I am glad to see Roddy Meagher adding some legal content to the debate this morning. The reporting on this issue has been informative, but it seems to assume that the 'master securities lending' arrangements that Opes operated under is some kind of sophisticated legal structure that has outwitted Opes clients by its cleverness. Frankly I have never seen anyone using this kind of agreement for margin-lending, and it seems like a bizarre mistake, or else singularly inapt. I don't say I am an expert in securities lending law. But I am a financial services lawyer, working offshore, mainly in hedge funds.
I notice that the International Securities Lending Association doesn't mention use of a master securities lending agreement for margin-lending purposes in the literature on its website. Neither does the Australian branch. The definition of securities lending they offer (as might be expected) has nothing to do with margin-lending. I've done a search on our legal databases to see if anyone has ever used this legal structure for margin lending, and I can't find a thing. Did the investors and the broker intend their relationship to be governed by this master agreement? Calling it a master agreement doesn't mean it automatically applies to every transaction the broker enters into, regardless of the intention of the parties. It also remains to be explored whether any of the relevant Corporations Act provisions have been breached by the broker. In Australia it appears that section 984B of the Corporations Act and reg 7.8.07 of the Corps Regs regulate this area. If that is right it would seem that there should be clear disclosure and no rehypothecation (ie granting of security interests in the shares by the broker) for a loan to the broker greater than the amount owed by the individual client.
There should be no rehypothecation at all where the individual customer is not in debt to the broker (if the law applies). At least where the last rule is breached, it would be interesting to know if there any claim available against the National Guarantee Fund under reg 7.5.64 of the Corporations Regulations, and what compensation might be expected. I don't want to offer false hope to investors: I don't practise in Australia any more and am not qualified to give legal advice on this issue. But at the same time, can the banks be so confident when it seems the agreement they are relying on is (apparently) being used for a purpose for which it was never intended (at least by the drafters)? Incidentally, now is the opportunity for all the gun capital markets lawyers out there to do their bit for society and offer their expertise pro bono.
