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

What the experts think about MF Global

The MF Global debacle rocked the futures industry and its full impact is yet to be felt. We talked to some industry veterans regarding the fallout of MF Global in the industry and its regulatory processes. Here is what they had to say.

Futures Magazine: How has the MF Global failure and the bankruptcy process impacted the futures industry?

Chris Hehmeyer: The biggest impact is that these problems have been like a baseball bat across the side of the head to the entire industry as to the risks of a [futures commission merchant (FCM)] bankruptcy.  People understand these rules better [now] than anybody did in the industry previously. Unfortunately we had to learn all this the hard way. Many people in the industry didn’t understand the laws around bankruptcies of FCMs. Because of our fantastic history with so few problems, the risks were underestimated. The risk of FCMs is greater than what had been understood previously. The biggest impact is that people now understand the risk better than before. The salesmen downplayed the risks because there had been so few instances of problems.

Fred Grede: It is difficult to quantitatively measure the impact on the futures industry from the MF Global fallout. How can you measure a loss of confidence in your business? Certainly industry volume is down over last year, but much of that decrease also can be attributable to market conditions. One of the measures I look at is funds held in segregation. According to [Commodity Futures Trading Commission (CFTC)] data, customer funds held in segregation are down about 10% over last year.

Subjectively, I believe the MF Global bankruptcy has had a huge impact on the industry. I have had countless calls from former traders and customers who want to understand the bankruptcy process, and of course, when they will get their money back.

More often than not, they don’t like what I have to tell them. But I also have had calls from all over the world. As an example, I had a call from a Ukrainian agricultural cooperative that got stuck in the MF Global bankruptcy. They can’t understand what happened and why they can’t get their money back quickly.

As a result, they are looking for other venues in which to do business.

Customers can understand market volatility, and are willing to accept gains as well as losses from market movement. But they can’t accept losses when someone else breaks the rules.

As far as the bankruptcy process is concerned, all of us in the futures industry have received a very rude awakening; that is, customer funds don’t have the priority we all thought they did in the bankruptcy process. 

Philip McBride Johnson: Unlike the later PFGBest episode, MF Global’s loss of an estimated $1.6 billion in “segregated” customer funds may turn out to be an internal management goof. But that is hardly consoling because we fragile human beings are more likely to make mistakes than to deliberately raid other peoples’ money. If a mature FCM like MF Global can mess up under stress, it could happen at any broker regardless of past successes. This is the message that futures customers have received and that the industry must somehow address.

We do not have the luxury of knowing that large futures customers like hedgers on the Fortune 500 list have nowhere else to go. Even under the Dodd-Frank Act, they are free to hedge using private swap agreements instead of exchange-traded and cleared futures contracts. Will they do so?

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