Since MF Global did anything change to protect clients from unlwaful behaviour from brokers?

A

adamts13

I don't believe much did... so I am seeking information about hypothetical collateral arrangements for customers trading with CME via a broker / clearing member that might allow for the use of say physical gold (as opposed to cash) as collateral as a means to minimise counterparty risk.

As an example, is it possible to pledge gold bars (of accepted brand as specified by CME) that comfortably exceed (e.g. 2X) margin requirements for active positions and thus minimise exposure to a counterparty not following the law during a crisis (e.g MF Global).

This would serve as an alternative to actively minimising cash held with a broker in excess of the margin requirements of the exchange for current positions and would also reduce the risks related to maintaining an active / per day treasury function where mistakes / fraud are possibilities.

There is plenty of information on CME's website that describe accepted collateral (and associated haircuts) for clearing members but nothing relating to how this could work for clients operating through a broker.

Is anyone aware if such arrangements are possible or catered to when trading CME (or any other exchange) via a broker? If so, what service providers or specialists can advise on navigating logistics (e.g. transfer / warehousing / custodianship of collateral) relating to such an arrangement for a client located outside of the US (e.g. Australia).

I know people might ask "why don't you speak to your broker" but I am trying to come to this discussion with as much awareness as possible informed by what others are doing or have done so that any proposition is mutually acceptable to ourselves and our counterparties.

I'd like to understand if (and why) there would be resistance to such an arrangement.

Thanks in advance people.
 
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adamts13 said:
I don't believe much did... so I am seeking information about hypothetical collateral arrangements for customers trading with CME via a broker / clearing member that might allow for the use of say physical gold (as opposed to cash) as collateral as a means to minimise counterparty risk.

As an example, is it possible to pledge gold bars (of accepted brand as specified by CME) that comfortably exceed (e.g. 2X) margin requirements for active positions and thus minimise exposure to a counterparty not following the law during a crisis (e.g MF Global).

This would serve as an alternative to actively minimising cash held with a broker in excess of the margin requirements of the exchange for current positions and would also reduce the risks related to maintaining an active / per day treasury function where mistakes / fraud are possibilities.

There is plenty of information on CME's website that describe accepted collateral (and associated haircuts) for clearing members but nothing relating to how this could work for clients operating through a broker.

Is anyone aware if such arrangements are possible or catered to when trading CME (or any other exchange) via a broker? If so, what service providers or specialists can advise on navigating logistics (e.g. transfer / warehousing / custodianship of collateral) relating to such an arrangement for a client located outside of the US (e.g. Australia).

I know people might ask "why don't you speak to your broker" but I am trying to come to this discussion with as much awareness as possible informed by what others are doing or have done so that any proposition is mutually acceptable to ourselves and our counterparties.

I'd like to understand if (and why) there would be resistance to such an arrangement.

Thanks in advance people.
More...

This is a great questions and I was thinking the same thing.

The larger brokers who have a warrants department can apply the cme gold warrants towards your account equity, but it's usually at a haircut, possibly up to 75%.

By larger brokers -> I am talking about ADM, HSBC, RJO types. I'd be surprised that some of the mid-tier futures brokers are setup for it. But it's a great question. i doubt the discount retail brokers can faciliate it bc they don't deal in deliveries.

The only thing that we are told, as customers, that have changed are that the NFA has login details for the bank accounts in which seg assets are held. So as part of the audit, they don't just rely on the reports from the broker, the NFA can check at the actual bank. How often the NFA actually checks is somethign I am not aware of...but I can see that they have been actively issuing warnings lately as I have been doing brokers checks on the NFA basic website.
 
CME advises a 15% haircut on gold at present for Gold Warrants. I imagine this is subject to change based on market volatility for gold. Ultimately Gold is readily convertible to cash with good liquidity for the specifications accepted by the CME.

Given any broker must deal with a clearing member which is usually a large multinational bank (Deutsche, JPMorgan etc) that does have capacity to deal in delivery you'd think there has to be the possibility an arrangement can be done via these large firms indirectly. Just a question of the 'will' to assist given the right incentives.

This document outlines how Gold Warrants work between the CME and Clearing Members (and their clients). Not sure if this can relate to a broker client.

https://www.cmegroup.com/trading/metals/files/comex-gold-warrants-faq.pdf

There appears to be a bit of organising involved but I wonder if we have allocated gold bars of a specification acceptable to CME in storage (e.g Perth Mint) in Australia, could we arrange a 'location swap' to an an approved CME depository (e.g. JPMorgan) who could then be involved in pledging it as collateral for trading via our clearing member. I am trying to understand exactly how this could work so as to assist our potential broker in the process.

Regarding the NFA Audits I wonder if these audits are only applicable for accounts domiciled in the USA. Can anyone comment on the segregation integrity for traders located outside of the USA. It's a wonder why there is still a lack of transparency in respect to these matters in the current environment (like that seen with negative oil prices only a few months ago).
 
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adamts13 said:
CME advises a 15% haircut on gold at present for Gold Warrants. I imagine this is subject to change based on market volatility for gold. Ultimately Gold is readily convertible to cash with good liquidity for the specifications accepted by the CME.

Given any broker must deal with a clearing member which is usually a large multinational bank (Deutsche, JPMorgan etc) that does have capacity to deal in delivery you'd think there has to be the possibility an arrangement can be done via these large firms indirectly. Just a question of the 'will' to assist given the right incentives.

This document outlines how Gold Warrants work between the CME and Clearing Members (and their clients). Not sure if this can relate to a broker client.

https://www.cmegroup.com/trading/metals/files/comex-gold-warrants-faq.pdf

There appears to be a bit of organising involved but I wonder if we have allocated gold bars of a specification acceptable to CME in storage (e.g Perth Mint) in Australia, could we arrange a 'location swap' to an an approved CME depository (e.g. JPMorgan) who could then be involved in pledging it as collateral for trading via our clearing member. I am trying to understand exactly how this could work so as to assist our potential broker in the process.

Regarding the NFA Audits I wonder if these audits are only applicable for accounts domiciled in the USA. Can anyone comment on the segregation integrity for traders located outside of the USA. It's a wonder why there is still a lack of transparency in respect to these matters in the current environment (like that seen with negative oil prices only a few months ago).
More...


I am sure you are aware, brokers, don't have to follow CME guidelines of 15%. I'd guess that most brokers will only apply 75% of collateral value towards equity to protect themselves against clients as per my original comment above. This also holds true for bonds as well, not just gold.

In terms of doing a location swap, I am not folllowing your comment above. if you have warrants in cme storage, then you don't need to do a location swap. The real question is, are there depositories outside the US that are recognised CME warehouses. Let's say the answer is no for argument's sake.

If you have buillion in perth, chances are they don't meet the cme delivery specifications. You'll probably need an OTC line with a bullion dealer who can do an EFP (exchange for physical). You give them the gold bars in Perth, they give you futures that are given up to your broker.

https://www.cmegroup.com/trading/me...tions/exchange-for-physical-gold-futures.html

You take delivery of the futures at your broker and get the warrants against. US CME registered warehouse

You are welcome
 
about auditing foreign accounts, please review regulation 30.7

there are two levels to this that are unclear and not really addressed in the rulebook

multi-currency accounts for US exchanges
So a German Client paying in EUR to trade on CME - this is probably still a US segregated account
foreign accounts for foreign exchanges
A german client sending in EUR to trade on LME, a foreign exchange

https://www.nfa.futures.org/rulebook/rules.aspx?RuleID=9066&Section=9

At the end of the day, the broker needs to meet the minimum cash requirements as all accounts contribute to that calculation

Foreign accounts mb with financial institutions of a certain size, so for example, you can't go keeping cash with some start up bank wich doesn't have enough assets.

My guess is that post MFG and PFG, the NFA are also checking foreign accounts as part of their reconciliation, but you can call the NFA and ask them.

As there are active futures brokers on here, would be good to get their feedback
 
Thanks for all this. All good stuff.

I think perhaps another solution could be:

An arrangement where a line of credit from an established bank using gold as collateral could be established to cover margin requirements with a broker.

Then use a KPMG or some other service provider for an outsourced 'Treasury as a Service' function to deal on our behalf to manage/minimise excess cash held with a broker day to day drawing on this line of credit. As an aside, I'm wondering if the fintech industry has come up with a solution to automate this function even? Very interested in this space.

My remaining concern would be if in the event of banking crisis ala GFC (but worse) and a bank goes under what risk is there to the collateral? Is it pooled as part of any liquidation process, is it ring fenced with claims limited to the balance on the line of credit or would the facility just be transferred to another institution?

Would love to have this idea scrutinised from a risk perspective.

Cheers again!
 
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to setup a tripartite agreement like that you need a commodity finance house, but why finance gold bullion when you can get cme warrants efp'd and accepted as cash collateral in your futures account

macquarie bank has an fcm, london bullion desk and commodity finance in sydney

can do it all in one house
 
actually, the efp price discovery was broken last few months, prrobably better off leasing the gold but that defeats the purpose of having gold to protect against fcm c/p risk
 
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