futures secured account and bankrupt risk

Your link is much appreciated and, as far as the information goes it accurately describes one of the risks in segregation:

"If an FCM blows up based on bad trades from Customer A, then Customer B could lose their money in the process of bringing that segregated account back to zero. And for that reason, Bloom also stresses the importance of using a sweeper account and removing any excess capital from the FCM, “Because once you remove it from the FCM, obviously, you cannot be asked to participate in the pro-rata distribution of the loss.”

But at the same time that the "pool" aspect of regulation is described in generally accurate terms the risks in a clearing firms's bankruptcy are glossed over to an extent that is misleading ... in fact completely misleading. The customer's funds are only given priority treatment when those funds have been "properly" segregated. Although the segregation rules are different in the UK they are still very similar. When Lehman went down there was over a billion that was not properly segregated resulting in losses.

The myth that there is no way to lose money when a clearer goes down is simply that ... A MYTH!



Quote from dafeeder:

http://www.futuresmag.com/Issues/2006/6/Pages/Cover-your-assets.aspx
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Quote from Swan Noir:

"... The myth that there is no way to lose money when a clearer goes down is simply that ... A MYTH!
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Yes, but it's supposed to be difficult for customers with segregated to lose money in such a situation.

Correct me if I'm wrong, but isn't this how it's supposed to work...

1. The FCM's funds are segregated from customer funds such that "business operations" or "speculations" of/by the firm are to have no impact on customer funds.

2. If a large customer wipes out his equity and then some...

a. The customer loses 100% of his capital account.
b. The FCM has full recourse to recover any account debit.
c. The FCM has a "capital account"... which is used to immediately cover the customer's deficit, as futures accounts settle daily.
d. If/when the FCM's capital account is exhausted, then and only then would "other customers" be required to stand good for additional losses on some pro-rata formula/per customer.

Should be that LOTS of things would have to go wrong... and in a BIG way before "other customer accounts" could be impacted for losses. (It's a good idea to have your money with an FCM which has a LARGE capital account ratio as a buffer against such events.)

Recalling the stock market crash of 1987... I had money with Refco. Hoping to be the "first rat off of a sinking ship", I wired-out my account funds immediately... fearing Refco might get into trouble because of the rapidity and magnitude of the decline. A few days after the crash dates, I called Refco and asked about how they "weathered the storm"... they said, "looks like we might have only about $300K in uncollectible debits... but that's no big deal as our capital account is $20 Million"...
 
Quote from Swan Noir:

Your link is much appreciated and, as far as the information goes it accurately describes one of the risks in segregation:

"If an FCM blows up based on bad trades from Customer A, then Customer B could lose their money in the process of bringing that segregated account back to zero. And for that reason, Bloom also stresses the importance of using a sweeper account and removing any excess capital from the FCM, “Because once you remove it from the FCM, obviously, you cannot be asked to participate in the pro-rata distribution of the loss.”

But at the same time that the "pool" aspect of regulation is described in generally accurate terms the risks in a clearing firms's bankruptcy are glossed over to an extent that is misleading ... in fact completely misleading. The customer's funds are only given priority treatment when those funds have been "properly" segregated. Although the segregation rules are different in the UK they are still very similar. When Lehman went down there was over a billion that was not properly segregated resulting in losses.

The myth that there is no way to lose money when a clearer goes down is simply that ... A MYTH!
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So how many Futures Clients lost money in the Refco Bankruptcy?
 
The OTC FX market doesn't count - I still haven't personally seen evidence of a US citizen losing segregated funds placed with a regulated FCM in the US.

Anyone ?
 
I do not think a single penny has ever been lost by a US citizen client of a regulated US FCM. But that is irrelevant. The link posted earlier in this thread explains one way in which clients are exposed. And there are others.

Counter party risk exists. When you play Russian Roulette the fact that you end up pulling the trigger an an empty chamber does not mitigate the risk. The probability of shooting oneself in the head with a "six-shooter" was one in six whether you walked away or were left in a pool of blood.

While it is not a simple equation to calculate the odds of an FCM blowing up in a way that impairs the segregated funds of clients the risk is not zero. BTW ... I don't think in modern times (but I do not know for sure) anyone had ever lost segregated funds with a UK regulated futures clearing. That is of little comfort to those who lost over a billion (THAT IS A BILLION WITH A "B") due to faulty segregation at Lehman.

Every regulator knows this as do the attorneys and accountants with practices that deal heavily with FCM's. The principals of every clearing firm understand this reality (although not necessarily the IBs) and all of the larger hedge funds are well aware of the risk.

I'm not suggesting people should not take the risk yet I am suggesting that clients should be aware of it and seek to mitigate it primarily by how much they keep on deposit and who they deposit with. Just because JP Morgan or Northern Trust holds the segregated funds that does not make them your counter party in a crisis> your counter party, if you have deposited into their account at Morgan or Northern could end up being Raving Maniac Futures LLC. Who you deal with matters.



Quote from bone:

The OTC FX market doesn't count - I still haven't personally seen evidence of a US citizen losing segregated funds placed with a regulated FCM in the US.

Anyone ?
More...
 
"I do not think a single penny has ever been lost by a US citizen client of a regulated US FCM. But that is irrelevant. "

It's entirely relevant. Insurance companies, who do go broke from time to time, and who issue "insurance" policies to individuals and corporations in exchange for monetary payment, are regulated much the same way in the United States in terms of segregated funds requirements and security safeguards as a US FCM.

In fact, one could argue that a US FCM might have an additional layer of private scrutiny much more intrusive and frequent and proactive than a regulator - the exchange clearing and compliance departments. I kept trading offices over a dozen years in four different clearing firms, and I can recall many instances of visits from exchange personnel walking around the hallways who were performing various financial audits. They always carried very thick reams of computer-generated reports and spent long days in conference rooms with risk managers and CFO's.

Your point is very spot-on regarding keeping a large trading account balance. For me personally, I wire money out to my family banking accounts for routine and special expenses, I wire money out into my external LLC business account for business expenses, I wire money out for 401K investments and other side-business investments, and I wire funds out quarterly for estimated tax payments. In fact, I spread trade and consider myself somewhat risk-averse because I have significant external funding committments that are entirely dependent upon my trading income. I think many traders are like that as they get older, but the younger 'bucks' do tend to live like college roomies and keep all their capital in their accounts.
 
But the damn rules clearly allow for the c ustomer to take a hit. How hard is that to grasp. Read the regs the link is in this thread.




Quote from bone:

"I do not think a single penny has ever been lost by a US citizen client of a regulated US FCM. But that is irrelevant. "

It's entirely relevant. Insurance companies, who do go broke from time to time, and who issue "insurance" policies to individuals and corporations in exchange for monetary payment, are regulated much the same way in the United States in terms of segregated funds requirements and security safeguards as a US FCM.

In fact, one could argue that a US FCM might have an additional layer of private scrutiny much more intrusive and frequent and proactive than a regulator - the exchange clearing and compliance departments. I kept trading offices over a dozen years in four different clearing firms, and I can recall many instances of visits from exchange personnel walking around the hallways who were performing various financial audits. They always carried very thick reams of computer-generated reports and spent long days in conference rooms with risk managers and CFO's.

Your point is very spot-on regarding keeping a large trading account balance. For me personally, I wire money out to my family banking accounts for routine and special expenses, I wire money out into my external LLC business account for business expenses, I wire money out for 401K investments and other side-business investments, and I wire funds out quarterly for estimated tax payments. In fact, I spread trade and consider myself somewhat risk-averse because I have significant external funding committments that are entirely dependent upon my trading income. I think many traders are like that as they get older, but the younger 'bucks' do tend to live like college roomies and keep all their capital in their accounts.
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Swan, it would be a first in the United States. Has not happened to date. For that matter, you should also concede that one could conceivably get screwed over if they hold a regulated insurance policy of any kind.

If you need to deal in absolutes, trading is not the business for you.
 
The below thread talks about this issue.


"The beauty of the segregated accounts protection, is that it was actually put to the test at the end of 2005, when one of the largest clearing firms in the world, Refco, went bankrupt in the matter of weeks. Attain had hundreds of clients with accounts at Refco, and not one of them lost money or was negatively impacted in a any way (maybe a few nervous moments watching the news). In short, the system worked as it was supposed to, on a grand scale."


http://www.elitetrader.com/vb/showthread.php?s=&threadid=192249&perpage=6&pagenumber=2
 
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