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Fallout from MF Global Far from Over

January 3, 2012
money funnel

Confidence in commodity markets were shaken and that uneasiness will continue in 2012


Marty Klinker, a Montana farmer and rancher, went to Washington in December looking for answers. He knew he wouldn’t find the nearly $500,000 he couldn’t access when MF Global filed for bankruptcy on Halloween 2011.

Klinker’s money was only a fraction of the $7 billion that was tied up and inaccessible to the customers who cleared trades through the now-defunct brokerage giant. In mid-December, Klinker and other MF Global customers received 72% of their money. The remaining 28% remains in limbo and there is no indication of when that money will be available to them, if at all.

This is the eighth-largest bankruptcy filing in U.S. history and it has shaken the markets late this year, and that uneasiness will likely continue into 2012, says Thomas Grisafi, an independent commodity trader and CEO of Indiana Grain Co. "On a scale of 1-10, this is a 9 in terms of impact on the market. Open interest and volume have gone down since the filing and a lot of local traders have been sidelined because of this."

Furthermore, says Grisafi, anyone who has ever sold a brokerage service to somebody could always offer assurance that money in a trading account is safe. "They can’t say that anymore."

The full impact of this will be sorted out in the coming months, says Scott Harms, an analyst with Archer Financial, a division of ADM. Volume typically declines late in the year, he says, but this year it has been accentuated.

Early in 2012, he believes a lot of money will be shifted around as farmers and other hedgers move money to new brokerages. How much of that money remains in the market remains a question. Beyond the $500,000 Klinker could not access, that was his biggest concern.

In a Letter to the Editor of AgWeb, Klinker wrote: "The question the marketplace would have to ask is; ‘Do I feel confident in buying that depressed position (thus stopping the free fall) when the free fall has been caused by the lack of security on segregated accounts, causing hedgers to liquidate positions due to lack of funds? OR, should I simply get all of my money out of the market before there is a melt down and I also lose all of my money held at my FCM (futures clearing merchant)?’"

That is a concern shared by Harms. "There is no question this has caused skepticism of the markets. The safety people felt with the markets will never be there. It’s important that people are made whole with this."

On the political front, there are many unknowns now as well. Klinker attended the 2011 Farm Journal Forum in Washington, D.C. searching for what he called "a political will" to bring changes to the way FCMs handled customer accounts.

These are supposed to be segregated accounts. Unfortunately, however, ranking Democrat on the House Agriculture Committee Collin Peterson says the rules have been softened over the years that actually allow FCMs to use customer funds. At the Farm Journal Forum, Peterson vowed to get those rules reverted back to the way they were originally set up in 1968.

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