Since late October, when MF Global Finance USA and MF Global Holdings filed for Chapter 11 bankruptcy, shocking the trading world, the firms’ customers have had millions of dollars locked in a regulatory holding pen. MF Global is a clearinghouse for many agriculture traders and brokerage firms, and that could have severe effects on farmers who are actively trading.
The New York Times reported that $700 million in customer money was missing, sparking investigations by the Commodity Futures Trading Commission and other regulatory agencies.
Peter Meyer, a commodity industry veteran and publisher of the Opening Print newsletter, notes that some MF clients were able to transfer up to 60% of their money 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," Meyer says.
When a brokerage firm goes bankrupt, the commodity exchange where the trade was initiated is responsible for any positions traders have, says Scott Irwin, the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois. If there was going to be a problem with futures positions involving MF Global accounts, Irwin believes, the situation would have been evident early.
Unfortunately, for firms that have accounts cleared through MF Global, that’s not the only concern.
"If you had a brokerage account with them," Irwin says, "and some of your money illegally disappeared, that could be an issue. The exchange stands behind your position, but if I sent a check for $100,000 that may not be there."
"If the money is missing, you’re basically going to have to get in line," Meyer says. "The exchange will decide exactly how much money is left in the pie and divvy it up among all the investors."
The Securities Investor Protection Corporation, which maintains a special reserve fund authorized by Congress to help investors at failed brokerage firms, has filed an application with the United States District Court for the Southern District of New York for a declaration that the customers of MF Global Inc. are in need of the protections available under the Securities Investor Protection Act of 1970.
- December 2011