There are billions of dollars of profits between the exchanges, brokerage firms which just received free business from the MF Global demise, and others in the industry. Someone (ahem... CME) needs to step up and create a coalition of these industry giants and pony up the money to make each and every one of the MF Global accounts whole, immediately.
If the government didn’t think that MF Global was too big to fail, the industry surely needs to. Do you think the CME put forth their $250 million guarantee or $50 million recovery fund out of the kindness of their hearts? No- they are worried about volumes, and rightfully so. With about $5 Billion worth of customers now unable to trade, the sooner those customers can pump those funds back into the markets, the better for the CME’s bottom line.
How is this supposed to work? We’re not saying this coalition needs to pony up the money and never get repaid. We’re saying they should step in and cover the money until the bankruptcy runs its course and the funds are released. Why can’t the industry put together a fund which covers the customer segregated funds, and in exchange for making the customer whole, the customer signs over any claim they had to their money in bankruptcy court to the fund?
Think of it more as fronting the money. After all, nearly all agree that it is just 10% or so of the money which is missing. At worst, the fund would be out the $600 million in missing segregated funds (and that's only if the trustee is unable to get any of the $41 Billion in MF Global assets to cover that shortfall). The problem here is less about there being no money than it is about the money being frozen up.
The industry simply can’t afford to wait for the bankruptcy to run its course. Every moment of inaction that passes is a moment without those funds coursing through the industry's veins. Consider that MF Global reported in its Q2 financials that it cleared 575 million contracts over the three months that ended June 30th, 2011. If the exchanges are getting $0.25 per contract, without taking action, that’s about $575 million in lost revenues per year. If the brokers who just received the accounts could get $0.25 per contract on the business moved to them, that’s $575 million in new revenue for them (assuming those accounts can get back trading).
There is plenty of money to go around, especially in the name of saving what has been the cornerstone of this industry since its inception- the sanctity of the segregated account. Hell, Attain will even pony up our share. Without taking this step, there is little any of us can do to help our clients feel secure. Industry participants will likely be worried about setting a precedent, but that is, in fact, the whole point. We need to be able to point to this time in our industry’s history and say, "Yes, it was ugly, but the industry stepped in and made the accounts whole."
If you’re still not on board, why not backstop the coalition fund with a rule granting the ability to increase NFA fees from the current $0.02 per trade to $0.03 to cover any shortfall the fund has to cover? And as a final brushstroke, how about making the coalition member’s investments in the fund count 100% towards their net capital computations, treating it like cash in the bank?
The choice is a known cost in a temporary, defined and shared burden or an unknown cost in an inequitable and unquantifiable loss of business in the long run. How’s that for risk calculation?