Investment Week

Up to 400 former customers of failed derivatives broker Global Trader [GTE Europe (GTE)] are set for compensation payouts.

The Financial Services Compensation Scheme (FSCS) says it is in discussions with the firm’s liquidators to assess the value of potential payouts to affected customers, adding it has already received 85 claims against the company.

Under FSCS rules, payouts cannot exceed £48,000.

GTE was placed in administration in February last year after an unnamed client sustained heavy losses. It does not have the money to pay claims against it.

The firm’s principal business was the provision of Contracts for Difference and spread trading services to clients. The liquidators believe some 400 investors could have claims against the firm for the return of cash balances held.

At the time of GTE’s demise, the FSA came under heavy fire for allowing the broker to carry on writing new business for five weeks after it was first informed by GTE that it was facing a shortfall of regulatory capital.

FSCS spokeswoman Sarah McShane says the default will fall on the investment intermediary class although it doe not look like an additional levy to cover the claims will need to be raised. She says: ‘Yes IFAs will be hit by this but it is a fairly standard default and we don’t think this will result in higher charges.’ This year, advisers have been hit with hefty rises in Financial Services Compensation Scheme costs due to mis-selling claims against stockbrokers Square Mile Securities Ltd and Pacific Continental Securities Ltd. Investment advisers, who sit in the same FSCS bracket as such firms, face a £44 million levy this year compared to ‘just’ £9m the previous year.

‘Help is on the way for customers,’ FSCS chief executive Loretta Minghella says. ‘We are working closely with the liquidators, and hope to make the first payments to customers of the firm shortly.’

Thoughts: The problem with Global Trader was that a lot of the customers affected had CFD accounts which held their funds on a non-segregated basis. This meant that the client funds were pooled together and held outside the FSA’s client money rules.

Under the rules set out by the Financial Services Compensation Scheme, clients have protection for up to £48,000 of their funds at a spread betting company regardless of whether these funds are held on a segregated or non-segregated basis. The Financial Services Compensation Scheme will pay compensation where a firm is unable to meet its obligations to clients. They will pay 100% of the first £30,000 and 90% of the next £20,000. So a maximum of £48,000. But they will not pay until the firm has been ‘declared in default’. Hence as we can see the scheme is thinking of paying compensation only when the liquidators have established the shortfall – which explains the shocking amount of time that has elapsed for the compensation scheme to finally paying out.

This is another reason why it might be wiser to trade with one of the publicly quoted companies like Capital Spreads or IG Index both of which are publicly quoted in London and consequently their financial position is very much in the public domain.

A statement indicated that it had been caught up in the recent Global Trader affair:

“It is with regret that FuturesBetting.com has had to take this action; however it is the priority and responsibility of the firm, as a regulated entity, to protect client funds. The reason for the decision to require all clients to close their positions is because the Company can no longer meet its capital adequacy requirements. Unfortunately FuturesBetting.com has been caught up in the financial crisis of Global Trader Europe and a significant proportion of the company’s resources have been ‘frozen’ along with that of all of Global Trader Europe’s other clients.”

“We have informed the Gibraltar Regulator of the situation and have agreed that the Company will cease trading with immediate effect.”

Clients were being asked to close their positions by end of trading on Friday.

Clients of Global Trader Europe (GTE) say they have received a cold response from the company after it ran into capital difficulties earlier this month. A group of clients have started a website – http://www.globaltraderclients.com/ – where they have a platform to share information and club together.

Clients, who have been in contact with Moneyweb, say they have not received an apology from GTE or any assurance that their money is safe.

Global Trader CEO Charles Savage counters that he can understand clients’ frustration, but says the administration process restricts him from making comments to clients. He asks clients to give the administrators time to evaluate the business before they can issue a statement regarding funds that clients can “hang their hats on”.

GTE was placed into administration earlier this month after one of its clients incurred trading losses that he wasn’t able to cover. As a result of the losses, a shortfall developed in GTE’s minimum capital, as required by UK regulations. Under the administration process, clients are unable to open new trades or withdraw funds.

GTE is a division of Global Trader, which in turn is a subsidiary of JSE-listed Purple Capital (JSE:PPE). Purple Capital shares set a new 12-month low on Thursday. They have fallen 44% in the past two months.

Global Trader insists that local clients have nothing to worry about and that the business is “highly profitable”. Global Trader pioneered contracts for difference (CFDs) in South Africa, and its business here accounts for over 80% of the group’s profits.

But some UK clients ask if Global Trader South Africa is so robust, why it or Purple Capital didn’t step in to cover the capital deficit at GTE.

Savage is quoted of saying that if Global Trader could have stepped in, it would have. The losses were simply too large for the parent to cover.

UK clients also complain that communication from GTE and the administrators, Smith and Williamson, has been poor. After the troubles arose, they received three e-mails: one from Global Trader informing them of the client’s default, and two from GTE’s administrators.

Savage asks clients to give the administrators time to follow the process. He says they are very reputable, and that the administration process is very clearly defined in the UK.

“They have been in control for just over a week,” says Savage. “They need time to get comfortable with the facts.” He stresses that they are protecting clients’ interests.

Savage says he is in daily communication with the administrators and is giving them information. He is also trying to find an angel investor to bail out the business.

Meanwhile, the Financial Times of London reports that GTE’s administrators are moving to recover assets of the troubled client. It reported Tuesday that an exclusive £16m residency on one of London’s most sought-after streets is set to come under the control of GTE’s administrators.

The defaulting client is rumoured to be Cold Investments, a company with links to colourful businessman Robert Bonnier. What is known is that the client incurred losses by betting on two technology shares: Artilium and SCI Entertainment Group.

Global Trader has admitted that the trades would not have been allowed under new risk control measures that were introduced after it was acquired by Purple Capital last year.

Financial services group Purple Capital has bought CFD and spread betting provider Global Trader for EUR36m, or R346m. Global Trader is a dominant player in the South African market, and also has operations in Europe North America, Asia, the UK and Thailand.

CFDs and spread trading are ways of taking bets on various stock market price movements. The products have become popular in South Africa, and a number of players have entered the retail market including Dealstream, Nedbank and Ideal CFDs.

Purple Capital says that Global Trader is a high growth business with a relatively mature, highly profitable and cash generating business in South Africa and established, regulated operations in a number of jurisdictions and geographies internationally.

“One of the biggest challenges for South African companies is to spread offshore,” says Purple CEO Mark Barnes.

Barnes declined to give a price:earnings multiple for Global Trader, but said he bought the business on a price:EBITDA multiple of ten times. However, he says the company is trading very well this year, and that the forward multiple is “significantly lower”.

He also notes that Global Trader has spent a lot of money obtaining regulatory approval in various offshore jurisdictions. It has yet to reap the full benefit of these investments, he reckons, with some overseas operations only starting to break even.

Global Trader was founded in Europe in 2000 and conducts in excess of a million transactions per year, worth over $10bn per year, for clients in 29 countries.

The purchase price will be settled by an issue of 88,6m shares for cash at a price of R1,80 per share. Purple Capital says it has received irrevocable undertakings to subscribe for the shares. “The balance will be funded out of current cash resources and funding facilities available to Purple Capital,” the company said in a statement to the JSE. Barnes said the money has been borrowed from major South African institutions.