Guide to Accepted Securities and Margin Calls 1. Guide To Accepted Securities And Margin Calls

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1 Guide to Accepted Securities and Margin Calls 1 Guide To Accepted Securities And Margin Calls

2 2 Guide to Accepted Securities and Margin Calls ACCEPTED SECURITIES CommSec Adviser Services (CAS) offers an extensive list of managed funds and ASX listed securities that can be used as security against an Investment Loan. Our accepted security list is regularly updated as we look to increase the range of managed funds and ASX listed securities clients can use as security against their Investment Loan. WHAT IS AN ACCEPTED SECURITIES LIST? A list of managed funds, ASX listed securities and investment platforms that can be lodged as security against an Investment Loan. A borrowing limit is assigned to each security and it determines the maximum loan amount that can be drawn against that security. Any managed funds or ASX listed securities held as security that are not on our accepted securities lists will be assigned a 0% borrowing limit. The market value of these securities are not included in the calculation of a client s Loan-to-Security Ratio (LSR). HOW DO YOU DETERMINE WHICH SECURITIES YOU LEND AGAINST? Our decision to lend against a security is based on a risk assessment which takes into account several factors. 1. Exposure to a company or managed fund We consider the overall value of a company or managed fund and determine the maximum percentage of that company/fund that we can hold as security at any time. If we reach this maximum, we generally cap the security by not offering any further lending against the security until such time as our exposure decreases. 2. Historical price volatility Fluctuations in the share/unit price Large fluctuations in the market price of a security could increase the client s potential of receiving a margin call. The industry classification of the security We consider the volatility of the industry which the security operates or invests in, relative to the overall market. 3. Liquidity (ASX listed securities) Shares with low trading volumes are considered illiquid and may be difficult to sell. The sale of illiquid shares may drive the price significantly lower, and increase the risk of margin calls. 4. Redemptions (managed funds) The frequency of redemptions offered by fund managers is considered. Funds that offer redemptions infrequently (ie once a month) may be considered illiquid due to the inability to sell units at short notice. 5. Internal gearing level (managed funds) The underlying portfolio of some managed funds are geared. The level of internal gearing is taken into account when determining the borrowing limit of a managed fund. BORROWING LIMIT UPDATES Depending on market conditions and our exposure to a company or fund, we may at any time increase or decrease the borrowing limit of a security, or cap it with no further lending permitted. Our accepted securities lists are updated on a regular basis and can be found at within the Accepted Securities section of the Investment Loan product page. Any changes to our borrowing limits during the month are also listed separately on this page.

3 Guide to Accepted Securities and Margin Calls 3 MARGIN CALLS Sharemarket volatility may cause you to experience a margin call. A margin call occurs when the value of your portfolio falls to such an extent that it is no longer considered sufficient to secure your Investment Loan. The margin call is a call to action that requires you to reduce your loan balance or increase the value of your loan security or a combination of the two. It is very important to regularly monitor your Investment Loan and have a plan of action ready in the event of a margin call. UNDERSTANDING INVESTMENT LOAN RATIOS Current Loan-to-Security ratio (Current LSR) Loan Balance Current LSR = Market Value of Accepted Security x 100 The Current LSR is a measure of the size of your loan relative to the value of your accepted security, expressed as a percentage. The Current LSR is often referred to as your gearing level. Base Loan-to-Security ratio (Base LSR) Base LSR = $50,000 in a security with a 60% borrowing limit $50,000 in a security with a 70% borrowing limit Margin Call Loan-to-Security ratio (Margin Call LSR) The Base LSR is the maximum amount that can be borrowed against your portfolio of accepted securities, expressed as a percentage. The maximum loan amount of each individual security in your portfolio is simply its borrowing limit multiplied by its market value. For example, consider a $100,000 investment portfolio consisting of: A 10% buffer over your Base LSR is provided to ensure that small market fluctuations do not result in a margin call. The Margin Call LSR is therefore equal to your Base LSR plus the 10% buffer. The size of the buffer provided may be subject to change from time to time. Maximum Gearing ratio Maximum Loan Amount Market Value of Accepted Security The Maximum Gearing Ratio represents the ceiling that we place on your Current LSR. This ratio is determined by us and may be above or below your Margin Call LSR. Your maximum permitted gearing level will be the lower of the Maximum Gearing Ratio and your Margin Call LSR. The Maximum Gearing ratio may change from time to time and can be found on our website: WHEN WILL A MARGIN CALL BE TRIGGERED? A margin call will be triggered when the value of your accepted securities fall and results in: i. Your Current LSR being greater than your Margin Call LSR; or x 100 Base LSR = ii. Your Current LSR being greater than the Maximum Gearing Ratio; whichever occurs first. (60% x $50,000) + (70% x $50,000) ($50,000 + $50,000) = 65% 80% 75% 65% Maximum Gearing Ratio Margin Call LSR Base LSR Margin Call 10% buffer If a margin call is triggered you will be required to reduce your Current LSR back to your Base LSR within the specified time frame, or as otherwise determined by the terms and conditions of your loan. 50% Current LSR Be pro-active Time

4 4 Guide to Accepted Securities and Margin Calls THE MARGIN CALL PROCESS In the event of a margin call CommSec Adviser Services will endeavor to contact the borrower and the borrower s adviser by telephone or . The usual timeframes given to restore the Current LSR to the Base LSR are: - 2pm (Sydney time) on the next business day if Current LSR > the Maximum Gearing Ratio; OR if more than 5% of the security is directly held in ASX listed securities. 2pm (Sydney time) on the 3rd business day - if 95% or more of the security is held in managed funds or investment platforms. The time frame commences on the day CommSec Adviser Services establishes that a margin call has been triggered. WAYS TO MEET A MARGIN CALL Following are the various ways a margin call can be cleared should one occur. It is important to ensure you have a plan of action in the event of a sudden decline in the value of your investment portfolio. Reduce the loan balance The loan balance can be reduced by either: Direct debit (an original direct debit request form must have been received by CommSec Adviser Services). Requests to debit can be made by contacting CommSec Adviser Services on Alternatively, a written request to debit, signed by all account holders, may be faxed to Depositing funds into the following Commonwealth Bank account: Name: Investment Lending Suspense Account BSB: Account No: Reference: loan number + account name You can make this payment through internet banking or at any Commonwealth Bank branch. The funds will be applied to the loan on the following business day. Biller Code: Customer Reference Number (CRN): Please contact CommSec Adviser Services on to obtain your CRN. Transfer additional accepted securities to the Investment Loan account Managed Funds complete an original Australian standard transfer form, a statutory declaration and provide a copy of the latest fund manager statement. ASX listed securities provide a copy of your shareholder or CHESS statement. If the stock is already CHESS sponsored with a broker, a completed Broker to Broker Transfer form is also required. Security provided by a third party A third party can provide additional security to meet a borrower s obligations. For example, a spouse, company or trust. To establish a third party security provider on a loan, the Third Party Mortgagor section of our loan application should be completed. This should be forwarded to us quoting the existing loan number. Once this information has been received, a Third Party Mortgagor pack will be sent directly to the third party to read, sign and return. To lodge their security, transfer paperwork should be completed as per the above section Transfer additional accepted securities to the Investment Loan account. It is your responsibility to have all documentation returned to CommSec Adviser Services by the margin call due date.

5 Guide to Accepted Securities and Margin Calls 5 Switching investments You may elect to switch from one accepted security to another with a higher borrowing limit, thereby increasing the Base and Margin Call LSRs. Sale of investments You can sell part of the secured portfolio and apply the net proceeds to reduce the loan. The amount required to be sold will depend on the borrowing limit of the security being sold. Establish a cash holding account You can nominate a hold amount within an Accelerator Cash Account. See page 5 for details. WHAT HAPPENS IF A MARGIN CALL IS NOT MET? If your margin call obligations are not met within the specified timeframe, CommSec Adviser Services may sell securities within your portfolio to restore the loan to the Base LSR or as otherwise determined by the terms and conditions of your loan. You should be aware that CommSec Adviser Services is not obliged to sell any securities within the portfolio. It is your responsibility to monitor the performance of the portfolio to ensure a margin call does not occur. MANAGING MARGIN CALL RISK Below are examples of how you can be pro-active and reduce the risk of margin calls. Do not borrow to the maximum. By not borrowing to the Base LSR, a larger buffer is created which allows for a greater fall in the security value before a margin call is triggered. Ensure the portfolio is adequately diversified. A diversified portfolio can help protect from fluctuating prices and a possible margin call. Review the loan and portfolio on a regular basis. CommSec Adviser Services offers an online service to both clients and advisers at Our website provides access to loan details and a What-If calculator that allows you to determine how certain transactions will affect a loan. If you are not currently registered for this service please contact us on (option 3) to obtain a login. Choose to re-invest distributions/dividends back into the investment. This will add additional value to the secured portfolio. Use distributions/dividends from the securities to reduce the loan balance. Avoid capitalising interest and instead pay monthly interest charges by direct debit. Capitalising interest will increase the loan balance and Current LSR. Cash flow management is paramount. Do not rely on income from the investments to meet interest costs. If a margin call is triggered, it is beneficial to have an action plan. Have cash ready to purchase additional investments or to reduce the loan balance rather than be forced to sell investments after the market has fallen. Take action as soon as the loan falls into the buffer. This occurs when the Current LSR is between the Base LSR and the Margin Call LSR. If you take action when the loan is in the buffer, you may be able to avoid a large margin call. Also, a smaller amount of money would be required to bring the portfolio back to a safer level. ACCELERATOR CASH ACCOUNT The Accelerator Cash Account (ACA) is a flexible cash account developed specifically for clients of CommSec Adviser Services. It is designed for investors who want convenient access to their money and a competitive interest rate. The ACA has been designed with investment lending clients in mind and also offers the following features: Increase borrowing capacity or create an additional buffer against margin calls by nominating a hold amount over all or a portion of the ACA balance. The account balance up to the nominated hold amount will be included as security on the Investment Loan and allocated a 100% borrowing limit. Streamline Investment Loan transactions by depositing money into an ACA to earn interest, while waiting for the right time to invest. Access an ACA via NetBank, telephone banking, ATMs and EFTPOS. For more information on the Accelerator Cash Account, please contact our Client Services Team on (option 2).

6 6 Guide to Accepted Securities and Margin Calls FALL BEFORE CALL The following graph identifies the required fall in security value to trigger a margin call. As the Current LSR increases, the fall required to trigger a margin call decreases. This illustration is based on an Investment Loan with a Base LSR of 70% and therefore a Margin Call LSR of 80%. 50% 45% Fall in portfolio value before a margin call is triggered 40% 35% 30% 25% 20% 15% 10% 5% As you can see in the above illustration, an Investment Loan with a Current LSR of 50% requires the portfolio value to fall by 37.5% before a margin call is triggered. CONTACTING US 0% 45% 50% 55% 60% 65% 70% Current LSR If you would like further information on our accepted securities or margin calls, please contact our Client Services Team on (option 3) or us at InvestmentLending@cba.com.au CommSec Adviser Services Investment Loan is provided by the Commonwealth Bank of Australia (CBA) ABN AFSL and Australian credit licence and administered by its wholly owned but non-guaranteed subsidiary Commonwealth Securities Limited (CommSec) ABN AFSL , a Participant of the ASX Group and Chi-X Australia. Applications are subject to credit approval. Fees and Charges apply. Please consider the Product Disclosure Statement (PDS) and Terms and Conditions, issued by the Bank, available from or by calling before making any decision about the product. The information contained in this brochure is of a general nature only and is neither exhaustive nor definitive. It is not intended to be advice and should not be relied upon as such. It has been prepared without taking account of your objectives, financial situation or needs. Because of that, before acting on the information, you should consider the appropriateness of it, having regard to your objectives, financial situation and needs. CAS2137 (10/15)