Refco's Lessons Learned?

Kim Taylor, managing director and president of the Chicago Mercantile Exchange's clearing house division, said that immediately upon learning of Refco's accounting problems, her organization put auditors in Refco's offices and began overseeing daily accounting. The CME is the designated self-regulatory organization for Refco LLC in the futures industry.

Before long, a number of the exchanges and clearing organizations had established what they called a Joint Audit Committee, which coordinated information gathering and dissemination via daily calls among all involved. Ms. Taylor credited those on the audit committee and others involved in trying to sort things out with their professional approach to the situation, saying without them, things could have been much worse.

"The reason it wasn't was because the industry approached it in a mature and grown-up fashion," she said.

David Hardy, group chief executive of LCH Clearnet in London, said that although his firm had employees in Refco's office in New York on the day the accounting problems came to light (on an unrelated matter), "We were sort of stuck on the other side of the Atlantic."

He said Refco's employees in the United Kingdom didn't have a lot of information, and he credited Ms. Taylor and Jeffrey Ingber, managing director and general manager of fixed-income clearing and settlement at the Depository Trust and Clearing Corp., with keeping a constant flow of information coming.

Mr. Hardy said thanks to the measured and open nature of the industry's response, Refco's FCM and broker-dealer operations are still up and running today. "We're talking about conducting an autopsy [of Refco] but we haven't got a corpse," he said. "It's still functioning, still solvent and is going to be sold. There is still, in our books, Refco Overseas and CIS (Cargill Investor Services, which Refco bought earlier this year) and a whole bunch of client business that hasn't gone anywhere. As we see it, something's gone wrong back at the base, but there's nothing to do with the instruments we're clearing through our books."

In fact, said Sean Keating, senior vice president for clearing services at the New York Mercantile Exchange, although NYMEX initially saw a number of customers leaving Refco's FCM platform in the days after the scandal broke, recently he has seen clients returning to Refco. "Everybody's not just leaving," he said.

Both Ms. Taylor and Mr. Keating said their clearing organizations and exchanges came up with contingency plans for various scenarios, and that they secured promises from other member clearing firms to pick up Refco business if that became necessary. Mr. Keating emphasized the quiet nature of those discussions, however. "It's a fine line the clearing organizations have to maintain," he said. "You don't want to cause a panic situation" by suggesting help will be needed.

As the panelists spoke, it became clear that many people at many firms played roles small and large in keeping Refco's regulated entities solvent and preventing a market-wide panic. JP Morgan Chase, Refco's clearing bank, assisted in a significant way with the wind-down of the broker-dealer arm, said Mr. Ingber, a process that required heavy trading in a number of different markets.

Mr. Ingber also praised U.S. regulations, in general, for their role in keeping order. "It exemplifies the brilliance and the beauty of the regulatory structure we have," he said. "While everything was falling apart at the non-regulated entities, there was this protective shell around the FCM."

Nevertheless Kenneth Rosenzweig, a partner in the financial services practice at the law firm Katten Muchin Rosenman LLP, said he saw room for improvement in how regulators communicate with the public. He said he hopes the Refco situation persuades the Securities and Exchange Commission and the Commodity Futures Trading Commission to work more closely together to come up with better ways to get information to the public about situations like Refco, and about how the regulatory structure protects investors.

[email protected]

Contact Bob Keane with questions or comments at [email protected].