When MF Global went down many traders seemed to regard it as an aberration -- a one time event that arose from a very unusual set of circumstances. They did not even pay attention to the CFTC financial reports that showed MF was clearly in trouble months before it went down. Contrary to the common wisdom even the retail trader who had bothered to do a three minute once a month review of his counter party had time to get out whole. Financial Data for Futures Commission Merchants -- Google it ... it is a monthly report that lags about 40 to 45 days. My wife checks the three firms we deal with around the 11th of every month (that's when the email alert tells us it is available) and informs me of significant changes. Now that PFG has demonstrated that fraud can be so simply perpetrated most traders see the need for insurance. They are realizing segregation is a joke. It is Swiss cheese protection. The most important thing to realize is that the industry hates the idea of insurance because for years -- forever really -- they have skated by with very little oversight. They do not want any scrutiny. The 20th century history for those that care is that the Chairman of Ways and Means, Danny Rostenkowski, ran interference for his homeboys in Chicago and protected the pits in every imaginable way including keeping insurance and therefore scrutiny off the table. That tradition continues under different leadership. Danny's indictment on 17 felony counts in the 90's cost him his seat. A very simple and low cost insurance scheme would cover 95% of the retail futures traders and cost next to nothing. All that should be done is that $100,000 or even $50,000 of each customers cash in a segregation account up to a maximum of 80% of that deposit. By leaving out the margin posted with clearing firms you greatly reduce the size of the scheme and by putting the customer at risk for 20% from dollar one you give them an incentive to care where they keep their money. And, since by virtue of the leverage available even $50,000 can go a long way for a speculator particularly if he can get it replicated two or three times by using more than one firm. Larger traders will have an easier and cheaper time purchasing more insurance privately once this mini-SIPC is in place. It is small, simple to implement, rational and sure to be opposed by the industry. The other problem is if it gets introduced in congress by the time the bill comes to the floor -- if it ever does -- it will be a monstrosity that will help no one. Such are the times we live in.
What aspects of the CFTC financial reports showed MFG in trouble or do you regard as particularly important as signs of trouble? Adjusted net capital? Excess net capital? Ratio between excess net capital/adjusted net capital and customers assets in segregation? Changes between months? It would be interesting to know your thoughts.
MF filed a report on August 31, 2011 reflecting their financial condition as of July 31, 2011. In that report they showed an Excess Net Capital of ($150,569,277). My wife and I each receive an email every month from the CFTC alerting us by the 11th or 12th that the report is on their site. The report was available by September 13th at the latest. I'm not suggesting i saw the negative number in RT. I had no account there and my wife only enters the firms into the spread sheet every month that we have accounts at. But, had we had an account there on the 13th my wife would have SHOUTED that number at me, I would have made a call to verify it was not a typo and once verified I would have emailed wire instructions, followed up minutes later with a call and sent a copy of those instructions by FEDX for AM delivery the following day. Of this I have no doubt. Once that number goes negative the regulators must shut the firm that day. They did not and ANYONE who thought COUNTER PARTY RISK COUNTS would have been out and saved the day the report came out or as the British say, they would be home and dry. What shocks me the most, since they are also a broker/dealer, is that the SEC did not lock their doors. Because of SIPC B/D's are, I have been told, more closely observed.
@Swan Noir: To be clear, are you saying that MF Global's predicament was evident in the CFTC reports, but that PFGBest's were not? Could this mean that carefully scrutinizing the CFTC reports might give a false sense of security? It's my feeling that deposit insurance similar to SIPC is badly needed for all regulated markets where it doesn't exist now. Such insurance should not be expensive unless there are a lot of payouts, in which case there is a problem going unhandled. FDIC insurance seems to work well for smaller banks. It doesn't work so well for the biggest banks, and that's an example of a problem going unhandled. Can you imagine what the economy would be like if we didn't have FDIC?
NO Swan Noir, I see no reason to have a deductible when I make a Cash Deposit with a broker I expect 100% insured coverage period if it can be done in Canada with up to $1,000,000 per client account insured there's no excuse for it not to be done in the US and further to rwk's - ". . . deposit insurance similar to SIPC is badly needed for all regulated markets . . . " - if you didn't already mean this rwk - I'd make it a requirement that Anyone - CTAs, hedge funds etc accepting client funds be required to insure those funds - 100% the incompetency of the so-called 'regulators' beggars belief, PFGBest's Wasendorf stated he stole client funds since the company first opened for business, so as far as the CFTC, NFA, CME and others go, they're next to useless at preventing fraud and so for whatever reason client funds are 'lost', 100% insurance is REQUIRED
I never like the 100% coverage concept unless the insurance is STRICTLY private. If there is any taxpayer involvement -- even a "moral guarantee" -- I want a bit of the pain to spread. I want people to care who there counter party is.
Yes, that was an obvious sign. However, I can't see too many signs of trouble in PFG's latest report. They had excess capital of $10m.
Thinking about this more, here's a couple of ideas for monitoring financial health. Ratio of excess net capital to net capital required. It seems the better firms have excess net capital exceeding net capital required. According to my calculations in the current report the mean FCM had excess net capital exceeding net capital required by 5.87%. I note that for both MFG and PFG their excess net capital was lower than net capital required. In the latest report PFG's excess net capital was 52% lower than net capital required. A warning sign surely? The other thing to possibly monitor is the monthly change in segregated assets as a funds flow measure. I haven't researched this measure's predictive accuracy yet.
LOL ... when they pull up the truck and take it all out the back door and the numbers are all made up nothing protects you. That's why segregation sucks and insurance is the answer. That said, the Penson risk was very obvious as was MF. It pays to look but nothing is guaranteed to save you.