economy. It is a failure – as if another one was needed – of Australian broker-dealer rules – or more precisely the lack of broker dealer rules.
The United States has strict rules which segregate client assets from broker assets. The broker can’t use client assets to fund their own business and there are limits on the extent to which client assets can be rehypothecated. In the UK those limits are thinner – and in Australia non-existent. That means that if you pledge your securities to a broker (for a margin loan or even as collateral against a bill as low as $100) you can lose the lot in the event of a broker failure because the broker can repledge them to cover their own borrowings.
Opes Prime was smaller than Lehman London but the characters were just as unsavory. I blogged about that here.
I have no problem with a broker-dealer using their own capital to run their business or to trade. I have a big problem with a broker dealer using their client capital to run their business. I suggested a fix to the Australian Government in a submission to the Cooper review – but alas this has disappeared into the do-nothing basket.
How long is it that Australia needs to hold itself up as a place where you can come, open a broker dealer, fund it with client money – and – in at least one case disappear with client money before the Australian Government will do something?
PS. There is a reflexive no-government-regulation thing amongst some of my readers. But the question here is not whether we should allow brokers such as Goldman to speculate. The question is whether we should allow them to speculate for their own profit with the clients’ money. Lehman US speculated itself into oblivion but it did not do it with client money and the clients of the broker dealer were made whole. Lehman UK speculated with client money speculating their clients into oblivion. In the Sonray case the clients were mostly retail.