MF Global: “Not in Compliance”
Nov 01, 2011
The MF Global situation changed dramatically this morning when Craig Donohue, CEO of the CME Group, uttered three simple words, "not in compliance". By now you know that he was referring to the number one rule at any FCM, segregation of customer funds from the firm’s capital. Quite simply, it was a game changer.
There is no more egregious offense in the futures clearing world than the co-mingling of client’s funds. I speak from personal experience as I ran the Spear, Leeds & Kellogg FCM in NY up until 2002 as well as holding a seat on the board of the NY Clearing Corp. There was no rule that the Clearing Corp, SLK, or myself took more seriously. There was never even a discussion about it no matter how tough the situation, including the days after the September 11th attacks when we worked around the clock for a week to balance the books and get funds to the clients that needed them. As proud as I was then of our diligence as an industry to get the exchanges and FCM’s back up and running, I am equally dismayed at these recent developments. Reputations are earned in years, ruined in days.
At last report $700 million out of $7.2 billion in segregated funds has gone "missing" at the venerable old school futures broker, which was taken over last year by a Wall Street veteran trying to resurrect his career. Instead this ex-Co-Chairman of Goldman Sachs, ex-US Senator from New Jersey, and ex-Governor of the State of New Jersey allowed greed and a personal desire to turn MF Global into a "mini-Goldman Sachs" to ruin the careers of many in his employ while putting a countless number of his client’s careers on hold.
As mentioned yesterday, on-exchange positions are guaranteed by the exchange-clearing house and can be transferred at the owner’s request. That said this recent development leaves how much money can be transferred with the positions very much in doubt as the regulators struggle to balance the books. Some MF clients were able to transfer up to 60% of THEIR money yesterday in addition to their positions but now must wait to recoup the rest, albeit with no guarantee. The reckless lack of controls at MF has had the consequence of putting clients out of business or, at the very least, at reduced capacity until this situation is resolved.
FCM clients trust their clearing broker to safeguard their trading capital, not "invest" it unwittingly for the benefit of the house. If these European bonds had appreciated in value, clients would have been none the wiser though their money would have in essence paid the salaries of the people who abused their trust. Now that trust has been broken by an ex-executive who should have, and must have, known better. While neither Mr. Corzine, nor MF Global for that matter, have been accused of any wrongdoing at the moment, their failure to supervise is inexcusable.