"As a CTA you constantly take risks and try to manage those risks," says Robb Ross, principal of CTA White Indian Trading. "One thing that you don’t want to deal with and you don’t want to manage is the risk of your FCM failing."
But dozens of CTAs had to deal with the MF Global situation and likely will be dealing with it for months to come.
Ross, who executed some business with and had customers clearing through MF Global, was solicited by a competing FCM on Wednesday, Oct. 26, which stated, "Hi Robb, I know you have some business over [at] MF Global. You may have heard that they have been having some problems. We’d certainly like your business."
It was not an unusual call as clearing and execution is a very competitive business. Ross, however, was very happy with MF Global and, after all, his customers’ money was safe, even if the worst happened and MF Global failed. In a refrain unfortunately repeated across the industry, Ross notes, "All the client funds are segregated, meaning that the firm could lose every dime, but those client funds are in separate accounts and not used for FCM business operations."
The first hurdle was getting customers flat, either for safety or part of normal operations. Levitt had a lumber roll to execute but could only liquidate one leg at MF Global and would have to put on the new position at a separate broker with new margin. He also had a yen position to liquidate, which was critical as the Bank of Japan had just intervened in the market that day.
Spreads added complications but options were worse. Ross was informed from his MF Global broker early Monday, Oct. 31, that all his stops were cancelled. "I had dozens of option straddles on with stops in the underlying futures markets. Now I had no stops, total exposure," Ross says. "Then the broker informed me that he had no ability to place any orders."
Ross decided to wire transfer as much capital as possible out of MF Global but it was too late. His MF Global broker told him around 9:00 that morning that another firm would liquidate his position as a give-up. This would be a trick as he didn’t have margin with them and no way to transfer funds from MF Global. Luckily his broker called back and said, "Robb, they’ve let us back in the system. I can execute trades right at this moment."
Ross was able to get flat and notes that the window of opportunity closed one hour later. "MFG brokers could no longer make trades. I had jumped through the window at the right time."
This highlights another problem. At various point in the days immediately following the bankruptcy filing, MF Global brokers had on-again/off-again access to markets. While customers were supposed to be able to liquidate orders, it was a crap shoot.