A federal district judge in Chicago has ruled that commodity brokers have the right to keep the interest earned by investing their customers' margin deposits.
Judge James B. Moran issued the ruling late Thursday in a lawsuit brought by investor William A. Craig against Refco Inc., a major Chicago commodity trading firm. Other defendants in the proposed class-action lawsuit were Merrill Lynch Futures Inc., Clayton Brokerage Corp. of St. Louis, and The Futures Discount Group Inc.
Craig's lawyer said he will ask the judge to reconsider the decision.
"I think this was an extremely important decision, and I don't think anyone felt this was anything other than a frivolous complaint," Refco President Tone N. Grant said yesterday.
Margin deposits are deposits made by speculators who buy and sell futures contracts. Futures contracts give the right to buy or sell commodities at a future date.
The unsuccessful legal action challenged the right of futures brokers to retain profits earned by investing these margin deposits.
Grant said the court upheld the right of futures brokers to keep these profits as long as margin deposits are invested in specified securities backed by the federal government, such as Treasury bills.
There are no specific rules that determine whether a stock brokerage firm or a customer receives the interest earned by investing excess margin funds or "free credit balances" in stock accounts, a Securities and Exchange Commission official said yesterday.
Stockbroker firms have adopted a variety of practices and negotiate with customers, the SEC official said. Many brokerage firms offer services that automatically transfer idle funds into interest-bearing accounts.
In his opinion, Moran held that Congress intended to allow futures commission brokers to keep interest or other profits made from investing margin deposits and also found that Commodities Futures Trading Commission regulations allowing this practice are a "reasonable administrative interpretation of congressional intent."
Moran also held that Refco's contract with its customers, which explicitly states that the firm has the right to keep interest on margin deposits, is valid and enforceable.