From the January 01, 2012 issue of Futures Magazine • Subscribe!

CTAs on the front lines of the MF Global battle

Managed Money

Commodity trading advisors (CTAs) execute trades for their customers. Their customers have arrangements with introducing brokers (IBs) and/or a futures commission merchant (FCM). The CTA also has relationships with executing brokers who must maintain relationships with the various FCMs of all those customers.

The MF Global debacle created unique problems for CTAs. Their customers who cleared though MF Global had their accounts frozen on and off in the days following the bankruptcy filing. If they executed through MF Global that was another problem. And with MF Global customers on liquidation-only, other brokers were apprehensive and technically restricted from taking MF Global business. An executing broker giving up MF Global really has no way of knowing if a trade is a liquidation.

Adding to the mess is the fact that CTAs are not the customer and were not in the information loop — such as its was, which wasn’t good — in the days following the bankruptcy. This was particularly dangerous as the Securities Investor Protection Corporation (SIPC) liquidating trustee and exchanges moved accounts to new FCMs.

Marc Levitt, principal of Silicon Valley Quantitative Trading, wrote the following note to his customers on Nov. 4: "What I will need to know from you is if you will be posting more margin to your account if called on by the new FCM or will be liquidating the currently open positions."

The positions were profitable but Levitt did not know how much margin would be transferred or whether they would be able to retain their open trade equity. They weren’t.

Complicating the matter was lack of communication. The letter goes on: "What is important is that in the next 24-48 hours or so you will likely be informed of your account transferring to a broker. Please let me know ASAP when this occurs, to whom, and any contact information you may receive."

Scot Billington, principal of CTA Covenant Capital, called the situation a "pain in the ass" but added it could have been worse. Billington operates a long-term trend following program and didn’t have any orders to execute, which was a good thing because his executing brokers could not accept MF Global give-ups.

He did receive notice from JP Morgan that they were not accepting any give-ups. This was a problem as one of his customers cleared JP Morgan but he had no relationship with its order desk.

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