Sentinel Management Group Inc, which oversees about $1.6 billion in assets, sought to prevent clients from withdrawing their cash to avoid having to liquidate investments at a discount, helping to take the Dow on Tuesday to its lowest close in almost four months. "Sentinel caught the biggest headlines today, and there were rumors about more liquidity issues and more distress concerning the investment banks," said David Katz, chief investment officer at Matrix Asset Advisors in New York. "The market is shooting first and asking questions later, and as in the past weeks, weakness has begotten more weakness."
NEW YORK (Reuters) - Sentinel Management Group Inc, which oversees about $1.6 billion in assets, sought to prevent clients from withdrawing their cash to avoid having to liquidate investments at a discount, helping to take the Dow on Tuesday to its lowest close in almost four months.
"Sentinel caught the biggest headlines today, and there were rumors about more liquidity issues and more distress concerning the investment banks," said David Katz, chief investment officer at Matrix Asset Advisors in New York.
"The market is shooting first and asking questions later, and as in the past weeks, weakness has begotten more weakness."
Sentinel, a futures commission merchant (FCM) with the U.S. Commodity Futures Trading Commission (CFTC), told clients in an August 13 letter: "We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients."
"We do not see an alternative and we don't believe it is in anyone's best interest if a run on Sentinel took place and we were in a forced liquidation mode," the letter said.
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Early on Tuesday, CNBC Television reported the existence of the letter and said Sentinel had asked the CFTC to allow it to halt client redemptions until it could conduct them in an orderly fashion.
The CFTC later said it had received no such request from Sentinel and that even if it had, it had no authority to act on such a request.
Sentinel declined comment.
News about Sentinel came on the heels of problems at hedge funds managed by Goldman Sachs and other companies in the United States and abroad.
On Tuesday, several Canadian investment trusts had trouble repaying short-term loans, further evidence that a crisis that began in mortgages had led to a wider credit tightening.
"Problems persist in the commercial paper and asset-backed markets," said Frank Hsu, director of global fixed income at Fimat. "Today it's Canada, but other countries, including the U.S., could have similar issues."
In yet another sign of rising risk aversion among global investors, spreads on two-year interest rate swaps widened to 63.50, their biggest gap since the days following the September 11, 2001 attacks.
The Dow Jones industrial average (.DJI: Quote, Profile, Research) tumbled 207.61 points, or 1.57 percent, to 13,028.92, its lowest close since April 24.
EXCHANGES LOOK TO REASSURE INVESTORS
The CME Group (CME.N: Quote, Profile, Research), the largest U.S. futures exchange, said in a statement that Sentinel was not a clearing member of the CME Group while assuring investors that its clearing member firms have continued to meet all of their obligations.
MF Global (MF.N: Quote, Profile, Research), one of the world's largest brokers of exchange-listed futures and options, issued a statement saying it had no exposure to Sentinel.
Sentinel, based in Northbrook, Illinois, provides cash management services for a number of commodity brokers and hedge funds.
Late on Tuesday afternoon, a CFTC official who requested anonymity said U.S. futures exchanges were trying to get other futures companies to step in and ease Sentinel's concerns about client redemptions.
"They're working jointly to see if they can get somebody to help out," the official told Reuters, referring to the exchanges. "They know they have to act."
The Chicago Board of Trade, Chicago Mercantile Exchange, New York Mercantile Exchange and New York Board of Trade, along with the National Futures Association, have told the CFTC they will seek out other companies to take over some of Sentinel's accounts, the official said.
Some of the companies might be affiliates of larger financial institutions that could provide an infusion of cash or credit, the official said. "They could fund redemption requests."
This should ease the concern of clients who want to take their money out of Sentinel and prevent the problem from spreading market wide, the official said. "Some other FCM could come in and say: 'Listen, I'll take over this whole (Sentinel) portfolio."
NOT FOR CHARITY
Sentinel's holdings include the funds of other FCMs that buy and sell commodities. If those FCMs cannot get their money from Sentinel, they could be short of funds to meet margin requirements on exchanges where they do business or have a hard time meeting other financial obligations.
"The (companies) who have money with Sentinel are members of the various exchanges. So the exchanges have an interest to make sure there is no spillover which will effect them," the official said. "They're not doing this purely for charity."
The CFTC official said the exchanges have told the CFTC "they have no indication that this is going to spread."
Sentinel's refusal to make redemptions appears to violate federal commodities laws, the official said. "If a client asks for money back ... you've got to give it back."
But the CFTC is not likely to make the situation worse by taking an enforcement action and freezing Sentinel's assets. "That may exacerbate the situation," the official said.
Most major U.S. banks and brokerages act as FCMs, including Merrill Lynch affiliates and Morgan Stanley, which reported more than $8.2 billion and $4.3 billion, respectively, in customer funds, according to the CFTC's June report.
These larger brokers have much higher minimum net capital requirements than the $500,000 for Sentinel. Merrill Lynch Professional Clearing Corp.'s net capital requirement was $74 million, but its excess net capital was about $1.6 billion. That was more than the $1.1 billion in customer funds it oversaw, according to a recent report with the CFTC.
In contrast, Sentinel reported $2.8 million in excess net capital while its customer funds totaled about $1.5 billion, according to the CFTC.
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