Financial History Issue 118 (Summer 2016) | Page 36

Headline from the Philadelphia Inquirer during the Crash of 1987 .
Hulton Archive / Getty Images pro rata basis , and each would share equally based on the percentage of the shortfall .
For example , if a segregated account should hold $ 100 million of customer assets , but only $ 98 million was in the account at the close of a business day , there would be a 2 % shortfall . If the customer had deposited $ 100,000 with that FCM to meet his margin requirements , then he would only receive $ 98,000 back , taking into effect that shortfall .
Notable Bankruptcies : Lehman , MF Global and Peregrine
There have been some noteworthy FCM bankruptcies in recent years . The largest involved Lehman Brothers , which filed for bankruptcy in September 2008 . On Monday , September 15 , Lehman had approximately $ 10 billion in customer assets . By the close of business on Friday , September 19 , all futures positions had been either transferred to other FCMs or liquidated , and all customer assets were properly transferred without a dollar lost by any of Lehman ’ s futures customers . It showed that if an FCM follows the applicable laws and regulations , then the system works .
That is not always the case , however . On October 31 , 2011 , another large FCM , MF Global , filed for bankruptcy with a shortfall of approximately $ 1.2 billion in customer funds . While MF Global ’ s customers did eventually receive 100 % of their assets , they initially got back only 70 %. The remaining 30 % was transferred to them over the next few years .
A few months later , another FCM , Peregrine Financial Group , filed for bankruptcy with a shortfall of approximately $ 200 million . That FCM only had $ 400 million in customer assets , so the shortfall totaled nearly 50 %. Because of these two bankruptcies and the resulting shortfalls in their customer segregated accounts , a number of regulatory changes have recently taken place . Most notably , all FCMs and their custodian banks holding customer assets must now report their account balances each morning to the regulators . Thus , the regulators can now compare the amount that should be held in its customer segregated account to the totals shown in its various custodian accounts . If any significant difference occurs , the regulators can take immediate action to determine the reason for the difference . Prior to this rule , FCMs only reported their balances on a monthly basis .
Another major regulatory change requires the CEO or his designee to approve any transfer of 25 % or more out of the customer segregated account . Most FCMs today deposit a large amount of their own capital into the segregated account to ensure , to the extent possible , that no shortfall in the account will occur . This FCM capital investment is called the “ residual interest .” Once the FCM ’ s capital is so deposited into the customer segregated account , it is deemed to be “ customer property .” This means that if the FCM fails for any reason , its capital so deposited will first be treated to protect the FCM ’ s customers and may not be used by any of its creditors until the customers receive 100 % of their assets back .
Assuming the FCM is doing well but wants to transfer back some of its own capital that was held in the customer segregated account , » continued on page 38
34 FINANCIAL HISTORY | Summer 2016 | www . MoAF . org
Hulton Archive / Getty Images Headline from the Philadelphia Inquirer during the Crash of 1987. pro rata basis, and each would share equally based on the percentage of the shortfall. For example, if a segregated account should hold $100 million of customer assets, but only $98 million was in the account at th HHوH\[\^K\H[HH Hܝ[ YH\Y\Y\]Y L ]]HYY]\X\[\]Z\[Y[[H[ۛHXZ]H N XZ[[YX]ܝ[ XH[ܝ\Y\΂ZX[Qؘ[[\Yܚ[B\H]HY[YH]ܝHB[ܝ\Y\[X[YX\ˈH\\[YZX[\X[Y܂[ܝ\H[\[X\  ۈ[ۙ^K\[X\ MKZX[Y\[X][H L[[ۈ[\Y\\]ˈBHHو\[\ۈY^K\[X\NK[]\\][ۜYY[Z]\[ٙ\Y\\܈\]ZY]Y [[\Y\\]\H\B[ٙ\Y]]H\H[BوZX[&\]\\\Y\ˈ]Y]Y[HH\XXH]˜[Y[][ۜ[H\[Hܚ˂]\[^\H\K]\ۈؙ\ K LK[\\HKQؘ[ [Y܈[ܝ\H]Bܝ[و\[X][H K[[ۈ[\Y\[ˈ[HQؘ[8&\\Y\Y][X[HXZ]H L HقZ\\]^H[]X[HXۛB KH[XZ[[ H\[ٙ\Y[Hݙ\H^]YX\˂H][۝]\[\K\Yܚ[H[[X[ܛ\ [Y܈[ܝ\B]Hܝ[و\[X][H Z[[ۋ]HۛHY Z[[ۈ[\Y\\]Hܝ[[YX\H L KX]\Hو\H[ܝ\Y\[H\[[ܝ[[Z\\Y\YܙY]YX[H\وY[]ܞH[\]HX[HZ[XK[XK[\[Z\\X[[[\Y\\]]\\ܝZ\X[[[\XX[ܛ[HY[]ܜˈ\HY[]ܜ[\\HH[[[][H[[]\Y\YܙY]YX[H[ۈ[]\[\‚8 8 SSPSTԖx 8 [[Y\ M 8 ˓[Qܙ‚\X[X[ˈY[HYۚYX[Y\[H\HY[]ܜ[ZH[[YYX]HX[ۈ]\Z[HHX\ۈ܈BY\[K[܈\[K\ۛB\ܝYZ\[[\ۈH[۝H\\˂[\XZ܈Y[]ܞH[B\]Z\\HS܈\\YۙYH˜\ݙH[H[ٙ\و IH܈[ܙB]وH\Y\YܙY]YX[ [\^H\]H\H[[[وZ\ۈ\][[HYܙY]YX[[\KH^[XK]ܝ[[HX[[\\H\][[\Y[\[YH8'\YX[[\\ 'HۘHHx&\˜\][\\]Y[H\Y\YܙY]YX[ ]\Y[YYB'\Y\\K'H\YX[]YHHZ[܈[HX\ۋ]\][\]Y[\HX]YXHx&\\Y\[X^HH\YH[Hو]ܙY]ܜ[[H\Y\œXZ]H L HوZ\\]X˂\[Z[HH\[[][[ٙ\XYHو]ۂ\][]\[[H\Y\YܙY]YX[ 0۝[YYۈYH