Yesterday the trading floor buzzed with news of Peregrine Financial Group declaring bankruptcy and locking up millions of dollars of customer funds. On Tuesday, the Commodities Futures Trading Commission filed an accusation complaint against the firm and its owner Russell Wasendorf, Sr. for misappropriating funds and bank records according to CNN.
Bloomberg further explains
that the assets were initially frozen by the National Futures Association on July 9 after it was discovered they only had $5 million on deposit at U.S. Bank instead of the $225 million it had previously claimed.
In light of similarities, many were quick to compare this situation to MF Global. Mark Gold of Top Third Marketing says it’s too soon to make that comparison. However, the familiar fear and hesitation that loomed over the futures market all winter is making its way back to the floor.
"We have another firm going under causing another black eye to the industry," he says. "It’s certainly raising more questions for the American farmer."
While many farmers are hesitant, Gold says farmers carry more risk if they stay out of the options market. "In light of today’s prices and volatility, the American farmer has much more risk in not using the options market than they do in using it," he says.
According to Gold the best way for a producer to manage risk is purchasing long-option-only positions that don’t require large amounts of excess funds be maintained in the account.
"If you put on a futures contract you have to keep a lot of cash in that account for margin calls," he says. "If the firm goes out of business that cash is up for grabs, as we learned with MF Global."
Farmers are often unwilling to spend money on options, but Gold says over the last 15 years he’s realized they are the only long-term approach that will keep farmers unemotional.
Watch for the Signs
Can you tell if your brokerage firm is in financial strains? Gold says there are certain "red flags" a farmer can look for to know if the firm is at risk.
He says farmers can research the rating of firms they do business with. "In any due diligence in opening an account, whether with a bank, or a commodity broker, or with anybody, you have to know who you’re doing business with," he says.