A Personal Account of the MF Global Fallout

Posted by Jeff Carter
on November 13th, 2011

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

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