Your specific counterparty risk is pretty much a crapshoot

With the latest debacle of Peregrine Financial Group Inc. CEO, Russell R. Wasendorf, Sr., misappropriating client funds, of which at least $200 million is currently unaccounted for, one has to really ask just how do you measure specific counterparty risk?

Note that Peregrine Financial Group Inc., better known as its online moniker, PFGBEST, was a NFA-regulated broker. Its website looked professional enough, with a plethora of salient and practical information. And if its testimonials page was to be believed, the customer service was amazing. It operated out of its own building in Cedar Falls, costing $18 million to construct, and had 200 employees. Physically visiting it, I hazard you wouldn’t think it a bucket shop.

So how do you gauge this specific counterparty risk? 10%? 20%? You can’t.

But what you can do, is peg it at 100% and spread out your funds across a few brokers, such that if any one were to completely fail due to incompetence (MF Global), or fraud (too many to mention), you reduce your collective counterparty risk by the same factor as the number of brokers you split your funds to. It’s a no-brainer.

Sources:
1. Reuters – PFGBEST CEO Arrested_2012-07-13 (backup)
2. Zero Hedge – Full PFG CEO Suicide Note_2012-07-13 (backup of USA vs RUSSELL WASENDORF, SR._2012-07-11)
3. NFA notice of MRA to PEREGRINE FINANCIAL GROUP, INC. AND PEREGRINE ASSET MANAGEMENT, INC._2012-07-09 (backup)
4. CFTC vs PEREGRINE FINANCIAL GROUP, INC., and RUSSELL R. WASENDORF, SR._2012-07-10 (backup)