CHICAGO (HedgeWorld.com)–Picking through the rubble of the Refco meltdown has turned up some positives, chief among them the degree to which communication among clearing firms, exchanges and regulators on both sides of the Atlantic kept the financial chicanery involving Refco’s books from destroying the firm’s regulated futures commission merchant and broker-dealer operations, and from cascading into a more widespread industry problem.
Those were among the conclusions drawn by a panel of futures industry and clearing experts Wednesday [Nov. 9] at the Futures Industry Association’s Expo, being held this week in Chicago. The conference’s panel session on Refco and the industry’s ongoing response to the situation was organized late in the planning process and replaced the traditional session on clearing.
Panel moderator Thomas Kloet, senior executive vice president and chief operating officer at Fimat Group, noted that the session’s start time coincided with the beginning of the auction process for Refco’s FCM business, Refco LLC. “I guess life does have its little ironies,” Mr. Kloet said.
A winning bidder for Refco’s FCM business was expected to be chosen on Wednesday [Nov. 9] and ratified in bankruptcy court on Thursday [Nov. 10].
Earlier in the day, Alaron withdrew from the bidding process after learning that Refco’s private client group, for which Alaron had submitted a bid, would not be separated from the other Refco LLC entities. “We are disappointed that we are unable to participate in the auction but we congratulate whoever acquires the business,” said Steven Greenberg, president and chief executive of Alaron, in a statement.
Four firms were left vying for Refco Inc.’s regulated futures business, among them Man Group, Interactive Brokers Group and J.C. Flowers, according to published reports.
Refco Inc., the parent of Refco LLC and another regulated business, Refco Securities LLC, a broker-dealer, as well as a number of unregulated subsidiaries, imploded in early October after revelations that its chairman and chief executive, Philip M. Bennett, hid debt owed to Refco by a company he controlled. The debt totaled about US$430 million, and it was effectively kept off the books via transfers between Refco, the company Mr. Bennett controlled and a New Jersey hedge fund, Liberty Corner Capital.
Liberty Corner has since maintained that it did nothing wrong and that Mr. Bennett duped it as well.
The nearly half-a-million dollars in debt was kept even from those investigating Refco in advance of an August initial public offering.
In discussing Refco and its fallout on Wednesday, each of the panelists pointed out that the company’s problems stemmed from bookkeeping fraud, and had nothing to do with the futures industry part of the business. Additionally, they said, Refco’s regulated businesses were effectively insulated from the problems throughout the rest of the company, showing that the current regulatory regime is effective.
Mr. Kloet said he performed his own quick analysis to gauge how the market had reacted to the scandal. He found that share prices of the publicly traded exchanges where Refco did a lot of business actually increased between the time Mr. Bennett’s allegedly fraudulent accounting came to light and the end of business Tuesday [Nov. 8].
The Chicago Mercantile Exchange’s per-share price rose from US$335 on Oct. 7 to US$388 at Tuesday’s close. The Singapore Exchange increased in value from US$2.51 per share on Oct. 7 to US$2.67 per share as of Tuesday. Euronext’s stock price rose from 35.11 euro on Oct. 7 to 36.77 euro on Tuesday. And the Chicago Board of Trade, which went public in October at US$54 per share was trading Tuesday at nearly US$117 per share.
“It appears as if one of the things the market might be saying is this industry continues to be in good health, and volume will continue to flow to the exchanges,” Mr. Kloet said. “As market participants, we’ve not seen systemic decreases in liquidity. These events, while important and instructive, to us have not changed the liquidity profile of the various products we offer.”