What happens to small REFCO customers $$$ ?

[CPTrader]

So how does one protect himself?

Segregated accounts not fuly safe, T-bills can be liquidated and commingled/shared?

So what to do - STOP TRADING?

 

[jimrockford]

Quote from CPTrader:

So how does one protect himself?

Segregated accounts not fuly safe, T-bills can be liquidated and commingled/shared?

So what to do - STOP TRADING?

The answer is (drum roll, please):

Due diligence.

Perform due diligence when selecting a clearing futures broker. A good analogy is that you should look both ways before you cross the street. So you would look at the broker's history. If it were Refco, you would see that in 1994, they consented to CFTC findings and a one million dollar fine, without confirming or denying wrongdoing, for having transferred segregated customer funds to non-segregated accounts, and then temporarily using those customer funds to pay Refco's debts, before returning the funds to the segregated accounts. You would see that they did this over and over again. You would also take note of Refco's well-known reputation for lax risk control, which always directly threatens any customer's segregated funds. And then you would say to yourself, hmmn, maybe I shouldn't rely upon a bunch of reckless deadbeats, who need to embezzle in order to cover their debts, and who don't protect adequately against black swans and other trading risks, as the proper outfit to clear my trades. So you go elsewhere, to find a little bit better risk control, and no history of embezzlement.

You must also face the inescapable reality that you will always be exposed to some risk of broker bankruptcy or embezzlement, whenever you trade futures. You must remember that limited insurance, for bank accounts and securities accounts, is an extravagant government benefit, which is the exception to the rule, not the rule. The general rule is that ya takes yer chances.

Maybe you could complain to your congressman about this situation. Maybe you could propose a "No Speculator Left Behind Act", as a way to fix it.

 

[Xenia]

The answer is (drum roll, please): Due diligence.

Good idea, but you need to do a better job than those who acted as underwriters for Refco´s IPO.

 

[CPTrader]

Quote from jimrockford:

The answer is (drum roll, please):

Due diligence.

Perform due diligence when selecting a clearing futures broker. A good analogy is that you should look both ways before you cross the street. So you would look at the broker's history. If it were Refco, you would see that in 1994, they consented to CFTC findings and a one million dollar fine, without confirming or denying wrongdoing, for having transferred segregated customer funds to non-segregated accounts, and then temporarily using those customer funds to pay Refco's debts, before returning the funds to the segregated accounts. You would see that they did this over and over again. You would also take note of Refco's well-known reputation for lax risk control, which always directly threatens any customer's segregated funds. And then you would say to yourself, hmmn, maybe I shouldn't rely upon a bunch of reckless deadbeats, who need to embezzle in order to cover their debts, and who don't protect adequately against black swans and other trading risks, as the proper outfit to clear my trades. So you go elsewhere, to find a little bit better risk control, and no history of embezzlement.

You must also face the inescapable reality that you will always be exposed to some risk of broker bankruptcy or embezzlement, whenever you trade futures. You must remember that limited insurance, for bank accounts and securities accounts, is an extravagant government benefit, which is the exception to the rule, not the rule. The general rule is that ya takes yer chances.

Maybe you could complain to your congressman about this situation. Maybe you could propose a "No Speculator Left Behind Act", as a way to fix it.

Due diligence does not solve anything.

The fact that REFCO made mistakes in 1994 does not ean theywill alway spusue th eillegalpath.

A question for you. Would you open an account/prime brokerage relationship with Goldman Sachs? YES!, I hear you say?

So what happens if tomorrow, the GS prop traders suffer a heavy loss on their books, and this is revealed to the markets and some big clients start running for the exits, trading partners, reduce/cut credit ines, etc...... what happens?!

My point is that in theory any well run firm in this biz runs the risk of ruin.. no due diliegcne can predict or prevent this.

 

[NickBarings]

Broker default is just part of the game, no way in
forseeing this, if so, just tell me which broker is the next
in line...and I will go short heavily on this broker;

 

[2cents]

Quote from CPTrader:

So what to do?

simply accept the risk of total loss on margin and other type accts / deposits VS looking for appropriate schemes / jurisdictions that may provide higher levels of protection?

just a few ideas of the top of my head...:
(am essentially looking at fx here, but not only...)
- schemes: escrow-type arrangements - some brokers offer this in some sub-grade-type jurisdictions - whereby the broker is actually putting his own money at play (not v.costly if u bucket most of the trades...)
- some people wld suggest to go with a Tier 1 bank / group instead of lower-rated / independent brokers, cld be a trade-off altho' it doesn't eliminate the risk
- jurisdictions: those with a single regulator and a single unified compensation scheme across financial products / mkts / services, eg the UK perhaps, but its only a perhaps... the UK FSCS applicability criteria r just beyond my limited abilities...

what do U think?

 

[globalfxtrainer]

Quote from 9th Gate:

The FX business is unregulated for the most part even in the US. The CFTC losses even more power you factor in offshore addresses. Refco futures division would dip into regulated / segregated futures funds, then what do you think their FX division with an offshore address was doing ? Where you wire the funds to and where they end up at the end of the day could be different. Even if the funds show up at the correct account then who regulates that they stay there in an unregulated account ?

I already uncovered what Interbank FX was doing. You send $ to the Bank of West to clear through for Interbank FX located in Utah, but your request for funds withdrawals goes to a NY, NY fax # when the Bank of West (Big bank out west) has no branches in NY,NY ???

If your going to deposit a large amount of $ in an FX broker and want 100:1 leverage I would do it through Gain Capital and opt for the following which is listed on their customer agreement:

Customer Funds. At this time, GAIN offers Customer’s two alternatives for the management of their Excess Margin Deposit. Customer funds not required as Posted Margin for Open Positions may earn a money market rate of interest if they are maintained in a commingled account at a Standard & poors rated financial institution having a rating of not less than A with total assets of, at least, $100 billion. Alternatively, Customer funds not required for open positions may be maintained in an individually segregated/FDIC insured account if Customer's opening Account Balance is in excess of US$25,000. There will be no interest income paid on Customer funds maintained in segregated account, which will be individually FDIC insured up to $100,000. Cash on deposit in such accounts will, at all times, be subject to the claims of GAIN Capital for amounts due by Customer, including Margin Calls, as described in Section 5 of the Customer Agreement.

This should be the standard for the entire industry. I have enough of a challenge trading, I don't need one with just trying to protect my money.

This sounds good. I have been looking into Canadian brokers as well and there is what appears to be a Canadian equivalent to the FDIC. It's called the Canadian Investors Protection Fund (cipf) see http://www.cipf.ca Apparently you don't have to be a Canadian citizen and also you don't have to live in Canada to be afforded this protection -- you just have to have an account with a broker/dealer that is a participant in this organization -- they're listed on the site (this is one of the reasons that Refco Canada didn't freeze customers cash accounts apparently, unlike their American counterparts).

It has, unlike FDIC's $100,000 USD limit, One Million CAD coverage (approx. $851,000 USD). The brokers that are covered by this seem to be a lot more safe than their American counterparts by in large, unless your account exceeds that amount, in which case I presume you would open an additional account (s).

 

[globalfxtrainer]

Quote from jimrockford:

It would appear that GAIN Capital's arrangement is fraudulent. GAIN Capital is trying to make it sound like FDIC insurance will protect the customer against a GAIN Capital bankruptcy. The regulator, National Futures Association (NFA), says:



See http://www.nfa.futures.org/investor/forex/forex.pdf#search=.

The point is that, according to NFA, FDIC insurance only protects against bankruptcy of the FDIC-regulated bank in which GAIN deposits your funds. If GAIN itself goes bankrupt, then you must get in line with GAIN's other creditors, in order to get your money back, and FDIC insurance will have nothing to do with it. How can FDIC insure against a GAIN Capital bankruptcy, if FDIC lacks the power to regulate GAIN Capital so as to keep its creditworthiness and regulatory capital within the boundaries established for FDIC-regulated institutions?

Note that the customer not only suffers the detriment of credit risk exposure to GAIN Capital, but GAIN Capital enjoys the beneift of using customer funds to enhance its own creditworthiness, against which it is better able to borrow and to profit, at the expense of customers exposed to this credit risk. And the kicker is that the customer receives NO INTEREST AT ALL in exchange for this credit risk. This arrangement gives GAIN Capital every incentive to take risks recklessly, enabling it to make tons of money, distributed to employees, management, and owners, until one day, the lax risk management results in a blow-up, and then you, the customers, are left holding the bag, because you financed the machine allowing the crooks to make their loot, which will have been removed from the company by the time of the blow-up, so that it will not be available to make you whole.

These types of false claims are appearing all over the place. Apex Capital, for example, is in business with the Refco futures broker, and has peppered these boards with false claims that segregated customer funds, deposited with a clearing futures broker, are insured against bankruptcy of the clearing broker. This was part of his effort to defend Refco. He launches false personal attacks against people who try to debunk these false claims.

Note that a black swan market event could trigger massive uncovered customer losses at GAIN, which would wipe out the funds held by the non-losing, non-defaulting customers.

Jim, isn't that Gain agreement saying that all the money is IN that type of FDIC account with the exception of the margin required to cover open trades....or are you saying that the whole account is exposed?

 

[2cents]

Quote from globalfxtrainer:

This sounds good. I have been looking into Canadian brokers as well and there is what appears to be a Canadian equivalent to the FDIC. It's called the Canadian Investors Protection Fund (cipf) see http://www.cipf.ca Apparently you don't have to be a Canadian citizen and also you don't have to live in Canada to be afforded this protection -- you just have to have an account with a broker/dealer that is a participant in this organization -- they're listed on the site (this is one of the reasons that Refco Canada didn't freeze customers cash accounts apparently, unlike their American counterparts).

It has, unlike FDIC's $100,000 USD limit, One Million CAD coverage (approx. $851,000 USD). The brokers that are covered by this seem to be a lot more safe than their American counterparts by in large, unless your account exceeds that amount, in which case I presume you would open an additional account (s).

brilliant contrib' thanks!!!

 

[just21]

The small customers are going to IB......


Thomas Peterffy, chairman of Interactive Brokers Group LLC, said his firm is taking in about $20 million a day in Refco accounts and has accrued about $120 million in additional accounts since the scandal broke.

IBG, which also is among a slew of bidders trying to buy Refco's futures arm, unlike its peers, took out full-page newspaper advertisements in the early days of the Refco scandal seeking Refco client accounts. Mr. Peterffy acknowledged criticism of the move, but said it was in response to being shut out of the early bidding for the unit. Refco reached a tentative deal to sell its futures and commodities brokerage firm to an investment group led by J.C. Flowers & Co., a private-equity firm.