Questions about Refco

clylbw

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Obviously the recent problems at Refco have been discussed a lot, but I am still puzzled over a number of issues after reading most of the information available. Please enlighten me. Can anyone please answer the following questions:

1. Two phases often mentioned are the regulated and unregulated businesses of Refco. What do they really refer to? Apparently, Refco Capital Markets Ltd, an unregulated unit which accounted for more than half of the whole group's profits, was at the centre of the issue. Can anyone please provide a summary of what had happened there?

2. Is it true that most bids so far are for the regulated units? Why are potential buyers not interested in the unregulated ones?

3. From the materials I have read, Refco became a big player by brokering commodity futures, but it also seemed prominent in FX and financial futures markets. Is this correct? Moreover, many trading arcades in the UK were said to clear through Refco; do the recent problems affect them?

4. The events have struck me as happening at a very fast pace. On Monday 10/10/05 people first heard about the accounting fraud. It was a serious problem, but judging from Refco's market capitalisation at that time, the $430m non-collectable debt should not have been fatal. Yet within a week the company had filed for bankruptcy. What dragged Refco down?

5. Even though I am not a customer of Refco, the debacle is quite unnerving as it prompts the questions about broker selecting and risk diversification. In particular, what should one look for when searching for a broker? CFTC registration and NFA membership helps, but is that enough? Should one also check a broker's reputation? Or is it one step too far?

Another thing that has struck me is the numerous online discussions when the problems at Refco first emerged. There was a huge debate on whether the customers should withdraw their funds. I would have run in the first opportunity, but many seemed to believe differently. Then, one day they still said there was enough liquidity to run the company, the next day (14/10/05?) they froze customers' accounts.

I am a hard-core cynic and the whole thing simply adds to my belief. When Refco went public in August, its accounts were examined by its auditor and three lead underwriters. Grant Thornton, its auditor, claimed they had no previous knowledge about the fraudulent debts, but I cannot shake off the feeling that Wall Street would sell anything to anyone for a fee.

Finally, I wonder how this is going to affect the futures industry as I am a futures trader. The fiasco has been called the Enron in the futures industry. The fall of Enron destroyed the energy trading business; would Refco affect the whole industry? How?
 
Oh dear, no reply. :(

I know the topic has been discussed a lot, but I am still SO puzzled by so many issues. Can anyone please offer any views?
 
Thank you so much for taking your time to reply :) , tsuntzu. The one and only answer I have had so far.
 
clylbw said:
1. Two phases often mentioned are the regulated and unregulated businesses of Refco. What do they really refer to? Apparently, Refco Capital Markets Ltd, an unregulated unit which accounted for more than half of the whole group's profits, was at the centre of the issue. Can anyone please provide a summary of what had happened there?

I think it's all pretty much covered by the various American press articles (although who knows where they get some of their information from) but essentially a receivable due from a Refco affiliate was reclassified as being due from a hedge fund (Liberty Capital). The American press has reported that Liberty were paid by Phil Bennet to substantiate this when it qas questioned by the auditors. In my opinion, were it not for the IPO, this would probably have never been made public and nobody would have been any the wiser. Bennet repaid the debt on October 10. However, this repayment was made using loan made to Bennet by an Austrian bank who had taken Bennet's 38% holding in Refco as collateral. Obviously, that 38% holding is now worth a fraction of what it was.

clylbw said:
2. Is it true that most bids so far are for the regulated units? Why are potential buyers not interested in the unregulated ones?

Exactly as tsuntzu has said. It's not that the capital markets side of Refco is unregulated.It's just that the appropriate regulation is far more difficult and costly to enforce. For example, some US firms are having to de-list because of the potential costs of Sarbanes Oxley compliance, to name but one. In addition, since Refco creditors have no claim on the segregated funds it makes sense to separate the FCM side. Of course, this will also insulate it from the results of any future class actions.

However, I would have thought that the fact that the capital markets/securities side is not being auctioned with the FCM side would be problematic for a lot of Refco's larger hedge fund clients who offset margin requirements with positions held with Refco affiliates.

clylbw said:
3. From the materials I have read, Refco became a big player by brokering commodity futures, but it also seemed prominent in FX and financial futures markets. Is this correct? Moreover, many trading arcades in the UK were said to clear through Refco; do the recent problems affect them?

Not yet. Unless they hedge or offset margins requirements with other Refco affiliates. Going forward, it's anybodies guess.

clylbw said:
4. The events have struck me as happening at a very fast pace. On Monday 10/10/05 people first heard about the accounting fraud. It was a serious problem, but judging from Refco's market capitalisation at that time, the $430m non-collectable debt should not have been fatal. Yet within a week the company had filed for bankruptcy. What dragged Refco down?

You are correct. The 430 million would not have been enough to bring Refco down. As I said, I believe that were it not for the IPO, it would never have been disclosed publicly. However, Refco was running with debts of over a billion. Seems a lot, but it's not really for that kind of business (i.e. the capital markets and securities side). Once their credit ratings were re-assessed by Moodies and S&P that debt would have immediately become a hell of a lot more expensive to service. In addition, there will have been all sorts of knock on effects of the capital markets side being forcefully segrated from the FCM side (BTW I'm not suggesting that segregated funds were mis-used in any way).

clylbw said:
5. Even though I am not a customer of Refco, the debacle is quite unnerving as it prompts the questions about broker selecting and risk diversification. In particular, what should one look for when searching for a broker? CFTC registration and NFA membership helps, but is that enough? Should one also check a broker's reputation? Or is it one step too far?

Everybody should, as a matter of course, check for CFTC and NFA judgements against their brokers. However, you could probably count on the fingers of one hand the number that haven't had some kind of problem. Almost all problems stem from some kind of conflict of interest, whether it's mis-use of segregated funds or mis-use of privy information.

As it happens, certain parts of Refco had a bad reputation simply because of their 'cost-concious' attitude. Some of that was fair and some wasn't (imo). From an FCM/broker perspective, I always thought they were fine. They have some highly regarded analysts on the commodities side and when I had an account with them they were always really helpful. The only thing I would say is that their software stank big time......

Knock on effects? For the FCM side the effects will be minimal provided they can sell it on quickly (with regard to your other thread... I don't imagine for a minute that IB REALLY want to buy it). As for the knock on effects on the capital markets and securities side. Who knows. It's pretty certain that Man will not be going through their IPO any time soon. It will be interesting to see how the CBOT ipo goes. Different kettle of fish obviously, but it will be an interesting measure of public confidence.
 
So many thanks, sandpiper :) ; really glad to have your view again.

I do enjoy this game, but sometimes feel like a baby in the financial woods :rolleyes: . It can be hard to tell truth from hype, and to pick the ones to trust.

Not sure about IB, though. Apparently they put up a higher bid today. :rolleyes:
 
Yes. Just seen the news on the higher bid.... Can't understand it.... unless it's an attempt to delay the proceedings as long as possible and then come up with some 'excuse' when they get access to the non-public info during their due diligence. Let's see if they are prepare to go to the 1bn mark....
 
Hi

so what has has happened to people who had funds in their refco accounts and had their accounts frozen? have they been able to withfraw their funds or have these funds been lost?

Does Refco plan to their broker operations?

If the broker is a member of the NFA or CMTC, does this not provide some level of protection in case the broker goes bust?

Oanda state on their website -
Safety of Funds
OANDA is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant (FCM), and OANDA is a member of the National Futures Association (NFA # 0325821).
OANDA maintains all customer funds strictly separated from operational funds in accounts maintained at highly reputable banks, such as JPMorgan Chase, Citibank, UBS, Deutsche Bank, Royal Bank of Canada, etc. Funds are withdrawn from these accounts only as a direct result of customers' trading related activities or customer withdrawal requests. In the unlikely event of an OANDA bankruptcy, all customer funds maintained at these banks are legally protected.
Moreover, OANDA continuously meets specific financial requirements, including minimal capital requirements based on customers' open positions. OANDA compiles and submits to the CFTC and the NFA financial data on a daily, weekly and monthly basis. Both the operational and the financial aspects of OANDA are audited by the NFA as well as financial auditors, which in our case is Deloitte & Touche.
As any other financial institution, OANDA has numerous internal procedures in place designed to prevent the possibility of fraudulent activity of OANDA employees.
Finally, OANDA uses sophisticated risk management technology so as to minimize currency risk. In particular, customer positions are continuously (and in an automated fashion) monitored, and, when appropriate, our back-end FX traders hedge accordingly.

Did/do Refco have similar policies in place to Oanda?


Many thanks

jtrader.
 
jtrader said:
Hi

so what has has happened to people who had funds in their refco accounts and had their accounts frozen? have they been able to withfraw their funds or have these funds been lost?

As far as I know, a deal is in place to transfer all the frozen FX customer accounts to FXCM where they will become unfrozen.

Refco futures division has never been frozen and still is operating normally.

Refco's US and non-european regulated assets have already been transferred to Man Financial.

Refco's European assets including refco overseas, and RTS London, Brentwood & Brighton, plus Gibraltar are now owned and operated by Marathon.
 
Got one letter from them,made no sense at all,going on about a court in New York and chapter 11.

Got my commodity account funds sent back to me no problem,the forex account is frozen.
 
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