MF Global Shortfall Exceeds a Billion Dollars- Futures Traders On the Short End of That LossTue, 22 Nov 2011 05:33:11 CST
The shortfall of commodity customer funds at MF Global Holdings Ltd (MFGLQ.PK) may be around $1.2 billion, about double initial estimates from regulators, the trustee liquidating the company said on Monday.
The news was a blow to customers still hoping to get more of their cash out of frozen broker accounts and raised new questions about why the authorities managed to locate only about 60 percent of the segregated customer funds three weeks after the parent firm's October 31 bankruptcy.
"I'm flabbergasted," said Tom Ward, a retired Chicago Board of Trade member whose two sons cleared their futures trades through MF Global and have been blocked from accessing their money. "The bottom line is, there's going to be a haircut involved. It's devastating, what this has done to the industry."
Monday's announcement was trustee James Giddens' first public statement on the size of the shortfall, which regulators initially said was about $600 million.
What's the impact down on the farm? Stu Ellis offers these insights of what the MF Global situation may mean even as this latest news on the bankruptcy suggests many who have traded with them face losing a significant amount of money:
"Based on its popularity with elevator managers for clearing grain hedging accounts through the Chicago Mercantile Exchange (CME), many US farmers may be closer than they think to the 7th largest bankruptcy filing in US history.
"What has happened, what is happening, and what will be happening? There are some lessons being learned that will impact the relationships involving farmers, grain elevators, and the banks that lend to both of them.
"The MF Global financial failure occurred, even after the implementation of the Dodds-Franks federal legislation designed to prevent such occurrences. Nevertheless the Wall Street investment house with subsidiaries worldwide filed for bankruptcy October 31 after attempts at selling assets of the company failed over the prior weekend. Its investments in numerous European banks soured when European governments refused to bail out the banks. The company was losing money and $660 million investor funds could not be immediately tracked because they were not in segregated accounts. Those include many margin and hedging accounts belonging to clients such as farmers and elevators.
"Because of the impact on grain elevators the National Grain and Feed Association conducted a webinar with members on November 10. It was designed to provide early guidance for holders of MF Global trading accounts and suggesting potential impacts of the various legal actions that are pending.
"Those actions include two bankruptcy filings by two of the three MF Global companies, and federal action against a third involving the Securities Investor Protection Act (SIPA), in which a trustee is handling the open hedging accounts.
"The scope of the action most closely impacting farmers and elevators is the $660 million in undifferentiated trading accounts, which the SIPA trustee is attempting to find among the MF Global deposits in other investment houses. That represents 11.6% of the accounts, which seems to be the amount that could be lost by investors. However, all funds could eventually be found and returned to investor accounts.
"But in the meantime, there are about 17,000 hedging accounts at the CME which have been transferred to 11 other brokerages, with only 85% of their margin intact. According to Dale Michael, Managing Director of Credit and Risk Management of the CME, MF Global had $1.5 billion in CME accounts, and was over collateralized, or had more money standing in trading accounts than was needed. But Michael says the CME can only do what the SIPA trustee says can be done, and part of that is to prohibit account holders from withdrawing money until all funds have been accounted for. Bankruptcy attorney George Angelich of Arent Fox LLP, says that could take months or years.
"In the meantime, the CME has posted a $300 million bond, of sorts, to convince the SIPA trustee to allow a distribution of the MF Global funds it holds to the account holders and allow full trading to resume. The funds are not related to the $500,000 indemnification funds that the Securities Investor Protection Corporation, which administers the SIPA, and provides to investors who lose money from equities resulting from problems with investment companies. And what is more those do not protect commodity investors. Angelich said it would only take a small change in federal law to add "commodity" to the SIPA and indemnify farmers and elevators which may lose funds in the current situation.
"Angelich says there are numerous investigations underway to determine if there were civil or criminal law violated, in addition to the SIPA trustee and the trustees in the other two bankruptcy filings on October 31. Michaels says the CME has also looked into the solvency of the MF Global accounts, and found them being managed within the terms of the law prior to October 31, but problems developed after November 1.
"A statement that shows a certain amount of cash in an account is not considered physical property and will remain under the control of the SIPA trustee, and claims may be filed later. Also, account holders which had deposited margin money for the express purpose of taking or making physical delivery of the underlying commodity on a futures or options contract would be able to file a claim to have those funds returned, but Angelich says be prepared to answer many questions. Angelich also said anyone who withdrew funds from MF Global accounts in the waning days before the bankruptcy filing could be the target of the trustee to return the funds.
"How will agriculture feel the impact? Everyone close to the MF Global issue has been given a stinging lesson in risk management.
1) Congress will undoubtedly revisit the Dodds-Frank financial services legislation with unknown levels of more regulatory control being applied and subsequent pass-through of cost to the consumer, as well as determine the extent of the futures industry not using segregated accounts.
2) Bankers who loan money for hedging or margin accounts will likely ask many more questions revolving around the security of their money, should there be a recurrence of events.
3) Everyone will learn the term "counterparty risk," which frequently was applied to the farmer by elevator managers who were concerned about non-delivery of committed grain, such as in the hedge-to-arrive difficulties of 1996.
4) Many farmers may start asking their elevator manager where his accounts are traded, if there is risk, and how the elevator is protecting the farmer's interest in the performance of grain sale contracts.
5) All of those issues will increase costs, and there will likely be increased costs involved in the business of selling a bushel of grain, meaning less profitability for everyone involved. Those lost profits will be used to insure future losses do not recur."
(Please note- the author of this article- Stu Ellis- grew up with Jon Corzine, former CEO of MF Global, attended school and 4-H club meetings, and have been friends since two farm boys were old enough to have friends.)
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