The Cost of Being an MF Global Client? 11.6%
Nov 02, 2011
In a letter sent today from the CFTC to the CME, the CFTC references a $633,027,696 shortfall in segregated client funds at MF Global as of the close of business on November 1, 2011. This number represents 11.6% of the total $5,445,839,890 MF was supposed to have on hand in segregated funds on the same date. What this implies is that MF clients should receive 88.4 cents for every dollar they had on deposit at MF. In essence an 11.6% haircut for the pleasure of doing business with what appears to be an unscrupulous firm. Unfortunately it’s not quite that simple.
In yesterday’s blog, I mentioned that some MF clients were able to retrieve 60% of their capital from their now defunct clearer. That was only half correct and entirely wrong. Let me explain. While some clients were able to secure a check (no wire transfers) for a portion of the monies in their account(s), the receiving banks refused to honor the MF checks and told the clients their money was "on hold". For the 150,000 account holders the situation went from being locked out of trading to being locked out without any of their money.
In the above referenced letter the CFTC informed the CME that "the balance of MF Global customer segregated funds would be retained by CME pending further direction from the (CFTC) and/or bankruptcy court". "The balance" is referenced because the CME has decided to transfer all non-proprietary positions to 1 of 6 designated "new" clearing firms on behalf of MF’s former clients but only with enough money to satisfy current margin and maintenance requirements. While the CME currently holds $2,434,265,227 in MF segregated funds, only 60% or $1,449,069,869 will be transferred to satisfy margin requirements at the "new" clearing houses. In other words, CME Clearing will hold $985,195,358, the "new" clearing firms will get the $1,449,069,869, and it appears the bankruptcy court will hold the balance of $2,378,546,967. It all adds up to $4,812,812,194 or $633,027,696 less than it should be. Confused yet?
Time to add some anger to your confusion. The CME, in a separate statement, claims that they completed an audit of MF last Thursday and every penny of segregated funds that was supposed to be there, was there. This implies that the $633,027,696 was transferred out of MF soon after the CME left the premises. Brazen move by an obviously desperate firm. To add insult to injury, the CME also states that the money was moved in a way that "may have been designed to avoid detection". I can only infer from that statement that the money not only left the building but also may have left the country. Brazen was an understatement.
At this point it’s very difficult to say when and how this will all will get resolved because the CME, the CFTC, the FBI, and the bankruptcy court all need to complete certain investigations before the monies are released to their rightful owners, albeit with what looks to be an 11.6% haircut for the privilege of doing business with MF Global. If I were an MF client, I would certainly ask for some of those European sovereign bonds MF bought with their money to make up the shortfall!