FCMs and Excess Capital

[CPTrader]

FCMs have net capital requirements.

ON CFTC.gov, there's a file listing all FCMs, cust equity, net capital requirements, etc.

http://www.cftc.gov/files/tm/fcm/tmfcmdata0508.xls

This is the same file that Futures mag uses for its annual rnaking of FCMs.

The interesting thing to note, is that the ranking by Futures mag, does not incude excess capital (diff between adj net capital and net capital).

The non-investment banking big four as I call them (Calyon, FIMAT, Man Financial & REFCO) have suprisingly very low excess capital.

If you calculate excess capital as a %age of the net capital requirement, you find that REFCO had the highets %age (among the "Big Four") as of Aug 2005 (though all four of them have relatively very low percentages).

The big investment banks rank best using this measure; Morgan Stanley, CSFB, Deutsche Bank, Lehman, UBS, Bear Stearns. GS & Citigroup's net capital requirments ar enot stated but I assume they would also be quite high.

Given this, I wonder about 2 things:

1. IS this excess capital %age measure of any value as to a predictor of a FCM's stability?

2. Are Man, Calyon or FIMAT or IB able to acquire REFCO, given their own relatively weak position by this measure.

It seems a major PE fund (like JC Flowers) or a big Ibank like CSFB, DB, UBS or Lehman would be a viable acquirer of REFCO.

Any thoughts???

 

[9th Gate]

Good post I have been thinking about this one. I modified the list to just show some of the main companies.

Some Notes:

1. May be safer to go with B/D vs non B/D because the SEC is involved in the securities transactions, so firm typically may have an overall company reputation to uphold.

2. The too big to fail concept would probably only apply to IB's doing business legally, because the impact of their capital sums.

3. The numbers don't lie, but liars use numbers concept probably applies to these calculations. I would like to see these company's financial documents posted on their websites, but then again if Refco's balance sheet made it past all those regulators then what chance does the average person have in catching fraud.

4. The CFTC's way of calculating does not seem to add up. The Net capital requirement (c) seems to be underestimated relative to funds on deposit and the leverage that some companies allow. This gives a false sense of security to the excess net capital number (d)

The adjusted net capital is customer funds on deposit , not company funds on deposit to cover operating risks, market risks, credit risks, counterparty risks, or customer default risks. This almost represents a "Ponzi" like calculation

Adjusted Net Capital = Amount of money that can be brought in
Net Capital Requirement = The bare minimum loss of payments to old scheme customers
Excess = The amount that does not have to be paid out

Pyramid crashes down if everyone asks for their money back at the same time, so I would have to freeze withdrawals, etc until I can run for the hills.

The only thing saving most of us is the fact that most of these companies are reputable companies doing business legally with good control systems in place.