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.
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.
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;
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?
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).
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?
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.