Vox Telecom Reels From Fall of Dealstream in South Africa

Mergers, Acquisitions and Financial Results

VOX Telecom, the AltX-listed voice and data company, had more than R200m wiped off its market capitalisation yesterday as fearful investors continued to sell after the collapse of Vox's stockbroker, Dealstream.

Vox had invested R30m in Dealstream Securities, but the telecommunications company, in its interim results to February , made a profit after tax of just R43,2m. It may have to wave most of that goodbye if it is unable to recover the cash that was with Dealstream. Vox said earlier in the week that the "recoverability" of the cash had been "materially prejudiced".

Dealstream is an online stockbroker dealing primarily in single stock futures and contracts for difference (CFDs). Single stock futures are traded on the JSE's platform and are cleared, settled and guaranteed.

Rand Merchant Bank acted as Dealstream's clearing member for its trade in single stock futures. Dealstream's CFDs, however, were traded over the counter and not captured by the JSE. They were not cleared or guaranteed by a large and sustainable counterparty.

Dealstream has not been answering its phones since the end of last week but it seems that problems with its trade in CFDs led to Dealstream running out of cash. This left Dealstream unable to keep enough cash in its account with RMB to honour the trades it was putting through the market.

RMB, the JSE and the Financial Services Board (FSB) began to investigate on Monday, and stopped any new contracts being opened with Dealstream.

But Charles Savage, CE of Global Trader, another large local provider of CFDs, said yesterday that Dealstream's problems were not specific to the CFD products offered "but more than likely attributable to a failure in risk management and/or questionable management practices".

While Savage moved to protect his own company's livelihood, he raised a point about regulation that many investors have talked about this week.

"A greater degree of regulatory oversight would have helped," Savage said. "I am not advocating that the blame be passed from Dealstream, who may have misled their clients and acted inappropriately, to be placed at the door of the JSE or the prime broking community.

"Instead I am rebutting assertions that the CFD industry should be held accountable. This kind of business failure has nothing to do with the products but rather the lack of appropriate risk management. We all need a higher degree of risk management and to establish a stronger regulatory framework."

But a stronger regulatory framework was put in place with Securities Services Act of 2004. It allowed market regulators to take faster and tougher action against financial institutions.

Allan Thomson, head of derivatives trading at the JSE, has said this week that no liability lies with the JSE. "It is true the JSE regulates listed companies. But the South African Futures Exchange can use its power to set appropriate contract margin rates and constantly evaluate them," Savage said.

Further, investors have been asking where the FSB was. Although it appears the FSB was aware of Dealstream's misleading statements about CFDs being guaranteed, the FSB did not step in to protect investors until it was too late.

(Source; Business Day)