MF Global Bankruptcy: Separating Fact from Fiction.
Oct 31, 2011
This morning’s confirmation that MF Global (MF), one of the largest Futures Commission Merchants (FCM), filed for bankruptcy protection has roiled the agriculture markets with baseless and irresponsible rumors, some of which originated on the CBOT floor and quickly spread through social media outlets.
MF clients have been told that they cannot add any new positions and are limited in their trading to liquidating current positions. This is a far cry from the "forced liquidation" rumors circulated this morning before the opening. No MF client can be forced into liquidating his or her position as long as they have enough cash in their account(s) to meet margin calls. Liquidation only and forced liquidation are NOT the same thing. As such it was extremely irresponsible for anyone to circulate the words "forced liquidation" and the CME must investigate the sources of such erroneous information.
The bigger issue here is the sheer size of MF and the negative impact on liquidity in all futures markets. If you are a client of MF, you have the right to transfer your positions to any other FCM that will accept them but MUST re-finance the positions at your new FCM without access to currently deposited funds at MF. This may not represent a problem for the "big guys" but for many market makers it represents a huge hurdle, as most of their trading capital remains tied up at MF. Eventually these funds will be released but it does present the possibility of a liquidity squeeze for all futures markets in the interim.
Traders also face the issue of where to go. The market maker and Introducing Broker business is a tough one that has faced severe contraction over the past few years. There’s only so much "capacity" available without large cash infusions into current FCM’s and additional risk management parameters put in place. Electronic trading has mitigated risk to a certain extent but fears still abound on the possibility of being responsible for a rogue trader in a business whose profitability has been compared to picking up nickels in front of a steam roller.
The demise of MF impacts not just employees of the firm but everyone who participates in the futures markets. Clients do not have immediate access to cash on deposit and are in essence out of business until their funds are released, which could take days. While the post-mortem will take some time, it appears that MF Global is yet another sad example of a firm that was driven by greed and strayed from its core business model.