How does this compare to LTCM, and what is the danger to derivatives in today's context?
First, regulated futures markets are just that, heavily regulated. The thought police are everywhere in this industry, trust me on that one! LTCM was offshore, and subject to virtually no regulation, certainly none that mattered in the real world.
Second, counterparty capital (i.e. customer monies in this case) is at effectively zero risk; the exchanges in Chicago mark all current positions to market twice a day, and NY marks once a day. There is no 3-day settlement in these mkts, as there is in stocks; everything is settled daily. In short, REFCO's liability regarding futures trading is nil, zero, zip, right this minute. As an additional safety measure, too, the Clearing Corporation, which performs the mechanics of trade clearing, settlement, delivery and so forth, has frozen REFCO's capital account...just in case some more fit hits the shan. Aside from the financial media (don't get me started on Peter McKay, btw) trying to whip up a frenzy and scare a lot of IBs and retail traders, there is just about nothing to be scared of in a practical sense. Business as 99% usual next week and thereafter, bar soem really off-the-wall new developments at REFCO.
LTCM, contrarily, negotiated capital requirements and clearing bonds and fees directly with their counterparties, on a case-by-case basis. Anything went, any deal they could set up. Their only hard requirement came from their clearing firm, Bear Stearns, who demanded (and got!) a minimum deposit of $500 million as a precondition for clearing LTCM's trade (Jimmy Cayne always was about the smartest guy on the continent...and he was dead right about this deposit, too). As a result, they ended up operating, at one point, on about 30,000% leverage, conceivably much more if one casts a jaundiced margining eye at their huge swap spread-spread position (no, that's not a typo; it's a bizarrely complex trade that they had a shjtpotful of on). One good blip, and POOF!, away goes their tiny sliver of capital...which POOF! occurred in August 1998.
The danger to the markets worldwide this time isn't much at all, but some does exist. World Capital was a pretty freewheeling operation, and I've not the slightest doubt in the world that they've some pretty funky stuff on their books. Additionally, the mystery counterparty who had the $430 million dinger to REFCO that Bennett ponied up (a good story, that -- the original classic shell game), has yet to be named. It's easily conceivable that if said counterparty is in the dinger to REFCO for that amount, he/she/they might well be in the dinger to other parties.
If such a situation actually is the case, some number of financial firms might take a sizeable hit. Not a 'Going Out Of Business' hit, but a solid shot amidships at least.
This affair is going to end up being one of the most fascinating finance fiascos in history...and it's just getting started. I've been on it like white on rice all week, and it's already gotten so complex that I can't tell, as they say, ''the players without a scorecard''. It rates to become more so, too.