Brokers warn of dangers from wider equities protection

STOCKBROKERS have firmly opposed opening up a $100 million equities protection scheme to cover investor losses from any future collapse of brokers such as MF Global that specialise in derivatives.

STOCKBROKERS have firmly opposed opening up a $100 million equities protection scheme to cover investor losses from any future collapse of brokers such as MF Global that specialise in derivatives.

The worldwide failure of MF Global has highlighted gaps in investor protection schemes with doubts remaining over the ability of the firm's Australian clients to recover a shortfall of about $80 million in its funds.

The $100 million National Guarantee Fund only protects clients of stockbrokers that are participants of the Australian Securities Exchange. This leaves investors that trade with brokers that trade contracts for difference and other stock lending firms without a safety net.

Australia has experienced rapid growth in over-the-counter derivatives trading in recent years and other less regulated forms of equities trading, but several collapses, including Opes Prime, have resulted in hundreds of millions of dollars in investor losses.

"We would oppose any move to extend its [National Guarantee Fund] application more broadly, or permit its funds to be used for purposes other than it was originally specified," said David Horsfield, the managing director of the Stockbrokers Association of Australia. "The amount of the balance sitting in the National Guarantee Fund is not unlimited and could be tested if there were a default on a not-exceptional scale."

Mr Horsfield's comments were contained in the associations submission to the federal government's review of rules surrounding financial market infrastructure.

The association's main concern is the relatively small size of the fund compared to the $4 billion daily turnover of equities across Australia's two main stock exchanges.

"The [National Guarantee Fund] must not be available as the default fund," Mr Horsfield said.

In contrast, the Canadian Investor Protection Fund covers all investment accounts operated by brokers, regardless of whether they hold stocks, bonds, futures or currencies. In the event of a broker going insolvent, the Canadian system reimburses each investor account for losses up to the equivalent of $US1 million.

The US also has an investor protection scheme, although coverage is not as generous, with each trading account protected for losses of up to $US500,000.

Australia's National Guarantee Fund was originally paid for from interest from stockbrokers' trust accounts, but since 2004 it has been self-funding.

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