Always have a back-up

December 31, 2011 06:00 PM
Managed Money Review

One of the first recommendations we heard following the MF Global debacle was to have more than one — preferably several — executing and clearing broker. This way you have someplace to go when a broker goes down.

Commodity trading advisor and CTA investor Andrew Abraham had nearly all of his assets tied up in his various CTA investments. "It is most of my net worth," Abraham says. He would have been out of business if he had fully funded his accounts, which included pools domiciled at MF Global as well as managed accounts, and left all his funds at the broker. However, Abraham used a tip from a CTA he allocated to, which is helping him survive this scandal. He keeps more than half of his investment money at the U.S. Treasury through TreasuryDirect. According to its website, "TreasuryDirect lets you buy and redeem securities directly from the U.S. Department of the Treasury. ... all the time knowing your money is backed by the full faith of the U.S. government."

Abraham says the two lessons learned are to have more than one FCM and not to leave more than your required margin plus a cushion with the FCM. "Thank God the bulk of my money was at TreasuryDirect."

Probably sound advice to keep your money with a reliable third-party cash manager.

More outrage

Outrage continues to pour in regarding the response to the MF Global situation. CTA Stanley Haar says he was "shocked by the total lack of helpful communication from the (Commodity Futures Trading Commission), CME (Group), (Futures Industry Association), (National Futures Association), etc. for nearly two weeks. The few statements made by those organizations were self-serving excuses, attempting to shift the blame to others, with no concern for finding solutions for customers."

Haar compares the scandal to the Tylenol tampering case of the 1980s, but says industry leaders have not stepped up to fix the situation as Johnson & Johnson did in the Tylenol case. "They already have done irreparable harm to the industry, as many customers will never return to the futures markets. Those who remain will never have the same level of confidence in the fairness or safety of the futures markets."

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.