McDouall Stuart was 'intensively supervised' by NZX

By Gareth Vaughan Sharemarket operator NZX had McDouall Stuart under intensive supervision with beefed up reporting requirements for “a significant period of time” before the Wellington-based sharebroker’s recent resignation as an NZX trading and clearing participant. McDouall Stuart’s move to pull out of trading and clearing activity last month meant it won’t be able to trade shares and must settle and clear trades through another broker. However, it will still be able to advise clients, hold their assets and underwrite and distribute new securities issues. NZX’s actions towards McDouall Stuart, one of the country’s smaller broking firms that specialised in finance company and oil industry research, have come under fire from some in the broking community, who were concerned about McDouall Stuart's liquid capital position in a tough market. A senior broking industry source told interest.co.nz it was crucial the central clearing and payments system was beyond reproach with no concerns that any counter party other brokers traded with had any issues around solvency, shareholder funds or profitability. The source believed NZX had exposed the industry to reputational risk and other market participants, as counter parties, to settlement risk and in his opinion, perhaps ought to have shut McDouall Stuart down. “If there had been a problem someone would have had to bail it out,”the source said. “You could say the stock exchange would bail out the trades, but ultimately the other participants or the NZX shareholders pay for that. The fact is, that risk should not have been taken.” NZX spokeswoman Rowan Macrae said no unsettled trades were left in the system when McDouall Stuart quit and the firm was cut off several days before its resignation. As for McDouall Stuart’s liquid capital adequacy: “NZX Market Supervision had the firm under intensive supervision, with heightened reporting requirements, for a significant period of time,” Macrae added. Through this period, NZX had ensured there was no risk to any counterparties nor to McDouall Stuart clients. There had been “intensive supervision” of client funds and McDouall Stuart was fully cooperative. Andrew McDouall, McDouall Stuart managing director, declined to comment. Meanwhile, a second senior broking industry source was more sanguine than his rival, suggesting NZX’s work with McDouall Stuart had delivered a good outcome for the market. Pulling out of its trading and clearing activity is a case of back to the future for the firm, which was an advisory firm for six years before buying fellow Wellington brokerage Waddell, Johnston, McCarthy & Co in February 2008 and becoming a trading and settlement participant. Hamilton Hindin Greene out too And it’s not the first to pull the plug on trading activity, with Hamilton Hindin Greene having done so last year. Ian Perry, Hamilton Hindin Greene’s chief operating officer, said the South Island-based firm assessed it would have required about NZ$1 million of liquid capital under new capital adequacy requirements. It therefore decided that, as a small firm with a small percentage of the overall broking market, this wouldn’t be a good use of its capital. NZX is investing NZ$10 million in the development of New Zealand Clearing Corporation, which it describes as the country’s first central counter party clearing system. The move is part of the sharemarket operator’s push to launch new derivatives products in dairy, electricity and equity futures with NZX describing it as the biggest project it has undertaken to date. The clearing system is expected to go live this year, although NZX and the Reserve Bank are investigating a potential joint venture. Macrae said any abrupt closure of McDouall Stuart would have created risk which was eliminated through “methodical and careful” frontline supervision. Furthermore the NZX had kept its co-regulator, the Securities Commission, continuously informed “at a detailed level.” And although interest.co.nz was told there had been some concerns about the situation at the Securities Commission, spokesman Roger Marwick said the commission was satisfied NZX’s performance as frontline broker regulator was good. The two clashed after the 2004 collapse of Access Brokerage when the commission issued a report critical of NZX. McDouall Stuart has carved out a niche helping small firms raise money. Recently it has advised Allied Farmers, whose board McDouall is on, and worked as lead manager for biotechnology firm BioVittoria’s unsuccessful attempt to list on NZX late last year. McDouall Stuart was also lead manager for the Diligent Board Member Services, Pike River Coal, Eastern Hi Fi and Austral-Pacific Energy initial public offerings. This was first published exclusively in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.