On Monday, October 31, 2011 MF Global filed for bankruptcy and there was a shortfall in the customer segregated funds.
It is not unheard of for an FCM to fail. It happened in 2008 with Lehman and before that it happened to Sentinel and to Refco. But in every case prior to MF Global the CME was able to arrange an orderly transition of business to one or more FCM’s. During those transitions customers were not barred from the market, employees were not locked out of the building and the integrity of the futures industry was maintained. The entire business of MF Global was to be transferred intact to Interactive Brokers, but IB backed out when the shortfall was discovered. That left the entire matter in the hands of the Bankruptcy court and the CME was powerless to step in.
MF Global through its principals has blazed a trail into new and uncharted territory. Never before has the sanctity of customer segregated funds been violated so blatantly and in such unprecedented amounts. The first few days after the filing, we thought that we were looking at sloppy bookkeeping. But as the days drag on into weeks and the shortfall continues to grow it appears that a concerted effort was made to deplete the customer segregated funds to support the proprietary positions of MF global.
I am as guilty as everyone else in repeating the phrase that no one has ever lost money due to the failure of an FCM. I’m afraid that that is no longer true. I have no insight into what the Trustee in bankruptcy is actually seeing, but his most recent statement that $1.2 billion is missing from customer segregated funds is extremely discouraging.
The failure of MF Global has devastated some 38,000 customers, thousands of employees, and hundreds of creditors. It is also a black eye for the futures industry as a whole. Ours is an industry built on honesty and trust. Your FCM guarantees that your trades will be made good win lose or draw. CME Clearing guarantees that all the trades submitted by your FCM will be made good, win lose or draw. MF Global has broken the faith and taken customer funds. I am not certain that the futures industry can ever fully recover.
If You are a CTA
If you are a CTA, the accounts you manage at FCMs other than MF Global are fine. If your accounts were holding positions at MF Global, those accounts have been transferred to another FCM with funds to cover most of the maintenance margins. You need to contact the transferee firms and find out how much additional funding will be required to continue trading. You will also need to establish new give up arrangements between your executing firm and the transferee FCM. If your accounts were flat at MF Global, 60% of the account balances have been transferred to another FCM. Regardless of whether your accounts had position or were all in cash, the transferee FCM may require your customer to repaper. Even though the Trustee in bankruptcy has assigned the accounts as a bulk transfer, no customer paperwork has been sent to transferee FCMs.
If You are a CPO
If you are a CPO , your pool positions have been transferred to another FCM along with cash to cover the maintenance margins. The transferee FCM may be calling for additional margin and will certainly ask for funds if you are adding to positions rather than liquidating positions. The NFA has issued Notice 1-11-18 regarding required disclosure by pool operators to pool participants. Among the disclosures required are the amount of pool assets held at MF Global and the impact on participant redemptions and valuation. The transferee FCM will probably require you to repaper the pool.
If You Don’t Know Where Your Accounts Were Transferred
U.S. Clearing Houses Announce MF Global Bulk Transferee Confirmation Service
CHICAGO, Nov. 4, 2011 — As part of the bulk transfer process for MF Global customer accounts and collateral held at U.S. derivatives clearinghouses, CME Clearing, ICE Clear US, The Clearing Corporation, KCBOT Clearing Corp., MGEX, NYSE Liffe US and The Options Clearing Corporation have coordinated to provide clients with further information on the status of their account transfers.
Customers with accounts transferring will receive communications from their receiving firm following the transfers. In addition, beginning this evening, Friday, November 4, 2011, clients are encouraged to send an e-mail message to clearinginformation@cmegroup.com, indicating their name, MF Global account number, office code and contact details. The clearing houses will respond to the e-mails by phone or in writing as soon as possible in order to confirm a client’s receiving firm. Clearing house representatives will also provide contact information for the receiving firm so that clients can confirm the amount of any transferred customer collateral and positions with the receiving firm.
Marc Nagel
Chief Operating Officer
Dorman Trading, LLC
mn@dormantrading.com
tel: 312-341-7894