Storm Financials re-participation strategy: Did it exist? (conclusion)

Reporter : Jimmy Olsen

Content : Storm Financial advice, CGI margin lending rules, Storm re-participation strategy, CBA & Storm.

Friday 25th May 2012

Click here to view Part 1 of “Storm Financials re-participation strategy: Did it exist?”

To view Part 2, please read on…


Q: Did Storm really have a successful re-participation strategy available as they claimed? 

If so, how did it work?


By way of illustration The Plain Truth has commissioned the analysis of a typical Storm portfolio for the purpose of highlighting the execution of Storms re-participation strategy.  This strategy generally involved the following steps in the re-participation program for the many Storm clients analysed.  For the purpose of confidentiality we will call this example ' Storm client  X'.

1)      The margin lender (in this example Colonial Margin Lending) would record, track and maintain on its Empire margin lending system each clients' current LVR and margin call LVR among other things. (click here to see a statement obtained by The Plain Truth and made by a former CGI manager)

2)      Using the information in 1) above, CML would detect immediately when the clients LVR exceeded their margin call LVR and would consequently issue and forward a margin call notice directly to the client.  The notice would inform the client that their loan is in margin call, by how much and offer some remedial options.

3)      At the same time CML would send a copy of the clients' margin call notice to Storm ' including advice that this copy of the notice was for information only. (click here to see notice)

4)      Clients prompted by their margin call notice would contact Storm and then Storm advisors would analyse clients' personal situation and assist them with advice on how to handle the margin call in their circumstance.

5)      If the client agreed with the advice Storm would then assist with the execution of the remedy.  In all cases, including this one, analysed by The Plain Truth the clients accepted the advice and the advice worked.

The various options including those outlined by the margin lender by which a Storm client could remedy a margin call were a) by offering additional security (cash or equities) as collateral to the margin loan, b) by simply paying down the margin loan using surplus cash, c) by selling secured equities and using the proceeds to pay down margin loan debt or d) by switching securities within the portfolio from lower base LVR assets to higher base LVR assets (e.g. switching from equities that were held at 60% or 70% to cash which had a 100% base LVR).

a) Offering additional security (cash or equities) as collateral to the margin loan

Whilst this option takes a portfolio out of margin call it relies on having surplus cash or equities available which can then not be used for other purposes. The disadvantage of this option is that should markets continue to fall and further margin calls be issued then one is left in a position whereby their surplus (spare gunpowder) has been used.  This option is a  punt' as it requires market recovery to occur relatively quickly and can not afford further market declines.

b) Simply pay down the margin loan using surplus cash

This option is as above with the slight additional advantage that the same amount of cash would have given the portfolio a small amount of additional buffer compared to option a).  A further disadvantage for clients where interest was prepaid (as it was for most Storm clients) is the prepaid interest component may need to have been broken and that the margin lender would then apply an early repayment penalty.  For those clients who had prepaid their interest, in addition to the early repayment penalty, the interest that the cash would have earned staying as cash was foregone.

c) Sell secured equities and use any proceeds to pay down margin loan debt

Once again whilst this option addressed the margin call, it progressively reduced the size of the portfolio in unit terms.  A further disadvantage is that when markets eventually turn and begin their recovery one is unable to effectively re-purchase the sold equities at anywhere near the same quantity as when sold on the way down.  This is due to buffer constraints within the margin loan terms and conditions.  Effectively this option severely destroys the overall size of the portfolio.  To paraphrase Storm '  this approach is a killing of the chickens'.  Furthermore, the interest issue of point b) above was a disadvantage.

d) Switch securities within the portfolio from lower base LVR assets to higher base LVR assets

This option was the most elegant as it resolved margin calls and preserved the asset base of the portfolio yet had none of the disadvantages of the other options such as early repayment penalties, burning of gunpowder and  killing chickens'.  This option had the ability to be used progressively and therefore it was irrelevant whether future movements of the market were positive or negative.

When this solution was applied in a falling market the effects where that future market falls had less impact on the portfolio as part of the portfolio was in cash and therefore  inoculated'.  Also a greater buffer was achieved (distance to margin call) as cash had a 100% base LVR compared to equities which were traditionally around 60% or 70%.

Conversely, as the market eventually turned positive and began to rise, the previously  inoculated' cash components of a portfolio would also cause resistance to the overall rise in the portfolio.  Only the portion of the portfolio that was in equities would gain from any rises in the equity markets.  The Storm re-participation strategy at that time involved switching back from cash to equities at around the same levels as the switch out occurred thus allowing the portfolio to have resisted the market fall and go back into growth mode as markets recovered.

As a consequence of the crash of 2001-03 Storm at the time developed this re-participation strategy.

The Plain Truth has obtained evidence showing that this strategy had been previously implemented successfully. The following sequence of slides shows:

1)      Graphics illustrating the switch to cash (inoculation) and re-participation strategies

2)      The various paperwork and documents that were sent to CGI to facilitate the strategies.


These transactions were not only done with the full knowledge and agreement of CBA but it is clear with their co-operation (as the switchbacks were done whilst clients were in buffer) and on a basis that a clear procedure had been developed and been accepted by both Storm and CBA going forward.

Below is the Colonial First State statement showing and confirming the above transaction, among others, as advised by Storm, requested by the client through Colonial Margin Lending and subsequently executed and confirmed.

Clearly Storm had a re-participation process and strategy in place in the event of significant downward market volatility that had been successfully tested in moderate to rough conditions.  Clearly this strategy was in cooperation with the CBA and implemented following CGI margin call notices sent to the client by the bank.  Clearly the bank cooperated in the early 2000's.  Just as clearly Colonial Geared Investments failed in its administration and management of its own margin lending product in 2008 and cleaned up its mess by destroying the client and conveniently blamed Storm as the scapegoat.  In 2008 the CBA's attacks on its clients with the cooperation of ASIC who prevented Storm clients being able to communicate with Storm for assistance in late 2008 resulted in monumental losses for many Storm clients.  Both the CBA and ASIC covered each others backs with their lies but now thanks to the falling out amongst thieves the client in this example along with many other Storm clients have the opportunity to recover compensation from BOTH the Commonwealth Bank and ASIC.  But more about this claim against ASIC in the next article.

The Editor

The Plain Truth,

PO Box 2783

New Farm  QLD  4005

Content : Storm Financial advice, CGI margin lending rules, Storm re-participation strategy, CBA & Storm.

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