When your FCM melts down: A CTA’s perspective

Oct. 31 truly was a Halloween for the industry and for MF Global customers. Between 6:00-6:30 a.m. I received a call from the broker. Rarely did I ever get calls from the broker this early unless there was an issue, and that issue usually was an option that needed to be bought back because we couldn’t get an ask price on. This morning was a lot different. The broker's first words out of his mouth where “Robb, MF Global is going bankrupt, everything is falling apart.”

I had options and futures positions on, so it was decision time. I had several paths I could take: Path 1 was to do nothing, let the course of action work itself out; path 2 was to liquidate everything.

I contacted my compliance consultant and accounting firm. The compliance person assured me that all customer funds were segregated. This was a major assurance in the industry. I wanted to make sure, as I always have, that every decision was made within the regulations. With the CPA firm I discussed previous situations like Refco and others, getting advice on the best course of action. The compliance person was at least half right – the clients monies were supposed to be segregated. With client funds I only have power of attorney to trade the account. Not the power to wire money anywhere.

Between 7:00 and 8:00 a.m. the broker had informed me that all my stops were cancelled. Stops are used to manage risk. I had dozens of option straddle positions on with stops in the underlying futures markets. I also had futures positions on. Now I had no stops; total exposure. Then the broker informed me that he had no ability to place any orders. No stops and no way to liquidate. Now we’re just rearranging the deck chairs on the Titanic, or as another CTA put it, we had 0% of the equity and 100% of the risk. I couldn’t trade. Later that morning the broker informed me that I could place orders with FCM Rosenthal Collins Group (RCG). I’ve had a relationship with them for several years. I called over there and they knew nothing of the arrangement, at least the person I talked to knew nothing about it. There was much confusion that morning. The S.S. Californian also was supposed to be there for the Titanic, but that night the wireless radio operator was sent to bed early and missed the Titanic’s distress call by 25 minutes.

As all the clients found out - any attempt to wire out funds was stopped by the bankruptcy filing. The monies and positions were stuck for the time being.

The broker then informs me around 9:30 a.m. that other firms might execute the liquidation. Soon after I was called by a firm that said they could liquidate all my positions. I had met the fellow a year before at another firm he was working for at the time. I told him it was a timely call and that “yes I wanted to liquidate all client positions as soon as possible.” I would have to email them the list of positions and accounts, and where they should be given up.

This was an unusual arrangement. I had no paper with this firm, no history and no money! Yet they claimed they were willing to execute these positions. If they weren’t able to reconcile with the accounts at MF global, even though these were offsetting positions and technically flat, I’d really have opposite positions at two different firms and might have to place equal margin there. Yet there was no way to wire/transfer money to that firm from MF Global.

All the while I was getting the email together of all positions and account numbers, and like Santa Claus, I was checking the list twice. At this point I knew which firms were being naughty and who were being nice, and MF Global was not on the nice list.

As I was getting this list together, my miracle happened. My MF Global broker called me; “Robb, they’ve let us back in the system, I can execute trades right at this moment.” It wasn’t clear if he could do give-ups. I figured that if I could at least exit out of all MF Global account positions, then I could call the various FCM’s that the other accounts were at and have them exit the positions. I told the broker, “Hell yes, get me out of all positions.” Minutes later he informs me that he was not only able to exit out of all MF Global trades, but was able to do the give-ups to the other FCMs for all the accounts that I manage All accounts that I managed were totally flat.

That window of opportunity closed one hour later. MFG brokers could no longer make trades. I had jumped through the window at the right time. Having a good relationship with a gifted broker really paid off.

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