Brutal lesson behind the Griffin failure

News Analysis: The harsh truth for 110 Liffe traders is that the rules don't protect them - and they're mad as hell
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The Independent Online
FOR THE 110 self-employed Liffe futures traders who have been put out of business by the collapse on Christmas Eve of Griffin, the Chicago- based futures broker, at the hands of sole trader John Ho Park, there is only one overriding, very simple issue - someone has stolen their money, and it is the job of the regulators to get it back.

But no one is prepared to accept the blame for their plight and to bail them out. And the traders - known as locals - are mad as hell.

Yesterday the two sides went head-to-head at a meeting between the officials of the brand new City regulator, the Financial Services Authority (FSA), and the rough and ready diamonds from the Liffe trading floor. It could not exactly be called a meeting of minds.

Many expected to be given back their money on the spot. They were not best pleased to be told that it would be at least six weeks before they got anything back, that the most they could expect for the time being was 50 per cent of what they lost, and that the share-out could be held up by haggling over exactly how much each trader was owed.

The news led to a chorus of booing and heckling and some choice language, above which the two FSA officials on the top table, Michael Folgar and Lindsay Thomas, struggled to make themselves heard.

The traders had little time either for Finbarr O'Connell, the accountant from Grant Thornton who just the day before had been appointed as liquidator to wind up Griffin, or for Andrew Lamb of the London Clearing House, who struggled to explain to the traders why the pounds 150m default fund could not be tapped to help them.

When John Ho Park, a skinny, bright, studious Cambridge-educated trader of Korean origin, took a spectacularly disastrous bet on the German futures market just before Christmas, he set in motion a train of events that has shown up a gaping loophole in the rules.

MeesPierson, the Dutch-owned bank, disovered that Griffin, which cleared for Mr Park on the Eurex exchange through which Mr Park did his deals, did not have the money to honour his trades. The bank then took the pounds 3m it had in Griffin's account to cover his liabilities. Unfortunately for the other Griffin traders, most of that money had been deposited to cover their own dealings, as well as those of Mr Park, and there was not enough money to cover both.

When the traders put their money into Griffin, the money went into what is called a segregated account. They thought that meant it was safe if the firm went down. It was. But what they did not realise was that while the money was ring-fenced from the firm's own money, the firm did not ring-fence one client's funds from another, nor was it obliged to.

To have had that extra protection they would have had to ask for individually designated accounts, which would have cost more to run.

It is hard not to be moved by the individual plight of this handful of traders. They may not be Durham miners, but they are not rich either. Some had just pounds 15,000 to play with. Others had been given pots of between pounds 10,000 and pounds 20,000 by friends or associates to trade with on their behalf, and who are not going to get their money back.

Many have children and homes, while some have just quit their jobs to set up on their own and have put all their savings into the business. They are worried, angry and confused.

Nick Durlacher, the chairman of the Securities and Futures Authority, incensed the locals when he said at the weekend that they were "experts" who should have been aware of the rules, and that the risk they were running by not having designated accounts was a risk no different from the other risks a trader takes.

One angry trader said yesterday: "They say we should have known about the difference between segregated funds and designated funds. How come then no one had designated accounts - even people who had been in the market for 17 years? The rules say they have a duty of care towards us. Clearly they have failed." Some traders are suicidal. Following yesterday's meeting, many have simply given up and started to look for other jobs.

Ever since the collapse, no one has properly answered the question as to why Griffin Trading, a medium-sized Chicago futures broker of distinguished parentage, should go under for just pounds 6.25m. Roger and Tex Griffin are men of substantial means. One of their antecedents served on the Chicago Board of Trade. The fact that the chief financial officer, Stephen Szach, it has emerged, left the firm last week, allegedly leaving a $1.5m (pounds 900,000) to $2m black hole in his wake, may partly explain the plight. The cause, so the story goes, was his own unauthorised dealing on the New York stock exchange. Griffin's lawyer, Ty Fahner of the Chicago law firm Meyer Brown & Platt, has declined to return calls.

There is a wider issue at stake here. For years the locals have been the lifeblood of the London market. But over the past few years their role has been increasingly under threat. London continued to rely on open outcry trading long after rivals such as Frankfurt's Eurex went electronic. Now, after losing its prime selling point, the German government bond future, back to Frankfurt, Liffe is seeking belatedly to move on to cheaper screen-based systems. But it may be too late. As one trader put it: "The bund has already gone back to Frankfurt. Liffe wants to stay in the game with the euro interest futures, but there is no way the Europeans are going to let them have that. It will go to Frankfurt, too."

Griffin and a number of smaller clearers provided a home for the floor traders displaced by the closure of Liffe's open outcry pits. The Griffin collapse will speed up the decline of the locals as a feature of the market. The brutal lesson of the last week is that the rules do not protect them, only size does. In a world of global megabanks, being a sole trader is a lonely position indeed.

Liffe is now pressing to close the loophole through which the Griffin traders have fallen. But their support does not run as far as doing anything concrete to solve the immediate problem for the traders, which is - where they can get their hands on the money they need to stay afloat?

As one local said: "We are the lifeblood of the market. I have paid my dues for seven years. They have milked us dry. The traders hit by Griffin account for 10 per cent of the local capacity. We have been out of commission throughout the launch of the euro. Their attitude is disgusting."

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