Anyone pulling money out of MF Global?

This reality is going to cause most traders to significantly alter their approach to brokerage firms.

This is a major damage control issue for all stakeholders on the corporate side of the clearing house / exchange traded derivative business. It also represents an area where additional controls will probably need to get done.

CFTC tried (and so far has failed) to alter the regulations on investment of customer segregated funds that have been in place since 2000. As account holders, we've all had pretty much a false sense of security since the Refco blow up in 2005 (IIRC).

Small firms are risky, but clearly at this point bigger does now mean better since no brokerage firm will probably every be considered "to big to fail". Our losses will never be socialized. We don't qualify for moral hazard pay.

Since we're all waking from a dream on this issue, it's worth reflecting on the current 'storm' in Europe may be coming ashore in the US in the next year. I'm not a doom and gloom kind of guy, but it looks like that contagon is going to make the the blow up in '08 look like just a warm up exercise.
 
I keep hearing from people that the SIPC will somehow guarantee securities and cash in the futures accounts. This is simply not true. The SIPC only does this for securities accounts (400 of which were at MF Globel) - not futures accounts (150K at MF Global). Rule 190 of the CFTC says that in the advent of a FCM bankruptcy, ALL assets in a futures account will be subject to the same pro-rate distribution from the futures accounts. Thus is you have a T-bill and some cash - each will take the same percentage haircut in the end.

There is no guarantee that the pro-rate distribution will be at 11%. Could be more or less. The longer this drags on and the more the trustee bills his $800 an hour, the more likely it will be less. In the end I still believe everyone will be made whole. But some of the funds may be years away from receipt by clients.
 
Quote from FreeMarketRider:

Like you, I'm not a lawyer. But keep in mind that there are two separate bankruptcies in progress here. A bankruptcy of the parent company and a bankruptcy of the brokerage unit. The brokerage was placed into bankruptcy to in part protect existing customer funds. This is why all accounts were (and are still) frozen. Accounts with active positions were transferred and / or liquidated. The rest of customer funds appear to be part of the bankruptcy process at minimum to insure equitable distribution based on an accurate accounting of the actual short fall in customer funds. There seems to be a lot of bounced checks out there if you believe whats being reported in the press. Unfortunately this may alter the size of the shortfall in customer funds. I would not want to share in either the loss or gain of open positions of other account holders.

I want to believe that the back office records that the trustee has access to are in pretty good shape. If I were guessing, those records will probably need to be vetted against account holder claims to insure accuracy before a final "hair cut" % can be determined. Any losses related an inability to access open positions is a whole other matter. SIPC clearly has no obligations to address this. It also seems fair that the losses of account holders with open positions should not have any bearing on the final 'haircut' we are all going to get (excluding any SIPC coverage for cash balances on deposit at the brokerage).

I really feel for the folks who couldn't liquidate positions. It an issue all traders are going to have to plan for going forward. I think it's fair to assume at this point that fund segregation does not mean that each account holders funds were in separate deposit accounts at the broker custodial bank(s). If this were the case resolution would be very simple and straight forward. We must rely on the integrity of the back off system, and any documentation we can provide to validate our individual claims.
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The brokerage is not in bankruptcy, it is in receivership / liquidation by the SIPC with consent of the CFTC. We all better hope it stays that way.
 
Quote from FreeMarketRider:


Since we're all waking from a dream on this issue, it's worth reflecting on the current 'storm' in Europe may be coming ashore in the US in the next year. I'm not a doom and gloom kind of guy, but it looks like that contagon is going to make the the blow up in '08 look like just a warm up exercise.
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I know and it's something that very few people seem to fully comprehend. Fewer counterparties = greater concentration of risk. Since we simply kicked the can down the road 3 years ago, we still have all of these issues staring us right in the face.

Now that the main profit center is gaming "moral hazard" as we've been ZIRP'ed to death, I can't even fathom what awaits us in the next few weeks/month/etc...
 
As an FYI, the correct address for SIPC should be:

http://sipc.org/

The other URL http://www.sipc.com/ takes you to a mirrored site that does not quite operate correctly. I just got off the phone with SIPC who pointed this out. The person I spoke with also said that at this point the use of claim forms is not yet required. He said that the trustee was working aggressively to try to reduce the need for the completion of claim forms. My inference from that is that there is a chance the trustee will get the bulk of funds disbursed through a process worked out between the custodial account holders and the exchanges. By inference this suggests that the back office system at brokerage was intact and accurately reflected account holder interests.

Docket item 47 looks kind of interesting - People trying to give back miss-directed wire transfers out of MF Global accounts. I guess it's better to return funds than go to jail.
 
Quote from steve0617:

Oh fuck me, this better not be the case.

Cause if MF figured out this 'loophole' you can be DAMN SURE GS and plenty of others firms have too.

http://goo.gl/E78wU
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I think the article may be correct that customer funds may have been used to meet margin calls on the corporate position. It's an open question whether this reflected an underlying investment in those positions or that it was a hail mary pass to keep MF Global afloat.

The following is from a proposed rule change (75 FR 67642) opening data 11/03/2010 extended closing date 6/3/2011 for FCM investment of customer funds that was proposed by CFTC http://www.cftc.gov/LawRegulation/FederalRegister/ProposedRules/2010-27657

The Commission proposes to remove foreign sovereign debt as a permitted investment in the interests of both simplifying the regulation and safeguarding customer funds. The 2007 Review revealed negligible investment in foreign sovereign debt 28 and that fact, in combination with recent events undermining confidence in the solvency of a number of foreign countries, supports the Commission’s proposed action. Removal of foreign sovereign debt from the list of permitted investments is not expected to significantly impact FCM and DCO investment strategies for customer funds. The Commission notes that, aside from general appeals to maintain the
current list of permitted investments, only one commenter specifically addressed foreign sovereign debt.29
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The Comment List on this potential ruling change shows MF Global had 3 staff meetings with CFTC.

Here is a link to the comments file
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=894

As far as I can see this rule was never adopted. So this situation is currently a big wake up call for account holders everywhere. Anyone with significant account equity anywhere who reads this is probably thinking to themselves, "Of Fuxx Me." at this point.
 
Quote from FreeMarketRider:

I guess if you knew you were facing the death penalty it could take some of the fun out of eating other folks lunch. It would make the end game for these folks a bit more like Momammar G.

Keep it simple - Do away with the minimum security country club prisons and make 'em do long hard time in hot nasty places. Perhaps Quantanamo Bay complete with weekly water-boarding. Why not - They are financial terrorists.
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Well as far as the financial terrorists are concerned I have other financial weapons but in this case I don't mind calling other c-level executives anything but financial terrorists. On my youtube channel Zeitgeist II: Addendum really explains some of the problems with monetaryism. This is definitely one of them but a new system would not have removed the corruption.
 
Screen Snips from the CFTC website showing MF Global interactions regarding proposed rule changes to 1.25 and 30.7 involving investment of customer segregated funds. These snips don't reveal anything except to suggest that MF Global was probably fishing for clarity over its current state as compared to the proposed rule changes that had not yet been adopted.

In a nut shell the proposed changes can be found at the following link. There's a chance all the big brokerages are already drinking the same coolaide.

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/reg125_307_factsheet.pdf

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