I think segregation of funds is more thorough than the financial solvency of one FCM. In the event of such failure, usually customer funds are also protected by larger networks. Anyway, this is an interesting story about undersegregation of FCMs and some reporting requirements. From a CFTC internal publication (see for more info: http://www.cftc.gov/foia/fedreg98/foi980827b.htm): 1. Proposal FCMs occasionally have become undersegregated as a result of market movements which cause deficits in the accounts they carry on behalf of their customers. Generally, the undersegregated condition is discovered as a result of the segregation calculation, which under Commission rules is required to be completed by noon on the business day following the day of the market movements. Most FCMs are able to avoid any undersegregated condition which might have occurred on the same business day for which the segregation calculation is made, using proprietary funds or through collection of deficits by wire transfer arrangements made with customers. However, this is not always the case. During the market downturn on October 27, 1997, the Commission was made aware that a few FCMs experienced undersegregation to a degree that they were unable to make up the shortfall from their own internal proprietary funds. Infusions of external capital were required in those cases to correct the undersegregated conditions. The Commission is also aware that, in at least one case, an FCM was aware that it was undersegregated as of the close of business on October 27, due to losses in the accounts of a single customer. Further, this FCM was aware on October 27 that it was likely this customer would default in its obligations to the FCM and that, as a result, the FCM would be undersegregated. Further, the FCM also knew that it did not have sufficient proprietary funds within the firm to correct the undersegregated condition. As explained further below, the Commission was notified on or about the close of business October 28--at least one day after the FCM was well aware of the situation.
Seriously.. Still no mention of this on the frontpage of WSJ or Bloomberg. Looks like the Tribune was the only hard copy to pick it up.. http://www.chicagotribune.com/business/chi-sat_sentinel0818aug18,0,4532488.story
Sentinel, a Northbrook, Illinois-based firm that oversees $1.6 billion, stopped the withdrawals Aug. 14, causing brokers Farr Financial Inc. and Velocity Futures LP to sue. Reason #1 not to deal with small firms. imho.
But we are not dealing with small firms. I deal directly with Penson which is a big firm for Futures clearing and custodian services but the fallout from Penson dealing to Sentinel ripples to outward. And the FCM has not issue any statement that they will make up for the shortage to their customers' account. So in the end, the FCM customers can get screwed even though they never dealt with or heard of Sentinel.
$1.6 billion is a small firm? There are not a whole lot of firms bigger than this, and Refco shows that large firms are no guarantee of success.
fyi I'm refering to Velocity and Farr: Farr, Velocity Other Sentinel clients are also unhappy. Farr Financial Inc., a futures broker based in San Jose, Calif., sued Sentinel earlier this week. Farr has $16 million to $18 million invested with Sentinel and if the firm doesn't return that cash, Farr said it may go out of business. A representative at Farr declined to comment on Friday. Velocity Futures LP, another futures broker that invested $18 million with Sentinel, filed a legal motion to intervene in the Farr suit. Sentinel manages its clients' money in large pools, rather than separate accounts, so any money that's returned to one customer leaves less for all the others, Velocity said. "Because Velocity has limited assets, any transaction that Sentinel enters into in order to generate funds to pay Farr will have a direct impact on Velocity," the company said in its motion. "The disposition of Farr's claim may, as a practical matter, impair or impede Velocity's ability to protect its interests."
Yeah I am a bit concerned. I have some dough parked at Velocity. I thought segregated accounts would protect us from such nonsense? Am I getting concerned for nothing?