Leverage is a complex instrument and its risks are frequently misrepresented to retail traders. With a number of brokerages using leverage with a positive connotation that allows brokers to advertise to their prospective and existing clients the merits of gaining big while trading the market, few mention the inherent risks.
The higher the leverage in a transaction, the bigger the chance that the client could not only gain big, but also lose big in the market. In a number of cases that loss may well exceed a client’s personal funds held at the brokerage, or even worse – it may well exceed a clients assets.
China’s Black Monday of 2015
Last year, Singapore kk Maybank Kim Eng Singapore incurred over $10 million of losses from the actions of a client who placed a bet with CFDs on the shares of Apple and Baidu. The infamous ‘Black Monday’ on August 24th 2015 when the Shanghai market slipped more than 8 per cent caused a lot of margin calls.
One such case is that of Wendy Lim Keng Yong, and her husband William Lye Hoi Fong, who was her broker at Maybank Kim Eng. On Monday, August 24th last year, the CFDs positions of Mrs Lim Keng Yong were closed by the broker due to the adverse market conditions which impacted the value of her position administered by her husband.
With the net result from the losses totaling over $10 million, the broker went on to take legal action against its client and the agent to get the funds back. With the amount of funds that Maybank Kim Eng is looking for from the couple surpassing $8 million, the perils of leveraged transactions are once more heavily discussed.
Two Separate Legal Cases
The broker chose to file two separate cases – one against its former agent of the brokerage and one against its client.
The initial hopes of the couple for a positive outcome have risen in the aftermath of a High Court ruling that the case against Ms Lim Keng Yong would have to be sent to arbitration, due to an arbitration clause signed with the brokerage. Contingent on the results from the arbitration, the High Court also postponed the legal proceedings against the client’s husband.
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The family claims that they have never sent orders to the broker to close the CFDs positions, but the intermediary of the transaction denies that.
Adding to the woes of the couple, most insiders within the trading industry are familiar with the action of positions getting a margin call. In that case, the broker or the broker that has been facilitating the transaction for its client can close the position at its discretion due to insufficient funds to maintain the open position on the market. There is no information whether this was the case here.
While the wife of Mr Lye Hoi Fong was certainly not the only one with a position that got margin called on Monday, August 24th, she certainly was one of the few whose husband was her trading representative at her brokerage.
Latest Court Ruling
The legal case is now on hold with the latest action dismissing the appeal of the broker that was seeking immediate legal action against the duo that it should be able to pursue a legal case against Mr Lye regardless of the outcome of the arbitration against Mr Lye.
Justice Steven Chong dismissed the appeal and mandated $10,000 costs, explaining that the suit against the former agent of Maybank Kim Eng Singapore Mr Lye was only temporary and “the appellant can still proceed against the second respondent upon the resolution of the arbitration”.
“It is clear under the terms of the Indemnity that the second respondent’s liability is contingent on, and subsidiary to, the liability of the first respondent under the CFD Terms and Conditions,” the judge’s ruling said.
Commenting to Finance Magnates, a company spokesperson from Maybank Kim Eng Singapore stated: “The court’s decision relates to a procedural matter, and we respect the decision of the court. As this is an ongoing court case, we are unable to provide further comments.”
The legal cases have not been resolved at the time of publication.