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Minyan Mailbag: More Refco Thoughts

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Prof. Succo -

Overly simplistic question, but according to Bloomberg:


"Exchanges and regulators have wide influence over Refco's (RFX) fate, according to current and former government officials. The NYSE can de-list Refco and the futures trading commission can rescind Refco's registration as a futures broker, a move that would put most of the company out of business."

If they pull their futures registration, could this be a similar situation for some of the proprietary trading hedge funds that General Motors (GM) was to the convertible arb community during 1H 2005? These guys use significant leverage so the impact could be throughout the whole banking industry.

MJ-

Refco's prime brokerage business extends the use leverage of some type to its customers.

If a third party steps in and takes over its whole book (another registered futures broker), there will probably be very little impact to the system and various prices of securities/futures.

If instead the company is forced to wind down (which is what seems to be happening) accounts that individual customers can't transfer themselves (a lot will be able to, but some won't), positions for those accounts will be liquidated. If there's a directional leaning in those accounts, there could be some disruption in the futures markets.

At this point with what we know, this probably won't ripple much into banking, unless there were banks extending uncollateralized credit.

This is possible, but probably not likely.

-Succo

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