MF Global is MF Kaput

There are a few sides to the futures business. I was always a “local” trader, and never had customers, filled orders, tried to get retail accounts or anything like that. Locals had different needs and wants from a clearing house than a customer, a broker, an introducing broker or some operation like that.

I continue to clear any trades I do at Shepard International Trading. I pay more in commissions there, but everything is clean. I never have a problem with my account. I don’t have to worry about the positions being leaked out of it, and the people that run the company play straight.

One of the great fears of a local trader is that one day some idiot bankrupts the clearing firm, your assets get frozen, access to trading is denied and you are stuck. If your clearing firm has a good risk manager, that shouldn’t happen.

However, that happened to a bunch of people today with the bankruptcy of MF Global ($MF). Traders couldn’t access their accounts and the trading MF did was liquidation only, meaning closing positions. I feel bad for the employees of MF Global. They didn’t have a hand in running the company into the ground.

This dislocation is only a short term operational problem. Money in clearing firms is segregated away from the assets of the firm itself. Traders don’t worry about that. But when assets get frozen up and you need to post margin on positions it’s a royal pain in the you know what.

The market decline today wasn’t about MF Global. It was about continued worry in Europe. The Europeans papered over their problems by throwing more money at it. Do you really think the Italians can continue to auction of debt at 6% interest rates and pay for it? Not a chance. The broader market isn’t affected by one futures firm. The only reason it’s a big story is they are led by a former Goldman CEO, and former government official (Senator, Governor) that was rumored to become a Treasury secretary.

MF Global went bankrupt for the same reason a lot of clearing firms go under. They chase yield. All the guys like me that have excess money in their account after their positions are margined give firms a chance at some cash flow. The firms that go bankrupt use that money to buy overnight treasuries and earn some interest on it. The problem today, no one is paying any overnight interest so that cash flow stinks.

When you are an operation like MF Global, you might do some financial budgeting based on earning a certain return on assets. When you don’t earn that return, you need to bump up the risk you take to earn more yield. In MF’s case, instead of buying US Treasuries, they decided to buy European securities. What could go wrong?

A haircut that’s what.

Boom went their balance sheet. Now they are done. Refco and MF Global followed a similar strategy. They rolled up IB’s and then tried to sell a lot of value add products and generate cash flow from deposits and commissions. In Refco’s case, fraud brought them down. MF just made some really poor business decisions.

Those of us in the know in the futures industry never thought MF was a particularly clean house anyway. My friend Dan Dicker from New York can tell you chapter and verse about their reputation on the NYMEX/COMEX floor. It wasn’t very good.

I mean, what did you expect? Their CEO ran the state of New Jersey into the ground. His claim to fame was front running customer business at Goldman before he became a US Senator. All you have to do is read “When Genius Failed”. Goldman downloaded the positions of LTCM before they lent them the money, then pressed the positions and caused them to go bankrupt. They took the other side as they blew out and made a ton of dough. Karma sucks. What did Corzine run better? MF or NJ?

One thing to note, just like when Stotler, Refco, Bear Stearns and Lehman went bust, none of the commodity clearing houses ($CME, $ICE, $NYX) were affected. The markets ran efficiently and on time.

Anyway, if you are a futures customer, or considering trading futures it’s sometimes important to check out your firm. Like I said, I use Shepard. For S&P execution, I also know a guy named Charles Reynolds that is pretty sharp. He runs his operation through FC Stone($INTL). Happy to put you in touch with either of them if you desire.


To clarify on the MF reputation-it was far before Corzine showed up. There are conflicting stories on my “chasing yield” meme. says that isn’t the case.

It’s ugly for the customers and the employees that had nothing to do with it. But, let’s see what the forensic accountants say when they go through bankruptcy. We learned a lot about Enron after the fact.

  • Anonymous

    good post Jeff…any other MFs out there we should know about?  who else is chasing yield?



    • You don’t know until the laundry is hung. It’s pure reputation. The reason I clear Shepard is Bill Shepard. He is as honest as the day is long and I would trust him with anything I have-including my family.

      The problem comes when they try to maximize ROA. In an environment where they are used to getting some yield off of their overnight assets, they have gone four years with 0%, and it begins to get really tough on margins.

      There are a lot of good people that work at MF, and they will land on their feet.

      • MR

         you should be careful who you recommend…FC Stone had some problems a couple years ago with a customer’s oil trades.  In turn they demanded many mutiples of SPAN from their other clients to cover their problems.

        • I didn’t recommend FC Stone, but I do recommend Shepard International.  

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  • Dan

    Stotler was a peach: employee payouts took many moons.  What’s really egregious in the MF failure is that it appears this failure is due to the pride and hubris of the CEO who thought he was smarter enough than the market to take a massive punt on euro sovereign debt.  The biggest losers are the 3000ish employees who are not only unemployed, but also likely unpaid until this gets resolved.  OH, and CTA’s trying to calculate month-end NAV’s and transition managed accounts to another FCM. Maybe they already did.

    On the bright side of things: score another one for the resiliency of the US futures markets! Seg accounts, daily M2M, and transparent pricing = robust market.  Put that in your CDS pipe and smoke it!

  • SPI245

    As you know Jeff,MF was the purchaser of most of refco assets, the other parts got folded into Lind Waldock.  I could never understand why a FCM would purchase all the local firms at the CME and keep all the company’s operating with their own risk teams and management.  It was a matter of time until someone screwed up and the parent firm was in trouble.  Corzine took advantage of his influence as a key player as well as GS reputation.  The truth was the customer and the public were dumb money and the key players where the smarter guys that used their lofty status to reward themselves.  I sure Obama is trying to figure out how to distance himself from the people that got him into office now that their true colors have sown through.

    • You bring up some excellent points on the business aspect of the transactions. I don’t know about the Obama thing. Corzine is a left wing Democrat, and to be perfectly honest it’s an easy target for a guy like me.

      It seems to me that he was chasing yield, but we won’t know until the accountants get to it.

      • SPI245

        I forgot what happened with the Northbrook firm that got FCMs to borrow against Libor rates in 2008 to chase extra yield.  Oh yeah I remember they lost everyones money.

  • “just like when Stotler, Refco, Bear Stearns and Lehman went bust, none of the commodity clearing houses ($CME, $ICE, $NYX) were affected.”

    Quibble: the only reason that is true is that Bear never filed BK (which was, of course, the reason they couldn’t be allowed to file BK). Which is, collaterally (as it were), the reason BSC wasn’t allowed to file BK and Lehman was.

    • I don’t disagree with you. I threw Bear in there because for all intensive purposes, they were BK.

  • thx jeff.  all i cant tell is where corzine goes, corruption and bullshit is the norm

    • Can you believe they messed with seg funds?  that actually shocks me.

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