Merrill Lynch To Sell Berndale Securities

Post by NeilMc on June 18, 2009 · Under Equities, investments, online trading · Comment 

Global investment banking giant Merrill Lynch has put up for sale its Australian stock broking affiliate Berndale Securities which provides stock clearing services and is the largest provider of such services in Australia.

The sale is apparently not linked to the high profile court case Berndale is currently engaged in. Berndale had launched legal action against prominent investor David Waterhouse who failed to pay margin calls for an Opes Prime trading account.

The decision by Merrill to sell Berndale will have implications on smaller stock brokers who are now required to either close, merge or outsource trade clearing to a third parties like Berndale. Previously those type of firms used the ASX clearing house ACH.

Currently ASX stipulates that settlement of trades must occur through the Australian Clearing House (ACH), with the ACH now proposing more stringent liquidity requirements.

The proposed regulation is to give the ACH the ability to deal only with brokers with enough financial muscle to settle all outstanding trades. The ACH wants smaller brokers to pass on settlement risk to third parties who have the ability to settle all trades. Opes Prime for example used Berndale as a third party house to clear its trades.

Merrill Lynch acquired Berndale as a legacy unit, when it purchased Mcintosh Securities back in 1996. Berndale was initially only a nominee company that institutional investors used to hold their stock in return for a small fee. Since then, it has expanded rapidly and provides full service back office functions including both stock clearing and lending.

Industry analysts point out that if Berndale were to cease serving clients, the number of firms which offer clearing services would be reduced significantly, which would reduce the amount of counterparties, increase fees and the risk that transactions fail.

Smaller stock brokers wishing to avoid having to increase their core capital to $5 million by the end of the year, and $10 million beyond that, will have to outsource clearing and settlement to third parties.

The Reserve Bank of Australia recently issued a report recently which said that of the 57 existing market participants (brokers) 17 would be affected by the change in regulation whilst 10 of them had liquid capital of less than $5 million.

Merrill Lynch is large enough to clear its own trades and as part of its merger with Bank of America is required to sell off non core assets. Interested bidders may include Fortis which provides clearing for both cash equities and futures, UBS, ETrade, Citigroup and Macquarie.

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