Refco Collapse Has Limited Futures Impact

The implosion of futures and securities broker Refco Inc. in the wake of securities fraud charges against its former Chief Executive Officer does not appear to have had a big impact on U.S. futures markets at this point.

Liquidation of customer positions by Refco LLC, the firm’s registered futures brokerage unit, reportedly contributed to big moves in several markets, including livestock and wheat futures during the week of Oct. 10-14.

But the exodus of customers away from Refco LLC slowed after Refco Inc. said it was seeking an “expedited” sale of the futures unit -- one of the few divisions in the company that has not filed for bankruptcy.

Cargill, the U.S.'s largest private company, said on Friday it would continue to clear its exchange-traded futures and options through Refco's futures brokerage despite Refco Inc.'s bankruptcy.

Cargill also said it is owed close to $100 million by Refco Inc. According to Refco's bankruptcy filing, Cargill is owed at least $67 million. The figure is related to Refco's acquisition of Cargill Investor Services Ltd., which closed on Aug. 31.

Refco LLC is a clearing member of the Chicago Mercantile Exchange and remains in good standing with the CME, according to the exchange.

The CME's Risk Committee has taken the precaution of restricting Refco LLC from withdrawing capital (including current excess capital) from Refco LLC without CME's permission and has required Refco LLC to submit weekly capital computations and segregated funds computations to CME.

The reputations of the Chicago futures exchanges do not appear to have suffered from association with Refco.

The Chicago Board of Trade’s initial public stock offering went off as planned last week and CBOT stock has skyrocketed in the first four days of trade. CBOT stock was trading at $132 per share at midday on Monday, up from an initial offering price of $54 per share.

CME stock came under heavy pressure when the Refco scandal initially hit the news, losing as much as 14% of its value at one point, but the stock quickly rebounded and on Monday hit a new high of over $357 per share.

A consortium of private buyout firms led by private equity firm J.C. Flowers & Co. tentatively agreed on Oct. 14 to pay $768 million for Refco LLC.

However, the Refco futures unit has since become a hot commodity itself. News reports Monday morning indicated three new potential bidders had identified themselves in filings with the bankruptcy court in Manhattan.

Futures brokerage firm Man Financial, Marathon Asset Management LLC and DIGL Inc., a Delaware corporation formed by Dubai Investment Group LLC and The Yucaipa Companies LLC, all told the court they are potential bidders for Refco assets.

The problems at Refco Inc. have continued to deepen. People familiar with the matter told Reuters News Service last Thursday that the federal investigation of Refco Inc. was fast expanding beyond chief executive Phillip Bennett.

Other individuals and firms -- including auditors, underwriters, lawyers and former Bennett subordinates -- are under scrutiny, they said.

Editors note: Richard Brock, The Corn and Soybean Digest's Marketing Editor, is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report.

To see more market perspectives, visit Brock's Web site at www.brockreport.com.