What sort of fund structure can cause clients lose more than 100% losses when the fund blows up?

Discussion in 'Risk Management' started by helpme_please, Nov 21, 2018.

  1. Robert Morse

    Robert Morse Sponsor

    #21     Nov 21, 2018
  2. Robert Morse

    Robert Morse Sponsor

    Risk is very simple. The customer posts a margin bond and the FCM post 8% of that value with the exchange. That is the collateral posted at end of day with the CME. To cover losses, first the customer funds are used. Then the FCM, then the CME. If the customer used an Introducing Broker (IB) to get to the FCM, The FCM can go after that IB to recover losses. Ultimately, the CME is your counterparty on the futures that they clear.

    I do wish the NFA/CFTC would create and fund a SIPC/FDIC type fund to protect customers, but they have decided not to.
     
    #22     Nov 21, 2018
  3. ajacobson

    ajacobson

    Some thoughts-
    Margin isn't intended to protect you as much as it's intended to protect the broker from being left with an unsecured debit.
    Any leveraged product has the ability to lose "more than anticipated".
    In 1987 it was short index puts so recognize it does not have to be just futures or futures options.
    Long or short stock on margin has the ability to also create an unsecured.
    Almost any account allowing these forms of trading will have personal recourse with very rare exceptions.
    Brokerage houses are all going to want personal recourse on accounts with these types of product. An additional caution - some retail structured products that have embedded short options - like reverse convert notes - actually do place limits on customer losses.
    Will a fund or managed structure limit the brokerage houses ability to pursue recourse against you personally?
    Generally, the answer is no and the industry has written this into all their agreement - this wasn't always the case, but the industry has evolved over time.

    IB got hit with about a $60 million(USD) unsecured a number of years back. It was margined a concentrated stock position that went south. Every brokerage firm has had some uncollected experience. They become conversations on this site pretty frequently.

    Lot's of humor in the trading community that goes something like - Lose a $100,000 and you have a problem - Lose $10 million and THEY have a problem.

    Keep in mind we all pay for these events. If Optionsellers leaves CME clearing with an unsecured which they never end up collecting - they dip into the clearing fund and commonly(not everytime)the clearing fund has the ability to create a special assessment and we all end up paying.
     
    #23     Nov 21, 2018
    IAS_LLC and sle like this.
  4. May I ask who is we? Does it include retail customers?
     
    #24     Nov 21, 2018
  5. ajacobson

    ajacobson

    Sure. Anyone who clears a contract.
     
    #25     Nov 21, 2018
  6. JSOP

    JSOP

    But this is options on futures. Do they operate the same way? If this is the case, what is this "called upon by your broker to deposit a substantial amount of additional margin funds to maintain the position" in the disclosure? What is that referring to? Is that referring to the "margin bond"? I didn't see that "margin bond" specifically mentioned in the disclosure statement from optionsellers.com? And if optionsellers.com was the IB, then FC Stone was supposed to go after optionsellers.com, why were all the clients receiving debit balances directly from FC Stone for them to pay up? Something does not make sense here.
     
    #26     Nov 21, 2018
  7. JSOP

    JSOP

    Optioncellers.com is just a CTA not a FCM, do they have to maintain a clearing fund as well?
     
    #27     Nov 21, 2018
  8. ajacobson

    ajacobson

    #28     Nov 21, 2018
  9. ajacobson

    ajacobson

    Gossip in Chicago is that it is about a $40 Million unsecured. FCStone cleared so the question becomes do they have $40 Million. Again this is gossip.
     
    #29     Nov 22, 2018
  10. Robert Morse

    Robert Morse Sponsor

    INTL FC Stone is a public company with much more than $40mm. The Financial Data for FCMs report is always late. Right now you can only view September 2018. ($167,741,650 net capital in the FCM) If you go review these over the next few month you will like be able to estimate the loss unless the Parent company adds funds,) https://www.cftc.gov/MarketReports/financialfcmdata/index.htm
    I'm sure if you follow their SEC filings, you might see something at some point.

    Bob
     
    #30     Nov 22, 2018