Market volatility claimed its first South African victim when Dealstream, a brokerage that dealt in derivatives, closed its doors.

The collapse of Dealstream will not pose a risk to the South African banking system, but investors with accounts at the brokerage may lose their cash.

The problems started late last Friday when Dealstream's clearing member for single stock futures, Rand Merchant Bank (RMB), realised Dealstream had outstanding margin calls.

Not enough in account

This means Dealstream did not have enough money in its account with RMB to honour the trades it was putting through the market. Because RMB is a JSE member and trades in single stock futures are guaranteed, RMB's exposure is not material.

"We're covered in terms of the initial margins. We'll use that to close positions," Braam van Heerden, head of equity trading at RMB said yesterday. "We will limit the blow as much as possible for Dealstream's clients."

RMB had ensured no new trading contracts could be opened with Dealstream and the JSE and the Financial Services Board (FSB) moved yesterday to investigate the matter and protect investors.

Allan Thomson, a director at the JSE said part of the problem was that Dealstream had been trading contracts for difference (CFDs). A CFD is an over the counter trading instrument that allows people to trade on a stock without delivery of that stock.

"Bet between two guys at the pub"

Trading CFDs is "like a bet between two guys at the pub", according to Thomson, and those bets are neither regulated nor guaranteed.

"Dealstream must make good its losses to RMB and transfer what it can if there's any surplus cash from winding down RMB's exposure. I don't know if there will be sufficient money for Dealstream to give any back to clients," Thomson said. "But we keep telling the market to please be aware that when you take on a CFD you are taking on that company's credit risk."

The JSE had tried to communicate with Dealstream about onselling CFDs. On Dealstream's website the company says all of its CFDs were essentially single stock futures held at the JSE, "providing the client a secure instrument regulated by the JSE", but this statement appears to have been untrue.

Thomson was clear yesterday that neither the JSE nor RMB would bear any of the liability.

Thomson said if Dealstream's clients had just registered their respective positions as single stock futures contracts with the JSE, the contracts would have been transferred to a another member and their positions and funds would have been secured.

"Not many people are aware that Lehman Brothers held very large single stock futures positions on the South African Futures Exchange. Because these contracts were registered on the JSE, the clients were simply transferred to another member and did not lose their positions or their investment when Lehman Brothers went under," Thomson said.

Elmarie Kruger, manager of capital markets at the FSB, said yesterday the FSB's investigation into Dealstream would not take long. She said that the brokerage's failure was not directly related to the subprime debacle.

Business Day