Refco Fallout

[Apex Capital]

Quote from nkhoi:

now where is that 'your money at segregated account ' is safe guy ?

I'm right here.
Feel free to educate yourself with the following insightful post by "Rufus-4000" . . .

http://www.elitetrader.com/vb/showthread.php?s=&postid=872801#post872801

 

[nkhoi]

miss that post, thnx

 

[jimrockford]

Quote from Apex Capital:

Baron is his own boss.

ET is his website, his baby, and no one is going to pressure him into making a decision about closing a thread. As opposed to you, it is my opinion that he conducts himself in a professional manner and refrains from making baseless claims and assertions about other people's business.

Apex Capital has a habit of putting words in my mouth. I never expressed any opinion as to Baron's professionalism. I leave Apex to debate that non-issue with himself.

Given the BASELESS ASSUMPTIONS and FALSE CLAIMS that you made about my money management business as a CTA, Baron simply chose to close the thread because he could see that you and your frail ego had an axe to grind regarding REFCO and my views on the segregated futures accounts there. You have no one else to blame for closing that thread than yourself.

Everything I said, in the other threads, was based on postings by Apex Capital himself. Baron assured me that his reasons for closing the thread were not as Apex Capital represents them.

Your claims and assertions regarding my clients and their funds were totally absurd, not too mention the fact that I never once stated that I had client money clearing thru REFCO.

I can go on and on about your ranting and raving about REFCO and how segregated futures accounts are treated in the FCM business, but it is purely a waste of time. I also noticed that when I responded via PM to correct your false and baseless claims, you conveniently disappeared and failed to even acknowledge my PM.

I publicly denied Apex Capital's accusations, and I responded to them and disproved them with the greatest possible detail, via my 2 postings in the thread "Refco Account Security", which I made on Oct 18, 2005.

As I indicated earlier, you obviously have an axe to grind.
And for someone that has no relationship with REFCO, you appear (in my humble opinion) to be awfully obsessed with them.

Strange.

I think we should all have an axe to grind against financial criminals like Refco, because they threaten our livelihoods.

Apex Capital admitted, in the closed thread, that he is in business with Refco: "I am a registered CTA that has no other business relationship with REFCO aside from doing some clearing business with them in commodities, as I do with several other FCMs" (see Apex Capital posting on EliteTrader of 14 Oct 2005 at 10:58 AM EST). Apex Capital used EliteTrader to reassure us that it was safe to clear through Refco. He claimed that his knowledge, as a CTA, was superior to that of myself and other ET members. He labelled himself as a a professional who should be trusted, and myself and his detractors as ignorant amateurs who should be ignored. He supported his argument with false claims that futures accounts are insured against broker bankruptcy.

I therefore demonstrated, in my Oct 18 postings, that Apex Capital lacks the professionalism which he proclaims of himself, so that his opinion should not be blindly trusted in regard to futures account security, and I demonstrated that futures accounts are NOT insured. I took it upon myself, as a public service, to debunk Apex Capital's false claims, so that EliteTrader members will be aware that their segregated futures accounts are not insured, and that they must exercise due diligence in their selection of a clearing member, as recommended by the CME and the CFTC. The case of Jim Rogers provides a stronger vindication of my position than I ever expected.

I hope this response satisfies Apex Capital.

 

[mind]

we had segregated accounts with refco futures. we had all money back within a week. from moment one i was sure this would happen. IMHO segregated accounts ARE backed by the other clearing members of the exchange, thus by the exchange, thus by the system itself.

some brokers incentify clients with additional basis points on their resting money if they are willing to give up segregation. everyone makes his own choices. i pesonally would not sell protection on a broker for a fraction of what i would make in the credit market for the same credit quality.

to me if a scandal of this magnitude leads to a delayed payback of five business days, this is proving the quality of the system. i had money their, they went bust, i have it back. period.

for those upset by the scandal. wake up. this is the world. watch. use hindsight. choose your partners well. and, let us face it, refco was an excellent choice. do not try to avoid that "mistake" ... it is impossible. this business is not about avoiding mistakes but about winning in the end ... and mistakes (=loosing trades) are part of the game.

peace

 

[FredBloggs]

i think this short article sums the whole thing up quite well.....

http://www.appliederivatives.com/co...7&IssueID=FF729531-B400-4813-838354F934B07097

 

[jimrockford]

Quote from mind:

IMHO segregated accounts ARE backed by the other clearing members of the exchange, thus by the exchange, thus by the system itself.

Mind, your opinion is specifically contradicted by the CFTC and the CME. The exchanges and clearing members will only make good on uncovered customer losses, from trading or embezzlement, AFTER all deposits by other customers, in the same pool of segregated accounts, have been seized and exhausted to cover those losses. The exchanges and members have NO obligation to pay one red cent to these customers who have lost part or all of their funds and positions in such a broker bankruptcy. The exchanges and members only guarantee trades against the counterparty risk that a bankrupt clearing member might renege on a trade, thus injuring customers of other firms; but they provide no guarantee that a bankrupt clearing member will return customer funds or property to its own customers.

Quote from CFTC at http://www.cftc.gov/opa/brochures/opafutures.htm:

Are my funds protected?

In an individual account, funds that you have deposited with your commodity brokerage firm to trade on commodity exchanges located in the United States are required to be segregated (held separately) from any of the brokerage firm's own funds. The amount segregated will increase or diminish as you make or lose money from your trading. 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.

Quote from Chicago Mercanitle Exchange at http://www.cme.com/clearing/set/fs/finsafsys10241.html:

Although CME Clearing segregates customer performance bond deposits from the clearing member’s proprietary performance bond deposits, the customer performance bond deposits for each clearing member are held in the aggregate, without identifying specific ownership of the deposits. If a default occurred in the clearing member’s customer account, CME Clearing has the right to apply toward the default all customer performance bond deposits and positions in the defaulting clearing member’s customer origin account at CME Clearing. Accordingly, positions and performance bonds deposited by customers not causing the default are potentially at risk if there is a default in the customer origin of their clearing member. 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.

Quote from mind:

let us face it, refco was an excellent choice. do not try to avoid that "mistake" ... it is impossible. this business is not about avoiding mistakes but about winning in the end ... and mistakes (=loosing trades) are part of the game.

Mind,

Refco was not a wise choice, and this would have been obvious to anyone who performed the due diligence recommended by the CME and CFTC. Refco, in the 1990s, misused segregated customer funds as a means to pay its debts. Refco then returned those funds, after temporarily misusing them to keep Refco afloat. Refco did this over and over again, on a routine, almost daily basis. The CFTC made these findings, and Refco consented to them without admitting or denying wrongdoing, and paid a $1.25 million fine.

If Refco had gone bankrupt, before it could return the embezzled customer funds, then those customers would lost have the entire amount of the embezzled funds, which was well in excess of $100 million. If the bankruptcy had been triggered by large customer losses, in a black swan market event, then the losses to customers would have been far greater. It appears that the financial crisis of the late 1990s did in fact cause a huge uncovered loss, but that Refco again avoided bankruptcy by concealing that loss and transferring it to the parent holding company; and the present scandal erupted because that cover-up collapsed, revealing the huge loss.

If the CFTC were an effective regulator, it would have shut down Refco in 1994, rather than fining it. If Jim Rogers had performed due diligence, he would have recognized Refco's history of embezzling segregated customer funds, and he could have avoided his current situation, of not being able to get back hundreds of millions of dollars of client funds which he deposited into Refco's segregated customer funds, but which Refco effectively embezzled by parking those funds in non-segregated accounts.

It is not prudent to clear through a clearing futures broker having a history of embezzling from segregated customer funds.

Nature gave us brains so that we could use them to avoid at least some mistakes. It is impossible to avoid all mistakes, but many mistakes are avoidable.

 

[man]

"Refco was not a wise choice, and this would have been obvious to anyone who performed the due diligence recommended by the CME and CFTC."


this is why these institutions, CNE, CFTC and NFA threw them out of the exchange and yelled against their IPO i guess three months ago ...

i think you did not get me right: it is very easy to be wise after the fact. your post sums up all the knowledge no one had four weeks ago. and no one could possibly have about other brokers still active. i repeat: from the persepctive four weeks ago refco ws an excelent choice.

regarding account segregation: i will check back what you said. the point her is not about trading losses, but principal. i remember two crisis: drexel and refco. futures accounts did not suffer a single dollar loss.

peace

 

[2cents]

Quote from man:

regarding account segregation: i will check back what you said. the point her is not about trading losses, but principal. i remember two crisis: drexel and refco. futures accounts did not suffer a single dollar loss.

peace

kinda correct it seems:
http://www.sec.gov/rules/proposed/s71701/sexton1.htm#P122_25856

One of NFA's first actions after it began operations on October 1, 1982 was to take a Member Responsibility Action to suspend an FCM that had used most of its customer funds for its own purposes.15 Since then, there have been no insolvency losses due to fraud by an FCM, its principals, or its employees. The few insolvency losses did occur were all due to customer defaults based on large trading losses. In fact, there have been no insolvency losses in funds required to be segregated since 1989 - over a decade ago.16

however past performance is... ;-)

peace

 

[globalfxtrainer]

Quote from 2cents:

kinda correct it seems:
http://www.sec.gov/rules/proposed/s71701/sexton1.htm#P122_25856

One of NFA's first actions after it began operations on October 1, 1982 was to take a Member Responsibility Action to suspend an FCM that had used most of its customer funds for its own purposes.15 Since then, there have been no insolvency losses due to fraud by an FCM, its principals, or its employees. The few insolvency losses did occur were all due to customer defaults based on large trading losses. In fact, there have been no insolvency losses in funds required to be segregated since 1989 - over a decade ago.16

however past performance is... ;-)

peace

Funds are not required to be segregated in a non-regulated entity like RefcoFX Associates, LLC. It is voluntary on the part of the entity. Depending on who you speak with at RefcoFX you get a different answer about whether funds were segregated or not. What is certain is that they were under no mandatory regulation to do so.

 

[jimrockford]

Quote from man:


i think you did not get me right: it is very easy to be wise after the fact. your post sums up all the knowledge no one had four weeks ago. and no one could possibly have about other brokers still active. i repeat: from the persepctive four weeks ago refco ws an excelent choice.

regarding account segregation: i will check back what you said. the point her is not about trading losses, but principal. i remember two crisis: drexel and refco. futures accounts did not suffer a single dollar loss.

peace

First of all, I responded to a posting by the EliteTrader member named "mind", but now that same person seems to be responding to my response, but under the different username of "man". Can you please clarify this, mind and man?

Second of all, all of the historical information I gave, about Refco's history of embezzling customer funds, has been a matter of public record since 1994, freely available to anybody who took the time to check on Refco's regulatory history. Refco had one of the worst and most extensive regulatory and enforcement histories of any FCM. So the argument that nobody could have known about it just doesn't hold any water. The problem is that people are just too lazy to and to naive to protect themselves from avoidable disasters.

You suggest that private parties could have reasonably assumed that since regulators failed to take action against Refco, it was reasonable for them to trust Refco. I think this is a completely unreasonable and naive viewpoint. U.S. financial markets regulators have always been ineffective, and it was never reasonable to use their inaction as the basis for one's own failure to perform due diligence. The regulators themselves acknowledge the need for private parties to perfom due diligence, so if you trust the regulators so much, it is pure contradiction for you to disregard and to poo-pooh their realistic advice.

You say that the point about account security is not about trading losses, but about security of the principal. I'm not sure you understand the relationship between the two. Trading losses by other customers, in the same pool of segregated funds, are a direct threat to the security of your own principal. If other customers have huge losses which they cannot cover, and which the FCM's regulatory capital cannot cover, then THEIR trading loss deficit is covered by liquidating YOUR positions and taking YOUR principal to cover the trading losses incurred by those OTHER customers. See the connection?

Also, if you read the link provided by 2cents, you will see that customers have, in fact, lost segregated customer funds in FCM bankruptcies. The last time this happened was in 1989. Even if it never before happened, it would not be reasonable to ignore the risk that it might happen in the future.