What happens to small REFCO customers $$$ ?

Discussion in 'Wall St. News' started by ER9, Oct 21, 2005.

  1. ER9


    If you had a small account with refco under 500k what would have happened to your money? Is it locked up and unobtainable until everything settles down or could it be withdrawn, transferred etc?
  2. I have a "small" personal futures trading account at REFCO Futures, LLC.

    I have been able to trade it every single day since the announcement of the $430 million dollar "loan" by ex-CEO Bennette. It has not been "locked up" or "unobtainable".

    Furthermore, a family member of mine has a rather substantial amount of money in a REFCO futures account and they were able to withdraw money out of it, and a check cut and Fed-Ex'd to them within 48 hours of requesting the funds.

    Those are my personal experiences with the firm dealing in segregated futures accounts.

  3. ER9


    Comforting to know. I don't have an account with them but i was concerned we as traders could risk loosing so much on such short notice.
  4. ER9,

    it would behoove you not to get so comfortable.

    Segregated customer funds, deposited into futures accounts, are organized into a few different pools of customers from the same clearing member (regardless of which introducing broker you have). If one or more of the customers in your pool have large trading losses not made good by meeting margin calls, or if the funds are embezzled, then the clearing broker's capital is applied to fill the pool's deficit. If this capital is not sufficient to fill the gap, then the clearing broker is bankrupt, and the assets in the pool will be distributed to the customers in the pool on a pro rata basis, without regard to whether particular property can be traced to a particular customer, and without regard to the broker's other creditors or the broker's other pools of customers. Customers would therefore lose either some or all of their property. No party would have any obligation to make any customer whole.

    Futures exchanges guarantee trades against the risk of a counterparty's default, but they do not guarantee trading losses by either you or by other customers in your pool at the clearing broker, and they do not guarantee against bankruptcy or embezzlement by your broker.

    If you are trading futures, then there is no Santa Claus, no Easter Bunny, and no deposit insurance.

    The CFTC and the CME both have warned, essentially, that you must perform due diligence in selecting your clearing broker.
  5. misha7


    No such 'luck' for Refco FX customers. For them account withdrawals are frozen until further notice.
  6. ER9


    I appreciate your clarification Jim.

    What can we do as traders to protect ourselves? Split our cash between two or more brokers?
  7. It appears the Canadian participants in the Canadian Investor Protection Fund may have a good answer to this. http://cipf.ca
  8. Xenia


    Oops, they did it again ?


  9. gnome


    Correct on all points. However, how often have we heard of an FCM going bankrupt or someone embezzling funds to the detriment of segregated funds? I have not heard of any, so perhaps we should not be overly concerned.

    In the market crash of '87, I had money at Refco which I wired out to try to beat the rush. I called them back in a few days to see if they were still open for business. I asked about the size of "uncollectible debits"* from customers... they said, "Looks like about $300K at this point, and that's not a problem as we have $20 Million in reserve".

    In the aftermath of the crash, the CME raised minimum margin to about $15,000 per contract.... Refco instructed me that, "we prefer you NOT trade stock indices... but if you do, OUR minimum margin is now $50,000 per contract". That was very good on their part as it tended to protect not only their reserve but all customers.

    *Money the FCM cannot collect from wiped-out customers because they have insufficient assets... the FCM has to make up ALL such losses to the extent of their "reserve capital" before the losses get shared among the customers.
  10. Gnome, this is a great point that you have made and one that goes completely unnoticed by several of the people here on this thread.

    Anyone remember Stotler back in 1990?

    They were unable to meet capital requirements as exchange members and were forced to shut-down because a third-party loan to the company had been pulled. All monies in segregated futures accounts were eventually returned to customers. It took as long as 9 months, but ALL monies were in fact returned.
    #10     Oct 25, 2005