Refco Account Security

[okwon]

Quote from Apex Capital:

Please cite a specific example in which the issues that have affected the closure of business at Refco Capital Markets have in fact, spilled over as you say into the futures division that handles segregated accounts.

While credit lines and banking relationships are critical to the Prime Brokerage and foreign-exchange and fixed-income over the counter trading along with securities lending, please show how this effects the futures division and their segregated accounts.

Last time I checked, Banks had very little to do with the margin FCM's extend to clients . . .
This might come as a surprise to you, but when you buy a futures contract it is simply a performance bond given to the Exchange Clearing Corporation. As a fellow ET poster has stated ( Brandonf ), Banks have nothing at all to do with this.

Again, please cite a specific example in which the issues that have affected the closure of business at Refco Capital Markets have in fact, spilled over as you say into the futures division that handles segregated accounts.

Problems haven't spilled over to the futures side yet. However, Refco did say earlier that Refco Securities was unaffected. Now they are winding it down. So it seems they have spilled over to the B/D side of their business.

I do agree with you though that someone will most likely take over Refco's futures business. But why would you leave your clients money in there until this thing gets sorted out? Even if the money is safe, who knows how long it will be tied up if this does end up spilling over into Refo LLC.

Quote from Apex Capital:

But for most of us average folk who trade futures, the "regulatory capital and excess regulatory capital of Refco, LLC, its regulated Futures Commission Merchant, and Refco Securities, LLC, its regulated Broker Dealer, have been substantially unaffected by the events of this week. The business at these subsidiaries is being conducted in the ordinary course including customer deposit and withdrawal of segregated funds."

The company continues with Goldman Sachs as a financial advisor and has hired Eugene Ludwig the former U.S. Comptroller of the Currency and former Chairman of the SEC and American Stock Exchange, Arthur Levitt to the board of directors as special advisors.

http://biz.yahoo.com/prnews/051013/nyth091.html?.v=27

 

[ellokn]

Quote from jimrockford:





Market discipline is sorely lacking in the case of Apex Capital. He describes himself as a CTA who clears other people's money through Refco. He has a fiduciary duty to protect other people's money. I think he has recklessly breached that duty by entrusting their funds to a futures broker with a history of embezzling customer funds....

All brokers have a history. ALL of them. While Refco's is more soried that most, I am sure whoever you clear through has a "history. "

I think you do not understand the difference between a securities broker and a Futures Comission Merchant. Sure there are not the guarantees or insurance as with an equity broker. There are other, and some might argue, more effective tools in place: An FCMs market capitalization (independent of client segregated funds) relative to position exposure is monitored real time by the clearing exchanges.

Further, and to protect customer funds, the CFTC has the ability to shut an FCM down immediately if the capitalization falls below level, or if there is reason to think customer funds are endangered. This has been done.

The system of protection to customer funds has been tested under greater threats than Refco and it works. What happens? Your account is secured the the Exchange Clearing Corporation and assigned to another FCM if you do not move it or assign it yourself first.

You can be sure that every penny at Refco is being monitored by the feds right now. If there were the the slightest suspicion of clients funds being endangered at Refco LLC, the shop would have been shut and client funds frozen until it is sorted out.

What might happen however, is that the liabily of the parent company is now so high, and lawyers are circling, and customer flight so fast, the brokerge could die a rapid death. This will not be the first time such a thing has happened. So we put on another trade with another broker. Life goes on.

I won't even begin to comment on your outrageously inflammatory and accusatory remarks about Apex Capital. Wow.

 

[jimrockford]

Quote from ellokn:

All brokers have a history. ALL of them. While Refco's is more soried that most, I am sure whoever you clear through has a "history. "

I don't think a prudent man would clear through a broker after it has been fined for using segregated customer funds to pay the broker's debts. I don't think it would be prudent, at least not until after the broker's internal corporate power structure and culture of corruption or incompetence have been smashed and reformed. Maybe I'm just a coward.

I think you do not understand the difference between a securities broker and a Futures Comission Merchant. Sure there are not the guarantees or insurance as with an equity broker. There are other, and some might argue, more effective tools in place.

...(omitted text)

The system of protection to customer funds has been tested under greater threats than Refco and it works.

What makes you think that you are in any position to assess the extent to which Refco threatens customer funds? I think we don't have enough information to do so. If there's a doubt, then there's no doubt, and a wise man gets out.

We agree that, unlike securities accounts, futures accounts have no guarantees. The system of other protections for futures accounts has its limitations. Its past results are no guarantee of its future performance. One must guard against Victor Neiderhoffer's mistake of disregarding the risk of unprecedented events. I am curious: I've seen it posted that no U.S. futures customer has ever suffered a loss due to collapse of a futures broker, but does anybody have any authoritative source (other than Apex Capital) proving or disproving this claim?

If there were the the slightest suspicion of clients funds being endangered at Refco LLC, the shop would have been shut and client funds frozen until it is sorted out.

Was Refco shut and its client funds frozen when the CFTC charged that it was routinely invading segregated customer funds to cover debts? Or are you perhaps overestimating, as have so many others, the level of protection we can expect from our government?

An FCMs market capitalization (independent of client segregated funds) relative to position exposure is monitored real time by the clearing exchanges. Further, and to protect customer funds, the CFTC has the ability to shut an FCM down immediately if the capitalization falls below level, or if there is reason to think customer funds are endangered. This has been done.

Nobody knows the FCM's capitalization, if its books are cooked by swindlers. I do not share the strength of your faith that the CFTC can always pre-emptively protect customers from the collapse of futures brokers. Neither does the CFTC, which warns us, on its website, under "What you should know before you trade": "Also, even though your brokerage firm is required to segregate your funds, you may still not be able to recover the full amount of any funds in your account if the brokerage firm becomes insolvent and there are insufficient funds available to cover the obligations to all of its customers. Your account is not insured."

You seem to be encouraging us to take this risk with Refco, as opposed to some other futures broker. Is there a reward for taking that risk?

 

[OldTrader]

Quote from jimrockford:


Question: what would have to happen, Oldtrader, and how bad would it have to get, and how many bells would have to ring, and how many red flags would have to be raised, before you finally became concerned that maybe it would not be a good idea to deposit funds with a particular futures brokerage? Would you just wait until the last possible moment, and then discover your funds were gone? [/B]

Rockford:

Here was what I said in my post:

Perhaps it's on the 50th page because it wasn't the problem at Refco. The problem did not have to do with trading losses. It had to do with fraud at the holding company level.

There are all kinds of risks pertaining to futures trading....but not all are applicable in this particular situation.

OldTrader

Now here's my question to you: where did you get the idea from my post that I think someone should "wait until the last possible moment and then discover your funds were gone"?

It seems that you have the propensity of jumping to conclusions. You've done it here, and you've done it the other thread as well.

But again, if I had an account at Refco (I don't) I would have wired my money out. Frankly, I don't think anyone in the regulated futures company will lose a dime, but it's always possible that the ability to trade for a period may occur, and that would not be something that I would want.

But just as you have jumped to conclusions on my post, you are jumping to a lot of conclusions on the entire Refco situation. And I think that's the point: some of your conclusions are unsupported by "facts", but are based on mere "supposition" on your part.

OldTrader

 

[jimrockford]

Quote from Oldtrader:

It seems that you have the propensity of jumping to conclusions. You've done it here, and you've done it the other thread as well.

Oldtrader,

You misread me. The thrust of my argument is not one of jumping to conclusions. The thrust of my argument is to recognize certain risks, and to recognize the extent to which we don't know certain things, and that we therefore cannot safely come to any conclusions.

Now here's my question to you: where did you get the idea from my post that I think someone should "wait until the last possible moment and then discover your funds were gone"?

Oldtrader, you asserted that the risk of customers, losing funds on deposit at a futures broker, is not applicable to Refco. Now THAT is what I call jumping to a conclusion. The more prudent course, which I advocate, avoids jumping to such a conclusion, by humbly keeping in mind the simple fact that we can't possibly be sufficiently prescient to presume to rule out such a risk. If we recognize a risk, we do the very opposite of jumping to a conclusion. We instead recognize that we don't know what will happen.

You would remove your funds from Refco, in order to forestall the risk of a short-term loss of use of your money. But if that particular risk were somehow magically eliminated, leaving only the remaining risk of having your funds permanently stolen or lost in a collapse of the firm, I get the impression you would deny the existence of such a risk, until it was too late and the money was gone.

This is why I asked you, how bad does it have to get, what specifically must happen, before you will recognize that the risk of permanently losing customer funds does apply to any particular situation? It is not enough that the CEO was arrested, charged with fraud, and released on $50 million bail? It is not enough that the parent company's financial statements for recent years have been officially disowned and cannot yet be corrected, so that we don't know the broker's capital? It is not enough that the brokerage itself embezzled segregated customer funds in order to cover debts? It is not enough that people much smarter and more rational than myself recognize the risk of permanently losing funds?

How close does the train have to get before you get off the railroad tracks, in terms of recognizing that the risk (not the certainty, but the risk), of losing customer funds, does apply to a particular situation?

 

[Tbill1]

Quote from jimrockford:


"We agree that, unlike securities accounts, futures accounts have no guarantees. The system of other protections for futures accounts has its limitations. Its past results are no guarantee of its future performance. One must guard against Victor Neiderhoffer's mistake of disregarding the risk of unprecedented events. I am curious: I've seen it posted that no U.S. futures customer has ever suffered a loss due to collapse of a futures broker, but does anybody have any authoritative source (other than Apex Capital) proving or disproving this claim?"

The owner of the Futures firm that I use told me the same thing.

Tbill

 

[jimrockford]

Correction to my previous posting in this thread:

I erroneously posted a question,

"It is not enough that the brokerage itself embezzled segregated customer funds in order to cover debts?"

When I actually intended to post,

"It is not enough that the brokerage itself embezzled segregated customer funds in order to cover debts temporarily, before it returned those funds? "

 

[jimrockford]

Apex Capital,

The passage I wrote, and which you quoted and to which you object, consists of both factual information, and also my opinions based on those facts, and based on other facts, which I posted but which you omitted from your quote. All of the factual information, about you, was derived from your own postings on Elite Trader boards. I made every effort to be accurate.

You, for example, certainly posted that you have superior knowledge, and that segregated customer funds, deposited with a futures broker, are guaranteed against the broker’s bankruptcy. Brandonf also made such postings. And you were both certainly wrong about this.

Perhaps you will find this interesting, from the Chicago Mercantile Exchange’s website at http://www.cme.com/clearing/set/fs/finsafsys10241.html, as follows:

Futures market customers face credit risk in doing business through any particular clearing member. Consequently, the selection process for a suitable clearing member is important. While the regulations dealing with segregation of customer monies are specifically designed to protect customers from the consequences of a clearing member’s failure, they do not always provide complete protection should the default be caused by another customer at that firm. Protection against a customer-caused default rests primarily with the management of the clearing member and the importance placed on its internal risk management controls.

If my version of the facts was incorrect, then I would encourage you to specify exactly which facts were true, and exactly which facts were incorrect. You might do this either publicly, or by PM. You have done nothing but give a vague assertion that my facts were not correct. If you give a specific explanation of the facts, and if it demonstrates error on my part, then I will publicly apologize for any incorrect facts, and for any opinions depending on incorrect facts. I already did this once before, when I realized that I had made a factual error in my dispute with you. I do hope this will be satisfactory to you. Perhaps you might apologize for your own errors as well. I will, in the meantime, stand by my previous posting. I don’t think your gripes are valid.

 

[FuturesTrader71]

Quote from Tbill1:

Quote from jimrockford:


"We agree that, unlike securities accounts, futures accounts have no guarantees. The system of other protections for futures accounts has its limitations. Its past results are no guarantee of its future performance. One must guard against Victor Neiderhoffer's mistake of disregarding the risk of unprecedented events. I am curious: I've seen it posted that no U.S. futures customer has ever suffered a loss due to collapse of a futures broker, but does anybody have any authoritative source (other than Apex Capital) proving or disproving this claim?"

The owner of the Futures firm that I use told me the same thing.

Tbill

I think in your quote above, you intended to say, "....suffered a loss due to collapse of a futures clearing merchant (FCM)..." which may be true. However, I am aware of 2 cases where a futures broker went under and took customer funds with him (was personally involved in one such situation). In both cases, the money was long gone even after NFA arbitrations ruled for the customers. The principals in those firms simply shut everything down and went elsewhere.

 

[zdreg]

Quote from jimrockford:

Apex Capital,

The passage I wrote, and which you quoted and to which you object, consists of both factual information, and also my opinions based on those facts, and based on other facts, which I posted but which you omitted from your quote. All of the factual information, about you, was derived from your own postings on Elite Trader boards. I made every effort to be accurate.

You, for example, certainly posted that you have superior knowledge, and that segregated customer funds, deposited with a futures broker, are guaranteed against the broker’s bankruptcy. Brandonf also made such postings. And you were both certainly wrong about this.

Perhaps you will find this interesting, from the Chicago Mercantile Exchange’s website at http://www.cme.com/clearing/set/fs/finsafsys10241.html, as follows:



If my version of the facts was incorrect, then I would encourage you to specify exactly which facts were true, and exactly which facts were incorrect. You might do this either publicly, or by PM. You have done nothing but give a vague assertion that my facts were not correct. If you give a specific explanation of the facts, and if it demonstrates error on my part, then I will publicly apologize for any incorrect facts, and for any opinions depending on incorrect facts. I already did this once before, when I realized that I had made a factual error in my dispute with you. I do hope this will be satisfactory to you. Perhaps you might apologize for your own errors as well. I will, in the meantime, stand by my previous posting. I don’t think your gripes are valid.

all of what you say, pales in comparison that apex capital says that i am lazy. of
course i am lazy and even more i am unfocused when it comes to the market if i bother to respond to him during market hours and do not capitalize my posts