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MF Global Scandal: Is CME's Financial Guarantee Just a PR Gimmick?


The litmus test will be how much equity shows up in the accounts of actual customers.

Monday marked two weeks since the news broke that MF Global (MFGLQ.PK) had "removed" unencumbered segregated funds from customers' accounts.

Segregation simply means that customer deposits can't be mixed with the firm's own money or used to cover firm expenses. They must always be available for customers to trade with or withdraw at a moment's notice.

During that time, MF Global customers have found themselves locked out of reduced equity in their accounts. Worst of all, even MF Global customers who held no open futures positions and only cash and unencumbered assets have found those assets under the control of the bankruptcy trustee.

The trustee is struggling to find the money, calling the record keeping "sloppy." There are stories that JPMorgan (JPM) and others "might be" involved in the ratlines. To any thinking person, this has all the hallmarks of a systemic-loss-of-confidence event. This is well put in a letter sent to bankruptcy judge Martin Glenn, who is handling the MF Global bankruptcy.

There has been little good coverage on this in the mainstream media. Forbes, and especially Robert Lenzner, has stayed on this story. Lenzner writes convincingly that the Commodity Futures Trading Commission has a loophole that actually permits firms to gamble clients' segregated accounts. Most of the real coverage is, as usual, in the blogosphere.

In Re: MF Global, Inc. Case No. 11-02790 (MG) (SIPA)

Re: The reputation of the United States

Dear Judge Glenn:

Our firm is a registered introducing broker with the CFTC. I have written to you previously on behalf of our customers. Here is a comment this morning from one of our former customers in Europe: "I will never do business in the United States of America again."

The system to protect futures accounts is broken. And the whole world knows it. What started as a failure of one FCM that quickly gave a black eye to the CFTC and especially the CME has now made our United States of America a very bad joke to commodity futures traders all over the world.

The problem this morning is not just excess margin equity. The problem this morning is the reputation of the United States of America.
Thank you very much for your time and for listening.

Very Truly Yours,

HL Camp, Proprietor, HL Camp Futures

The CME Group (CME) has first line regulatory responsibility for insuring basic fundamental protections for customers. To say that it failed is putting it lightly. Now after fiddling while Rome burns and no doubt witnessing the beginning of a run on other firms, the CME has decided to respond with a financial guarantee of sorts to see if it can unplug the logjam. Assuming that the vast majority of people still expect rule of law and decent conduct, this is put up or shut up time.

The litmus test will be how much equity shows up in the accounts of actual customers. And more importantly, whether those customers can access that money or transfer to other firms. Anything else is a charade. One might speculate that the CME would have the outcome calibrated and that this is more than a PR gimmick. Gimmicks now will have deep and long-lasting blowback effects.

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