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.
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.
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.
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
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 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.
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 <a href="http://s1104.photobucket.com/albums/h331/specsalot/?action=view&current=6-23-11.jpg" target="_blank"><img src="http://i1104.photobucket.com/albums/h331/specsalot/6-23-11.jpg" border="0" alt="Photobucket"></a> <a href="http://s1104.photobucket.com/albums/h331/specsalot/?action=view&current=7-20-11.jpg" target="_blank"><img src="http://i1104.photobucket.com/albums/h331/specsalot/7-20-11.jpg" border="0" alt="Photobucket"></a> <a href="http://s1104.photobucket.com/albums/h331/specsalot/?action=view&current=7-20-11B.jpg" target="_blank"><img src="http://i1104.photobucket.com/albums/h331/specsalot/7-20-11B.jpg" border="0" alt="Photobucket"></a>