metalblue
Well-Known Member
BoyBlue_1985 said:
You still able to make the yacht in Monaco this weekend?
twinkle;
Listed business works something like this:
Client deposits money to allow to trade (pretty much the initial margin)
Client trades (and pays a commission to bank/broker)
Bank/broker executes trade on exchange
Bank/broker pays to exchange margin requirements for client trade.
Once trade is "open" the client continues to pay any extra money to cover potential market movements called variation margin (or they can withdraw money).
Nice and simple. Now clients have "option" of being segregated or non segregated, if segregated they have (supposedly) a bit more protection in the event of bankruptcy as the money is held at exchange seperately from the general firms books but the downside is that the costs for trading are much higher with a segregated account. So if I have 2 non-segregated clients their margin requirements (can) offset one another at exchange but as the broker/bank I (rightly) ask them to BOTH deposit their margin requirements, therefore if client A buys something and client B sells exactly the same thing I don't have any exchange margin requirement but both clients will give me money to cover the individual requirements.
So now I find myself in a situation of holding client money...now banks/brokers deal with 1,000s of customers doing this sort of business and you can see how they can end up with a big pot of cash just sitting there. Naturally they want to do something with that money to earn "something" from it, typical the preferred transaction is to lend it out overnight/short-term to the treasury markets however when overnight interest rates are about 0 I will receive nothing so in this case I might look to use some (not all because my clients may want to withdraw cash) to "buy" government debt (I do this as the regulators told me it was "risk free" in other words as good as holding cash). Now as a firm I have earnt commission and interest from this operation, I want to take "my" money and make it work for me so I trade commodities/stocks/etc...now in a well managed firm the risks I take on these trades do not outweigh that pot of money I have accumulated. This is a very simplistic view of the business and there are many different types of trades/account types etc that add extra levels of risk and complexity.
Sometimes things can go wrong (credit crisis/asian crisis/etc etc) and these can create highly irregular market movements putting a firm at risk as it does not have funds to cover it's margin payments/market gets scared/nobody trades/clients want to withdraw money all at once/etc etc but risk should ensure that there is enough spare cash to handle such events and positions aren't left to run. In MF's case IIRC they took a hit on sovereign debt which was probably (partly) purchased with client deposits (as did many firms but they had the money to take the loss themselves whereas MF perhaps over extended themselves), there then becomes the question about if they used client money to cover their own margin requirements or for other purposes and so on and so forth and I am not privy to enough details to be able to validate such accusations. Time will tell how much of the money is recoverable or clients can be made good from various guarantees/goodwill.