MF Global announced that a U.S. registered representative of the firm, trading wheat futures at the Chicago Board of Trade, exceeded his authorized trading limit and lost $141.5 million on Feb. 27. The trader, confirmed as Evan Dooley, working out of the Memphis MF Global office, was terminated immediately.
In a press statement, MF Global said, “A failure in one of the company’s retail order entry systems permitted the representative to establish significant positions in his own account, which were liquidated later that morning…. The company believes it has made the appropriate adjustments to its order entry systems to prevent a recurrence of unauthorized trading of this type in the future.”
MF Global CEO Kevin Davis said in a conference call Thursday morning that certain MF Global retail order entry systems didn’t have “buying-power control.” The risk management mechanism would not have allowed trades exceeding an account’s limits. “Some offices do not having buying power control,” Davis said, adding that the safety mechanism can make trading less efficient.
Davis went on to say that from now on, all retail entries will have buying-power control and the MF Global will, “Sacrifice some efficiency for safety.” He added, “It is embarrassing for all of us.”
Recent rising liquidity in the wheat market enabled the rogue trader’s actions, according to Davis. “Given what is going on in the wheat market globally, in particular in the last 14 days, it has become a much more liquid market, which was why he was able to put on positions big enough to lose such a quantity of money in such a short period of time,” Davis said. “The problem occurred [in] one night, and it was fixed and addressed. We have taken steps to bring in third-party internet trading security experts to give us and the board and our shareholders another layer of confidence that this could not happen again.” The initial third-party review of its order systems is expected to take a few weeks, with a more thorough review slated over several months.
Based on the MF Global statement and interviews with CBOT traders, it is apparent that Dooley entered large short positions in several wheat contracts in the early morning hours. When the positions were discovered, MF Global covered the positions on or around the day session opening when the March, May and July wheat contracts all spiked more than $1.50 in the first 10 minutes.
Wheat futures markets have experienced unprecedented volatility in recent months. The CBOT (CME Group), Minneapolis Grain Exchange and Kansas City Board of Trade have raised daily price limits in wheat. Current limits are set at $1.35 and MGEX recently lifted its limit on its March ’08 contract.
According to an MF Global press statement, the company, as a clearing member, is responsible to settle at the clearinghouse and as a result, the company recorded a bad debt provision for the full amount.
Upon the release of the news, CME Group released a statement saying, “MF Global has met and continues to meet its obligations to CME Clearing and remains in good standing as a clearing member of the exchange.”
The Commodity Futures Trading Commission (CFTC) put out a statement noting that it became aware of the MF Global situation on Wednesday and continues to be in close contact with the firm and the CME Group, which is the designated self regulatory organization for MF Global.
The CFTC noted that it already had been closely monitoring all of the U.S. wheat markets in light of recent volatility in the wheat futures markets.
MF Global’s stock has dropped to $23.23 from Wednesday closing price of $29.28, a more than 20% move.
