Beware the 7th of November: At Least $1 Billion Needed.
Nov 04, 2011
A rough week for MF Global clients may turn into quite a few rough days for all futures market participants. Yes, MF accounts are being transferred and while that solves one problem, it has created an even larger $1 billion problem. That’s billion, with a "B".
5,300 ex-MF accounts woke up this morning in a new clearing firm, with a new margin clerk, and a 40% margin deficit, never mind a 100% excess capital deficit. More should wake up to this reality on Monday morning. Exactly how many more is still in question because at this pace it would take until Thanksgiving to move every account. That won’t happen however as many smaller accounts risk liquidation within days if they don’t transfer successfully.
It’s important to remember that just because you had an account at MF that does not guarantee you another clearer before the hammer comes down and your positions are liquidated, which looks like it may happen sometime Monday.
Look at the ratios in today’s CME Press release. 5,300 of the reported 100,000 accounts have been transferred but $410 million of the $1.449 billion that CME Clearing expected to move in total has gone with those accounts. 5.3% of the accounts had 28% of the available capital attached. Big guys done, middle guys still moving, little guys out of luck? Issue 1: Risk of "homeless" positions being liquidated "at the market".
As discussed on Wednesday, CME Clearing is "holding back" 40% of MF’s segregated funds on deposit. This 40% was used for initial and maintenance margins on positions held at MF as of last Friday and throughout the past week. Mingled into this 40% is quite a bit of margin premium that had already been fully funded at the time of the option trade. Now the margins and option premiums are only 60% funded. The result is a collective $1 billion dollar deficit, the exact amount that CME Clearing is holding onto. Add that number to the very real possibility that the "new" clearers will be charging double margin in the near term and the $1 billion figure becomes a blip in the rearview mirror.
Interest rates are historically low but it’s about as easy for a trader to borrow risk capital as it is for some folks to get a home mortgage. Ex-MF traders may have collateral for a risk capital loan, but it’s tied up in a bankruptcy court with no release date in the offing. If your mortgage falls through, you don’t buy a house. If your risk capital loan gets denied, you have no choice but to liquidate your positions. Either you liquidate or someone will do it for you. Issue 2: Risk of "under-funded" positions being forced into liquidation.
If something like this had happened in the equity markets, chances are pretty good that the market would have traded in one direction, down. Futures markets are obviously different as there’s a buyer and a seller on each trade. It would have been impossible to determine if the legacy MF positions were slanted one way or the other even if they weren’t spread all over LaSalle Street.
While the markets may not go in a specific direction as a result of Issue 1 and Issue 2, liquidation could flood the market with no regard for prevailing price action. Forced liquidation orders are always market orders and as such could lay bare the liquidity air pockets that the very MF traders liquidating their positions prevent from happening on a day-to-day basis in every futures market. Pure irony.
Not quite the Ides of March but best to take that intra-trading-day nap with one eye open.