During the past 40 years — Futures marks its 40th birthday this month, which we plan on celebrating with special articles all year long — the industry has gone through dramatic changes. The days of using these markets only to hedge grains and livestock are long gone, and along the way, currencies, bonds and stocks — traded by hedgers and speculators alike — joined the commodities trading club. Options and ETFs also would join, and soon the entire world got into the business. Exchanges popped up in Europe and South America, Asia futures trading expanded beyond Japan. And the Germans launched an electronic exchange, pushing the floor-centric U.S. exchanges to jump on board. Today trading is a 24/7 business. Derivatives are traded by all levels of speculators, fund managers, investment banks and corporations. Even OPEC uses the market, as do central banks.
The futures markets have faced much adversity on the journey. Some of that includes markets that have failed due to outright manipulation. Some includes businesses that have failed because of bad risk management or chicanery. Just as in any other business, the futures industry has seen its share of fraud. This shouldn’t be too surprising, after all, it is a business built on fear and greed.
However, the failure of MF Global casts a darker shadow on the industry. That largely is because 36,000 MF Global customers got caught holding the empty bag of their segregated funds.
There are many fingers being pointed as to blame: MF Global Chairman Jon Corzine and his executive team and board; the Commodity Futures Trading Commission (CFTC) that gave away the store to SIPC, whose trustee seemed clueless regarding futures customer fund segregation priority; or the Chicago Mercantile Exchange (CME), which was the firm’s self-regulatory organization. Of course all had a hand in creating this Greek tragedy, but Corzine is most at fault, and if anyone should be wearing an orange jumpsuit, it should be him. And even if he inadvertently gave an order to move funds, he’s the one who ran the company, unfortunately into the ground.
To get another view of the event, we interviewed CME Group Executive Chairman Terry Duffy, a 31-year veteran of the futures markets (Terry Duffy, Staring down his biggest challenge). During the Congressional hearings last month, Duffy testified that the CME was told on Oct. 31 that Corzine knew about the customer funds that were surreptitiously moved. He told us point blank that MF Global violated CME segregated fund rules. What could the CME have done to prevent this debacle? Duffy believed the CME did what it was supposed to do, but how do you stop someone who is “hell bent on doing something improper?”
I do believe something needs to change to prevent this kind of violation that hurts customers, but I also tire of the arrogance of some investment bankers. Corzine came off in the hearings as a somewhat sympathetic if clueless character, but I’m guessing you don’t get to the top of Goldman Sachs or become governor of New Jersey by playing nice all the time. And he certainly used his political wiles and Wall Street menace to harass the CFTC about rule 1.25, as well as try to have the Financial Industry Regulatory Authority back down from forcing MF Global to reveal its sovereign debt risk.
Further, Corzine has perfected the non-answer. Anyone who witnessed the three MF Global executives (including) Corzine testifying in front of the Senate Ag Committee would wonder how these three, who didn’t seem to know who ran different departments, ran a company the size of MF Global. And more so, you wonder about the MF board members who hired them.