Magazine article Modern Trader

Crawling from the Wreckage

Magazine article Modern Trader

Crawling from the Wreckage

Article excerpt

The futures and options industry held its breath Monday, Feb. 27, but as Barings' losses and customers were eventually accounted for, and no exchanges went bust, it collectively sighed in relief and began searching for lessons in the wreckage.

About 20 U.S. FCMs with positions at Baring had their deposits frozen in Japan and Singapore, says John Damgard, the Futures Industry Association president who coordinated U.S. FCMs' lobbying efforts. Immediately after the collapse, the group filed a claim of $350 million with Barings administrators Ernst & Young in a British court.

With ING assuming all Barings liabilities, client firms that went through Baring Securities in London got their money first, whereas the ones dealing with Bating in Singapore and Japan still hadn't received their deposits by March 7.

One firm involved was Chicago-based Sakura Dellsher, whose Chairman Leo Melamed was livid over the Asia Pacific exchanges' handling of non-Baring monies.

"Our biggest fear was that our money was not segregated," says Melamed. "It's one thing to worry if [Baring] is going under, it's another if they're using your money to do it."

Although both SIMEX and the Japanese exchanges require clearing members to have segregated customer funds, they froze all Baring accounts from Monday, Feb. 27 to Monday, March 6.

"Everybody was concerned about not giving funds to bogus customers, particularly in the light of rumors that Leeson had set up dummy accounts," Damgard says.

But Melamed counters: "The rule of segregation is sacrosanct. If it's segregated money, it's free, it's easy to move. So why freeze it?"

According to Melamed, all U.S. FCMs allowed customers to offset their positions at other brokers, free of charge. As a result, the frozen customer funds became the U.S. FCMs' liability.

"The customer's money was never in jeopardy; it became our obligation, our money at stake," he says. …

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