I found some very interesting data today. In this FT times article, the head of the CME states that auditors visited MF Global on Thursday, Oct 27th and found everything to be ok. Segregation of customer funds was "intact." However, on Friday, the very next day, the segregation report showed a $900million shortfall. http://www.ft.com/cms/s/0/09bdd8ea-212b-11e1-8a43-00144feabdc0.html#axzz1g34ckmF8 So what happened between Thursday and Friday? Rehypothecation is what happened. In this FINRA report, on page 9 it states that firms only need to make rehypothecation calculations at the end of the week. "Under Rule 15c3-3, this computation must be made weekly, for those firms that carry customer funds exceeding $1 million, as of the close of the last business day of the week," http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122388.pdf My guess is that MF global had a custom of pledging out customer assets every friday as part of their re-hyopthecation efforts. This caused the discrepancy of customer funds from thursday to friday, and since MF global declared bankrupcy during the weekend, those customer funds ended up being stuck at outside firms.
If my hypothesis above is true, it has very disturbing implications for the securities industry. It means that the missing customer funds at MF Global are NOT a result of active fraud or theft by MF executives, but rather an unintended side-effect of a perfectly legal mechanism that allows brokerage firms to transfer customer assets to outside firms.
Keen observation. It is amazing how much you can do in the investment business that is perfectly within the law and in accordance with the regulations in place that puts client funds at risk. It is a sewer of legal corruption built upon a base of insane leverage that uses customer capital to gear it all up. Whether your hypothesis pans out as true or not ... good insight!
I had no idea. After all of the series 7 BS I went through, and the CE I still go through, I always thought it was mandatory that funds be kept segregated constantly. Not reconciled once per week. Jesus, that is truly scary.
Who knows. If all the money was there as of Thursday, but suddenly gone Friday, you'd think it would be a simple matter of retracing whatever transactions occured on Friday. It may be a matter of conflicting motivations. MF's counterparties probably have a good sense of what happened, but they are keeping quiet because they want to hold onto the MF funds they already have and not give them back to MF's customers. The trustee has an incentive to drag this out as long as possible to rack up his billing fees. Its the same guy whose doing the Lehman case which is still going on. The regulators may be afraid of letting the public know that MF's failure was not due to fraud but rather a result of poorly designed rules that affect all brokers.
There was a post on zero hedge (can't find it now, I wanted to check the date) where a customer requested a wire transfer for funds (200k) and the next day the wire transfer was reversed. MF (or someone) took the guys money. "And it's gone" This would have been a rehypothecation for sure.
...I recently had a conversation with an individual (we'll call him Bob) who had three MFG accounts. He, like many other customers, smelled a rat with MFG as the stock price plunged and the FINRA issues with the Euro bond positions became known. Bob voted with his feet. He closed off all open positions. He got back to cash. Then he requested a wire transfer for the balance(s). He left a small operating balance in the accounts in order to keep them open. This fellow was small potatoes. Two of the accounts were under $20k. The other was $215k. Wire transfers to a bank were requested. According to Bob, the wires went out on Wednesday, October 26 (four days before BK). All three wire transfers were received on Thursday October 27. But on Friday, October 28, the bank that had received the funds reversed the wire transfer for the larger amount. The transfers for the two smaller amounts were not reversed. ... Hereâs the rub. Iâm told that in the matter at hand, the "XYZ" bank operating on behalf of MFG was JPM... http://www.zerohedge.com/contributed/corzine-mfg-fog-war
OP, I believe you are wrong. What killed MF was the broker dealer arm, the money on the FCM(Which I believe its the vast majority of deposits but a former client can confirm) can not be 'rehypothecated', it can only be invested in securities allowed by the regulations(Which ONLY allow foreign sov debt if the deposit was made in foreign currency). MF did not gamble on foreign sov debt through the FCM cash, up until the last minutes The cash in the broker dealer side was raised in the repo and capital markets, not from customers. This has been my understanding after viewing the Corzine testimony and reading the reports out there
So what's the best thing to do in the future if you wire money out of your account of a failing broker and you are afraid they might try to reverse it? The best I can think of is wire it away a second time immediately to one's account at Interactive Brokers. Hopefully they would not be able to reverse both wires. Also I think that IB hopefully might be sticky about allowing them to reverse a wire to it. Also of course one would give written instructions via fax to each bank describing the circumstances and instructing them to under no circumstances reverse the transfer and that they will be held civilly liable and sued immediately of they impede your access to the funds or reverse the transfer. Actually if there was a delay in the wire transfer but it was still finally received but held or something like that, then I might sue same day and try to get a temporary order freezing the funds at least. Even notice of a pending suit alone would probably be enough for the bank to freeze everything.