if this is true no futures account is safe from a black swan event. the only possible exception might be ib because they sweep the funds into an insured account.
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Refco Owes Jim Rogers Fund $362 Million
- Thread starter just21
- Start date
if this is true no futures account is safe from a black swan event. the only possible exception might be ib because they sweep the funds into an insured account.
Quote from PuffyGums:
Someone explain how Jim Rogers became an unsecured creditor when it seems all he did was deposit govt bonds and open positions in futures.
Could any other futures customer be declared an unsecured creditor?
Maybe I am wrong, but the article is very clear about Beeland being a hedge fund, and use the unsecured prime brokerage services provided by Refco. By using Prime brokerage services such as risk based margin calculation, etc, by definition the Beeland account becomes unsecured.
Beeland accounts are not the same as Jim Roger's personal investment accounts, since hedge funds have extra financing needs, therefore have leverage that is greater than that available to an average investor.
Quote from inet:
How does IB sweep the funds into an insured account?
you will have to ask them exactly how its done but it is my understanding that with ib any cash in a futures account is swept into an insured cash account nightly.
it might be a good time for someone from ib to put out a press release to reassure the traders.
here is what the website says:
Securities Account Protection
Customer securities accounts at Interactive Brokers are protected up to $30 million (including up to $1 million for cash). The market value of your stocks, options, warrants, debt, and cash -- denominated in all currencies -- is covered by this insurance. Futures, options on futures, and single stock futures are not covered, but available cash will be swept from your futures account to your securities account periodically to take advantage of insurance coverage as much as possible. As with all securities firms, this insurance provides protection against failure of a broker-dealer, not against loss of market value of securities.
This protection is provided by the Securities Investor Protection Corporation (SIPC) and Lloydâs of London insurers. SIPC provides the first $500,000 per customer (including up to $100,000 for cash). For customers who have received the full SIPC protection, the Lloydâs policy provides up to an additional $29.5 million (including $900,000 for cash), subject to an aggregate limit of $150 million.
For the purpose of determining a customer account, accounts with like names and titles (e.g. Individual/John Smith and Individual/John Smith) are combined, but accounts with different titles are not (e.g. Individual/John Smith and IRA/John Smith).
SIPC is a non-profit, membership corporation funded by broker-dealers that are members of SIPC. For more information about SIPC and answers to frequently asked questions (such as how SIPC works, what is protected, how to file a claim, etc.), please refer to the following websites:
The Real Question is whether Roger's Fund was in exchange traded contracts or swaps. Should be interesting to see if others are "made whole" before him. It will not be easy to just fly away with those assets or even put him in line. There is ALOT of exchange/industry politics that will proceed BEFORE the law and creditors. Especially, if they are in futures contracts. I know damn well this will send a chill into Prime Brokerage Customers if he gets stuffed. We are in uncharted territory here (Not in the sense of a Brokerage going under because of fraud but--- because of the size and the fact that you have unsecured prime accounts invested in liquid assets. The only case I know about, the accounts were made whole --the money just "showed up". This is the type of thing that no one wants to see ---especially exchanges.)
FWIS, I had bad experiences with Refco at the CME about 4 years ago and have not done business with them since. I am surprised Jim Rogers had all his business with one firm.
On the brighter side, the Rogers Raw Material Index Trakkr's go live at the CME in November.
FWIS, I had bad experiences with Refco at the CME about 4 years ago and have not done business with them since. I am surprised Jim Rogers had all his business with one firm.
On the brighter side, the Rogers Raw Material Index Trakkr's go live at the CME in November.
Quote from rufus_4000:
By using Prime brokerage services such as risk based margin calculation, etc, by definition the Beeland account becomes unsecured.
can u elaborate plse, re why it becomes unsecured? (i am in the midst of prime brokerage services type negotiations, altho' for fx spot trading essentially at this point, and perhaps fx cfds etc, also secured agreement on designated segregated client acct with my 'prime', therefore v.interested indeed in hearing more abt what may happen shld they go tits up...)
thanks in advance
IB will sweep any funds not required to meet margin requirements into an insured securities account, once each day, after marking to market after the close of business. Any funds required to meet margin requirements remain in the commodities account and are not insured. If margin requirements increase, due to an adverse market move, then IB will automatically move the additional needed margin from the insured securities account to the uninsured commodities account, again after marking to market, once per day.
It isn't very complicated.
It isn't very complicated.
Quote from 2cents:
can u elaborate plse, re why it becomes unsecured? (i am in the midst of prime brokerage services type negotiations, altho' for fx spot trading essentially at this point, and perhaps fx cfds etc, also secured agreement on designated segregated client acct with my 'prime', therefore v.interested indeed in hearing more abt what may happen shld they go tits up...)
thanks in advance
Well, where do I begin, the whole concept of margin and financing is very simple in the retail range, but can be very complex in the institutional client side. Basically, for retail equity clients, it is Reg-T, straight up, no ifs ands and buts, for retail future clients, it is SPAN, also clear cut. I don't know about FX, never dealt on the retail FX side of the house. By the way, the description here (Reg-T, etc) are highly US centric. I will give some idea of the UK / Asia treatments later on, but only some.
For institutional clients, the combination is utterly confusing. If the institution is a broker dealer or a market participant (aka, member of exchanges, certainly market makers), the institution can use standard Risk-Based-Haircuts, the RBH-SPAN calculation is straight forward and applies mostly to market makers, but can apply in some cases for just exchange members. However, since by regulation, the clearing firm can not lend the institutional client reg-T requirements, but can lend the client SPAN money. So what a lot of clearing firms that is both a broker / dealer and a FCM does is to keep most of the client's money on the securities side, and use the securities side to satisfy the SPAN requirements. This is probably the simplest description of regulated cross-margin treatment. There are some variations I won't go into.
For non-exchange member institutional clients (a large majority of them are hedge funds), the water gets muddy. In Beeland's case, it gets even more confusing as Jim Rogers personally is still a member of CBOT and CME, but the Beeland entity is not (I am guessing here, but the article clearly says unsecured, so the conjecture is probably correct).
Let me go on a tangent for a second here, hedge funds don't want to be exchange members for the simple reason that they don't want to have file SEC reports regarding flow, and execution center destination. Anyways, for hedge funds, the RBH is not applicable, so a lot of prime brokers invented something called Risk-base margin calculation, basically lending the hedge fund money overnight to cover the margins (SPAN and Reg-T). I know I just said that "clearing firm" can not lend their customers Reg-T money (confusing, isn't it?) but an "offshore financing arm" *can*. Typically the "offshore financing arm" would do an overnight reverse Repo to cover the margin requirements. Now, since the money is coming from an offshore financing arm, the money as well as the collateral for the Repo need to be kept on non-secured accounts (sometimes off-shore, sometimes not), as the money is not the customer's money, but instead through an off-balance sheet transaction (i.e., reverse Repo). This, incidentally is also how hedge funds get leverage.
This is also the reason why financial services firm have so many legal entities, for instance in Refco's case, Refco LLC (the regulated FCM), Refco Securities (the regulated broker / dealer), Refco Capital markets (the unregulated financing and prime brokerage arm).
There are hedge funds are don't use leverage above the regulated amounts, so they are purely regulated. But the prime brokers privately don't consider them to be "prime brokerage clients", as they would generate no financing revenue. Prime Brokerage generate substantially more financing revenue than from providing brokerage and DMA type of services (the rule of thumb is usually 65/35 split, or more).
Now, back to other liquid contracts like CFDs, they are treated in UK under a simple leverage scheme similar to SPAN, I am not sure about regulation regarding CFD and the undelying cross-margin treatment. You also mentioned "client" accounts, this is more like a wrap-account type of setup, is that correct? If so, while wrap-accounts are sometime bundled into prime brokerage services, they are different, keep in mind that prime brokers generate most of their revenues from financing, a wrap requiring no financing is just a plain vanilla institutional (or even retail) account, maybe secured, that's all.
The key in hedge funds is leverage. Which is why sometimes people confuse a CTA, an investment vehicle that uses the standard futures leverage, with unsecured leveraged funds, from a clearing firm perspective, CTAs are substantially simpler to service, don't require extensive financing through the unregulated arm.
Because of what happened at Refco I was wondering if there is no way to protect investors against banks and brokers.
I was thinking about the following:
The money deposited at the broker or FCM has to be limited to the absolute minimum.
The investor will deposit a bank guarantee for the additional funds to reach the margin level.
In case of losses the broker will ask the bank to pay for the losses if the investor agrees.
Payment should occur within 12 hours.
If the investor refuses to pay due to a dispute, the bank will block 150% of the amount of the proven losses. This money cannot be withdrawn anymore by the investor nor buy the broker till the dispute has been settled.
Would any broker accept this?
Well, if we join forces and go as one group with a heavy volume, there will surely be parties that are interested to accept these conditions.
The way things are now is crazy. People give millions of dollars to others without any guarantee at all.
I was thinking about the following:
The money deposited at the broker or FCM has to be limited to the absolute minimum.
The investor will deposit a bank guarantee for the additional funds to reach the margin level.
In case of losses the broker will ask the bank to pay for the losses if the investor agrees.
Payment should occur within 12 hours.
If the investor refuses to pay due to a dispute, the bank will block 150% of the amount of the proven losses. This money cannot be withdrawn anymore by the investor nor buy the broker till the dispute has been settled.
Would any broker accept this?
Well, if we join forces and go as one group with a heavy volume, there will surely be parties that are interested to accept these conditions.
The way things are now is crazy. People give millions of dollars to others without any guarantee at all.
pretty sure they were only futures contracts. i also think he used no leverage, so even if his positions were unwound i doubt they would make much of a dent in the market. but that's just my ignorant opinion.
Quote from TGM:
The Real Question is whether Roger's Fund was in exchange traded contracts or swaps. Should be interesting to see if others are "made whole" before him. It will not be easy to just fly away with those assets or even put him in line. There is ALOT of exchange/industry politics that will proceed BEFORE the law and creditors. Especially, if they are in futures contracts. I know damn well this will send a chill into Prime Brokerage Customers if he gets stuffed. We are in uncharted territory here (Not in the sense of a Brokerage going under because of fraud but--- because of the size and the fact that you have unsecured prime accounts invested in liquid assets. The only case I know about, the accounts were made whole --the money just "showed up". This is the type of thing that no one wants to see ---especially exchanges.)
FWIS, I had bad experiences with Refco at the CME about 4 years ago and have not done business with them since. I am surprised Jim Rogers had all his business with one firm.
On the brighter side, the Rogers Raw Material Index Trakkr's go live at the CME in November.