Since Monday morning, when MF Global Financial and MF Global Holdings filed for Chapter 11 bankruptcy, shocking the trading world, the firm’s customers have had millions of dollars locked in a regulatory holding pen. How long those regulatory gates keep the money sealed is now up to regulators and the court systems.
The New York Times initially reported Monday night that $700 million in customer money was missing, sparking CFTC and other regulatory agency investigations. That was followed on Tuesday afternoon by reports that the Federal Bureau of Investigation was joining the exploration party to see if MF Global committed illegal activities by shifting money from segregated customer accounts to cover their own trades.
How deep this goes and the pending ripple effect to farm country, are still unknown. MF Global is a major clearing house for many agriculture traders and brokerage firms, and that could have severe effects on farmers who are actively trading.
The CME Group suspended MF Global from any trading activity on Monday, says CME CEO Craig Donohue. "CME Group will no longer recognize MC Global or any of its divisions as a guarantor for purposes of floor trading privileges.
"We additionally agreed to facilitate the transfer of open positions at the last settlement price at the request of customers and the re-margining of such positions at the transferee firm," he says.
Peter Meyer, a commodity industry veteran and publisher of Opening Print newsletter posted in his AgWeb blog
on Tuesday: "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."
When a brokerage firm goes bankrupt, the exchange is liable for any positions a trader has on the exchange, says Scott Irwin, the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois. Being a zero-sum equation, the commodity exchange where the trade was initiated is responsible for that position. If there was going to be a problem with any futures positions involving MF Global accounts, Irwin believes that situation would have been evident yesterday. Unfortunately, for firms with accounts cleared through MF Global that’s not the only concern.
"If you had a brokerage account with them," Irwin says hypothetically, "and some of your money illegally disappeared, that could be an issue. Customer funds are different than futures positions. 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 get in line like, unfortunately, some of the investors with Bernie Madoff did," Meyer said in an interview with AgWeb on Tuesday afternoon. "They will decide exactly how much money is left in the pie and divvy it up amongst all the investors."
Irwin cautions people not to jump to conclusions about how much money, if any, is missing at this point. The size of MF Global is to such a large scale that it will take a number of days to run through all the accounts and trace back all the trades.
However, Meyer says he is already hearing from the trade that account holders at MF Global should expect to see between 70% and 90% of their money back. He doesn’t expect anyone to recuperate 100% of their funds.
The Securities Investor Protection Corporation (SIPC), 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. This is the same group that defended victims of the Madoff Ponzi scheme.