Schwab, Hurt by Crash, Studies Ways to Cut Risks
Charles Schwab Corp., parent company of the nation’s largest discount brokerage firm, said Thursday that it agreed to study and implement measures to control risks in light of the recent stock market turmoil.
The parent of Charles Schwab & Co. announced last week that it will post a $22-million fourth-quarter loss following a settlement of claims against a customer who owed $84 million in unsecured debts to the company following the crash.
‘Unknown Risks’
In an Oct. 28 agreement with banks led by Security Pacific National Bank, Schwab Corp. pledged that it had already launched and will “pursue diligently” a study of appropriate ways to identify and control risks.
“Recent events in the securities markets have made apparent that certain heretofore unknown risks to the financial condition of (Schwab) exist under operating policies of (Schwab) in effect on Oct. 19, 1987,” Schwab acknowledged in the pact.
Those risks include “the acceptance of customer orders for excessive uncovered put options or for complex and substantial trading positions,” said the agreement, included in a report filed with the Securities and Exchange Commission on Thursday.
Wall Street suffered its worst one-day loss in history on Black Monday, Oct. 19.
The pact requires Schwab to continue implementation of risk-control policies identified by the study.
It did not specify how stringent the new risk controls might be, or when the firm hopes to complete its study.
Officials at Schwab did not return phone calls to comment on the study.
The customer, later identified in press reports as Hong Kong businessman Teh Heui Wang, maintained large uncovered options positions and was unable to meet margin calls, Schwab said.
Equity Rights Sold
Schwab Chairman Charles E. Schwab said last week that his firm could easily absorb the $22-million loss, and stressed that the firm exceeded all regulatory capital and liquidity requirements.
In its report to the SEC, Schwab also disclosed that its former parent company, BankAmerica Corp., exercised an option to sell one-third of its equity rights in Schwab Corp. for $14.4 million.
