A Personal Account of the MF Global Fallout

This is an email I received from a reader. I thought you might find it insightful and a real voice in the MF Global mess. MF Global’s fraud has real world consequences. It’s not just big IB’s and banks that got caught up in it. Individual traders and small businesses are being destroyed by the lack of personal ethics that leaders of MF Global had. Here is the contents of the letter.

I am both a long time member of the CME and a substantial shareholder. I also have been left holding an empty bag, because I was foolish enough to have ALL my trading capital in my accounts at MF when it went BK, believing that segregated funds were sacrosanct. So I have substantial amounts at stake no matter how you look at this situation and stand to be a big loser no matter how it turns out.

There are benefits to being the largest exchange and there are disadvantages. The benefits are obvious. The disadvantages seem to be passed over by those who do not appreciate free markets to begin with, which include left wing (which is most) politicians, bulge bracket banks, who want to internalize all financial transactions, and the media in general. The CME, to read the press and the blogs the last couple of days, ‘all of a sudden’, is the only institution responsible for customer funds. There is more criticism of CME management than of John Corzine or his buddy Chairman Gensler, both of whom are ‘all of a sudden’ playing duck and cover. Nothing like a good lynching when the mob’s fever is up.

I personally lobbied the exchange to step up and take some action that would, in effect, force the issue. It seems that everyone is represented in the New York bankruptcy court but holders of segregated futures accounts. So, I applaud this action by the CME. But let us remember that there are maybe as many as ten other exchanges that MF was clearing customer futures trades on. Where are they? A good number of them, ICE in particular, has been busy for the last 4 or 5 years nipping at the heals of CME with the full support of the New York banks doing everything it could to weaken CME’s position with the FCM’s, the customer base, and the regulators.

When the sun shines the CME is too big and has monopoly power. When there is trouble, ‘all of a sudden’ it is the CME’s fault, CME’s responsibility, CME’s mess to clean up. Where is the CFTC and its Chairman? Where were the auditors for ICE ($ICE), the Minneapolis Exchange, LIFFE($NYX), EUREX. Don’t they have self-regulating responsibilities as well, or do all the other exchanges leave it up to CME($CME)? Funny, I don’t remember seeing payments from any other exchange for contracted audit services as a revenue line item in the CME Group Inc. financial statements.

What a rabble of vipers we have become in this country, but it has not been ‘all of a sudden’. The last two generations has seen a slow steady denigration of the very idea of personal liberty, property rights, profits, responsibility, as well as just deserts. Otherwise both Corzine and perhaps Gensler and a whole slew of others would already be wearing orange jump suits. “Not only in this country”, you say? Right! But that was the reason that people came here. That is the reason people invest and trade here. This was the only place where you could get a job mowing lawns if you wanted or rise to run a bank if you had what it takes, and perish the thought, keep what you earned.

Not any more! Now the guy or company that plays it straight, makes markets, innovates, and manages to put together a little nest egg for himself and his family is marched against in the streets, criticized in the press, and on the floor of Congress by a bunch of second hand mooches looking for the next piñata to smash.

The industry needs change, but it is not the kind of change that all the hand wringers looking for Big Brother to save them with will bring. The industry, and this apparently ‘all of a sudden’ means the CME, must pick up the cudgel of leadership and make sure that customers are protected, that this morass is corrected and can not happen again. This first step by the CME is a good one but not nearly enough.

We need to see all the exchanges go back to gross margining not net margining regardless of what the big banks and FCMs think of it. But the big guys did not like putting up the gross so we gave them the net.

We need to see serious criminal penalties for breach by a fiduciary, so that someone, whether he is an ex-Senator, or a even a past or present high ranking employee of Goldman Sacks, gets a perp walk just a quickly as a purse snatcher caught red handed on Broadway. But the big guys don’t like orange.

We need a SIPC, FIDC style insurance model that is run by the exchanges whose franchises are at stake, and not the government. The CME had a trust fund that it once required every FCM to contribute to for every trade, but now there is a paltry $50 million available. The big guys did not like it so we canceled that program.

You want to start an exchange? Fine! Start paying for audits instead of fancy lunches for Congressmen, regulators, and D.C. bureaucrats convincing them to give you a free shot at CME’s markets. A group of guys see the pile of money that this or that market is making locals and shareholders and they get the regulators to look the other way when they set up some new online venue regardless of whether they have enough employees to sweep the floors let alone monitor network security or customer funds at the firms they do business with.

Can the CME do more? Yes! But it has so far done more than anyone else. But that’s not much because no one else is doing anything.

thanks for the link Ace.

thanks for the WSJ link Josh.

Thanks for the link CNNMoney

9 thoughts on “A Personal Account of the MF Global Fallout

    1. If they are self clearing, it means they have a direct relationship with the clearing house. MF also had a direct relationship, and then had a lot of sub-clearing firms.

      The key is to trust who you are doing business with. Talk to the folks at Amp and ask them what they do with their overnight money. Get a feel for them. See if you think that they are of high enough character to not co-mingle funds.

      Then, watch your trading capital. Don’t keep more in your account than you need. Unfortunately, it makes for a lot of messy margin calls.

      I clear Shepard Trading. If I died tomorrow, I’d trust Bill to make the right decisions with all of my assets. If I needed money right now, and they couldn’t get a check cut, I don’t doubt that Bill would cut me a check out of his personal account soon. That’s why I clear there.

  1. The Option Queen Letter (also an injured party of the MF Global mess)

    This is just the part regarding the MF Global mess.

    Schwarz Young, CFP, CMT, MS

    Highwood Terrace

    New Jersey 07086


    13, 2011


    are into week two of the MF Global debacle. 
    Many of the farmers, producers, buyers and traders who cleared through
    MF Global have been “out of business” for a while.  It is important to realize that the
    spill-over effect of this sort of mess is much larger than the few thousand
    employees of MF Global that lost their jobs. 
    The bankruptcy of MF Global flows to the support staff of the exchanges,
    brokers, producers that cannot hedge their positions, the farmers who have no
    way to hedge their risk and many other people who used to fill the orders
    etc.  The velocity of money is
    considerably slower with this spreading problem.   You
    might say why not clear through another broker, but many of these customers
    have all their funds tied up at MF Global. 
    Another factor is the safety of the money.  Would you be willing to put money into
    another brokerage house if you cannot get your money out of the house you are
    in?  What makes you believe that the new
    brokerage house will be any safer than the house you previously cleared through
    and what if they all begin to fail?  MF
    Global did allow positions to transfer to different clearing houses along with
    cash to be used for margin.  The question
    arises how the trustee can allow any cash out of the accounts without allowing
    all customer cash to be returned to the customer.  Is the trustee awarding those who kept risk
    or positions over the weekend in favor of those who were in cash?  How can this be allowed?  Isn’t it favoritism of those with positions
    vs. those without positions?


    the customers of MF Global responsible for the actions of the public
    company?  The answer is no.  Are the share-holders, well in a way yes,
    they are owner of the corporation.  This
    is the time when the credibility of the system will be put under a magnifying
    glass.  MF Global is the test case.  Will the public view their money as safe in institutions
    or will that money be returned to the mattress. 
    Certainly, the mattress is gaining points every day.  The longer that this case remains unresolved
    the more points the mattress gains. 
    Interest earned is not worth the risk of loss that is the message that
    this case is sending out to the public, loud and clear!

  2. Fairly typical mix–for a financial professional–of trenchant analysis and self-aggrandizing/self-pitying entitlement. The standard breakdown: all successes are my own entirely, and all failures are because of others’ stupidity.

    1. Exactly right – I was expecting to feel sorry for the guy, but then he goes off on a huge pile of unrelated nonsense. Last time I checked, greed and stupidity was the cause of MF emploding. Drivel.

  3. Isn’t it contradictory to say you need a strong exchange regulatory framework to ensure client funds are protected…then point out that the big brokers like Goldman (and MF Global) thwarted it with their heavy influence at the exchanges (and at regulators)? 

    I would say self-regulation and government regulation failed badly at protecting investors here, but I don’t see the evidence that self-regulation is going to solve the problem alone.

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