Your investment capital in the UK is it really protected ?

[tar]

I took this from ET forums ...

Blog | MF Global UK Clients

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Jonathan Ford – Financial Times

For a country that hosts one of the world’s top financial centres, Britain is acquiring a worryingly poor reputation for protecting client money when investment firms fail.

British clients have already had their fingers burned in one big case – that of Lehman Brothers, where they recovered much less than their US counterparts. Now much the same seems to be happening at MF Global, the US brokerage that collapsed last autumn.

While American clients have recouped nearly three-quarters of their cash, the British have at best got back about a quarter. Many have received nothing at all.

Bankruptcies are always messy for creditors, but the position for investment clients should be clear. UK regulations require client money to be segregated from the brokers’ capital and held in separate bank accounts. When brokers fail it should be a simple matter to sweep each account and return the proceeds to its holder. While not every client will be repaid equally, or even at all, at least they know swiftly where they stand.

Unfortunately, the law has intervened to muddy the waters. Following legal challenges relating to the Lehman bankruptcy, the UK’s supreme court has swept aside this system, replacing it with one that treats clients not individually but as a class. A loss falling on a single client will therefore now be spread across the whole.

True, this has a narrow legal logic. Given that the law provides that all clients should be segregated, the idea is that they should all be protected equally.

But it has unwelcome consequences. By loosening the definition of a client and entrenching the mutualisation of loss, it slows the repayment process, and makes the level of recoveries harder to gauge. This is especially the case as it exposes UK clients to claims from those who do not necessarily have segregated UK assets to claim against. In the case of MF Global, for instance, the UK clients could be substantially diluted by a claim from the company’s US affiliate.

Britain’s system for resolving bankruptcies cannot make good prior regulatory failures. In MF’s case, the system of segregating client monies may have been inadequately enforced, exposing clients to risk of loss. But the supreme court’s ruling does not fix this; it simply piles uncertainty on top. The Financial Services Authority must now get a grip, and reassert the principle that recoveries in bankruptcy should be based on properly enforced segregation. Otherwise, the UK’s poor reputation risks becoming entrenched.

 

[neil324]

Well, the answer is starting to look like no.

I thought the FSA regulated industry to protect clients and give fines when regulations are not followed, then regardless of what the company done with your money and went bankrupt, you was covered up to £50k through the FSCS, which is paid for by a levy upon it's members.

Is this not the case.

Or don't the FSCS pay out if regulation was not followed.

 

[capitalspreads]

the FSCS protects up to €100k of monies . the major thing it depends on is that the company you do biz with is actually regulated by the FSA or has a passport to operate in the UK (mifid). So trading with a company based out in Cyprus would not be covered.

it does not depend on the financial probity of the company concerned as was shown by the Key Data Systems fiasco where the owners of the company apparently just stole all the money. The Police and regulators gave up looking for it (quite quickly) but this was a simple decision for them because the debts were covered by the other financial companies (i.e companies like mine).

so the regulator (who had no liability) made the decision to stop looking for the funds and just dumped it onto the industry.

The MF Global clients will probably get the same treatment and will get a payout from MF and then a second payout from the FSCS. In the past the protection was generally understood to be afforded only to segregated monies but a recent high court settlement over the lehman's failure seems to now indicate that all monies may be 'equal'. Which makes a mockery of much of the FSA's CASS rules.

the problem is that for smaller companies the regulatory burdens are quite high already. If they must also now be liable for every flyboy company's debts then the attraction of operating from the UK may start to pall.

answer seen from the view of a company that actually has to pay (through no fault of ours) for the shortcomings of others.

Simon

 

[FixOrRepairDaily]

"Your investment capital in the UK is it really protected ?"

I don't think so.

"Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings.

In the UK, there is no limit on the amount of a clients assets that can be rehypothecated,[3] except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance."

Hypothecation - Wikipedia, the free encyclopedia

 

[hacks]

the FSCS protects up to €100k of monies . the major thing it depends on is that the company you do biz with is actually regulated by the FSA or has a passport to operate in the UK (mifid). So trading with a company based out in Cyprus would not be covered.

The 100,000 Euros (£85,000) protection applies to deposits with banks etc. For investment firms (e.g. spreadbetting) the limit is £50,000.

I'm sure you're already aware of this but I thought I'll post this to avoid confusion.

 

[counter_violent]

"Your investment capital in the UK is it really protected ?"

I don't think so.

"Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings.

In the UK, there is no limit on the amount of a clients assets that can be rehypothecated,[3] except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance."

Hypothecation - Wikipedia, the free encyclopedia

Well should this practice be outlawed? I think probably yes ! Client monies are deposited in their trading accounts for a reason, which is as margin on any trading business they may wish to transact. So how come this money can appear on the companies books as cash assets when it clearly is nothing of the sort.

It all sounds like yet another accounting scam to add to the very long list.

 

[MORRIS2001]

This is an interesting subject and one which all traders should spend some time brushing up on as in recent years there have been more than a fair share of CFD/Spread firms going to the wall or getting alarmingly close. Interestingly, each case would appear to highlight different failings from Global Trader to WorldSpreads.

The reality is that post Nov 07 all retail client funds must be seg. They can only be non seg in theory if the client has chosen to elect up their status. Some firms will have been offering incentives to encourage clients to do this but to date I've never thought of a logical reason as to why anyone would ever accept. Some firms have been quite pushy such as trying to force anyone with balances above a certain level to elect up. In reality this should be a clear indication of balance sheet pressures.

When funds are seg it is close to impossible for a firm to use those funds to hedge their book exposure at the clearers. This means that when a firm needs to hedge it must use its own balance sheet assets to lodge as margin. Several things have happened in the last few years. Firstly, many Spread/CFD firms only had small balance sheets in the first place but many became much, much smaller in 08 due to bad hedging calls or bad debts with clients. This has had the effect of putting firms under pressure to hedge less as they can no longer use client funds to hedge and they lack the money themselves to do so.

Equities are highly balance sheet intensive as you must hedge more and also clients hold for far longer. Many firms hedgin exposure at any one time is mostly long term mid-small cap positions clients are sitting on.

Conversely, since 08 the clearers (prime brokers) have increased their margins to the brokers and this applies even more pressure.

Some firms have reduced or stopped offering equities because it is such a cash hungry asset for hedging and too high risk to hold unhedged.

It's another reason why fx has become so dominant in the UK as it is high frequency, low margin flow and book loss formulae are infinitely more predictable than any other asset so you hardly need to hedge until your exposure in one direction reaches too critical a level.

In addition to the issue of whether funds are held seg or non seg, there is another risk which is never really discussed and that is one of systemic client default. Firms like 24 hour markets as it removes the risk of waking up in the morning to find half your clients have defaulted on overnight moves when the exchanges were closed. Again, fx is a safer instrument because although the liquidity thins out over night you can still close out clients as they default with very low risk of negative balances.

But systemic risk is deeper than this. Client funds, while segregated are still 'pooled' so what happens to those client funds if enough clients default to wipe out all seg funds on deposit? If you have a well balanced portfolio of clients and positions spread over an array of markets this risk is minimised. However, if a firm's client funds are imballanced by having a handful of mega accounts, or the broker is exposed to just one primary market this can be a very different matter.

The more clients ask their brokers how they operate the safer the industry should become.