[MrBill]

Well, to be honest, Refco was always guilty of failing to deliver shares. We had to threaten them several times that we would 'buy in' their position if they did not make settlement. I guess if they were doing that with hundreds of other counterparts the sums could add up. However, I also know that some of the collateral we leant them was to cover short option positions. The only problem being that they reregistered them in their own name and did not redeliver them back. And, now those assets are tied-up in the bankruptcy proceedings and we are an unsecured creditor. I guarantee you, my interest is not abstract here. We stand to lose millions. That is someone's job for sure. Maybe mine.

[Doly]

I thought that part of trading was accepting that companies could default on you?

[MrBill]

Yes and no. You sign agreements like ISMA/ISDA in which the standard risks of default are clearly outlined. This usually prescribes what your risk are in the case of a default.

In this case, the counterpart illegally seized collateral from one transaction covered under ISMA as payment against a contested transaction under ISDA without there being any cross-collateral agreement. It is very hard to protect yourself against illegal acts. You have to rely on legal remedies which are long and costly. Complicating this issue is a bankruptcy where all the assets get thrown together and then all the creditors fight over what is theirs? Usually there are not enough assets to go around.

In any case, it is unfortunate, but through prudent risk management our losses are manageable. It could have been worse if they had held more of our collateral. You lick your wounds and you move on. That is not to say management is happy and that someone won't pay for it with their job?

[OilsNotWell]

I saw this on another board:

$this->bbcode_second_pass_quote('', 'H')ow can you tell that it was a naked short? "Shares sold, not yet purchased" seems to me to be the definition of any short.

[MrBill]

You're right though. I would have expected the options to be seen under commitments & contingent liabilities or under assets (depreciating assets), but I see no mention of them? Strange beast that Refco. Seems like it will be a mess to now sort out what was and what was not in a segregated client account and not mixed up with their own trading positions.