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Yesterday INTL FCStone filed a “Statement of Financial Condition” in which it disclosed within a Footnote that the company is attempting to recover over $35 million from clients of, the now defunct Tampa based hedge fund run by James Cordier and Michael Gross.

Footnote 1(p) titled “Subsequent Events,” cites the OptionSeller’s debacle for FCStone’s $35.5 million accounts receivable balance. The filing further states that clients may each owe up to $1.4 million to FCStone. This of course is in addition to the millions of dollars in principal these investors have already lost. In full, Footnote 1(p) reads as follows:

During the week ended November 16, 2018, balances in approximately 300 accounts of the FCM Division of IFF declined below required maintenance margin levels, primarily as a result of significant price fluctuations in the natural gas markets. All positions in these accounts, which were managed by Inc. (“Optionsellers”), an independent Commodities Trading Advisor (“CTA”), were liquidated in accordance with IFF’s customer agreements and obligations under market regulation standards.

Optionsellers is a CFTC-registered CTA with a CFTC Rule 4.7 exemption for “qualified eligible persons”, which indicates that the account holders meet certain minimum financial requirements and have a high level of financial sophistication and financial resources. Pursuant to the account agreements, Optionsellers, in its role as a CTA, acted with discretion over the trading in the customer accounts, while IFF acted solely as the clearing firm in its role as the FCM, at all times meeting its obligations as the FCM to these accounts.

IFF’s customer agreements obligate the account holders to reimburse IFF for any account deficits and the FCM Division continues to pursue collection of these receivables in the ordinary course of business. As of November 27, 2018, the aggregate receivable from these customer accounts, net of collections thus far, is $35.3 million, with no individual account receivable exceeding $1.4 million. The exposure to losses from these customer accounts is not yet determinable, as collection efforts are in early stages, given the timing of events that led to the receivable balances disclosed above. Depending on future collections and an assessment to be made under U.S. GAAP, any provisions for bad debts and actual losses ultimately may or may not be material to the financial results of IFF or of the Company. IFF and the Company believe that these accounts receivable balances, along with possible exposure to losses from these customer accounts, will not impact IFF’s or the Company’s ability to comply with their ongoing liquidity, capital, and regulatory requirements.

In other words, INTL FCStone is going to continue to pursue OptionSellers’ clients for “collection of these receivables in the ordinary course of business.” Clearly FCStone does not consider itself at all culpable in this matter. That is yet to be determined.


  1. Gravatar for Paul korn

    Trades were initiated by who managed their clients’ accounts. Why would the clearing firm be responsible for the negligence or malfeasance of the firm that managed the accounts?


    1. Gravatar for Cecil

      The clearing house sets the margin requirements for trading in the instrument, in other words are supposed to ensure any trader wanting to trade in the specific instrument is adequately margined up (protected). Knowing that Natural Gas is a risky instrument, susceptible to such wild market swings as was experienced in this case, the clearing firm should have set applicable margin requirements for the instrument. If they did, this situation would have been avoided altogether for the trader would not have been able to over-expose to the underlying risk in the market.

      Let's say a trader wants to sell naked calls on Natural Gas. The clearing house charges $5,000 margin per contract (due to the underlying riskiness of the instrument). A Trader decides to risk 10% of clients total account of $1,000,000 - thus $100,000 of his clients funds - he is able to sell 20 calls. The market explodes upwards, loss = $5,000 per contract - client has lost $100,000. Client's account now at $900,000 - he has taken a knock, but still solvent, he survives to trade another day.

      Now let's say clearing house knows that instrument is risky, but does not put up applicable margin requirements - say they only require $500 per contract (ignoring the underlying risk they know from history exists in this market). Same situation, Trader decides to risk $100,000 of client funds - at margin requirements of Clearing House he is able to write 200 contracts. Market explodes, loss of $5,000 per contract = $1,000,000 loss, client is wiped out.

      Who is at fault here? The Clearing House for not requiring adequate protection (margin) against exposure to a risky market, or the Trader who followed the rules set by the Clearing House for trading in the instrument?

      Who determines the risk of the underlying instrument - margin requirement - the Trader or the Clearing House?

      1. Gravatar for paul korn

        The clearing firm disclosed that the accounts managed by "declined below required maintenance margin levels, primarily as a result of significant price fluctuations in the natural gas markets." Thus these accounts apparently had sufficient margin to execute the trades.


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