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Is the MF Global Saga Finally Winding Down?


It would appear that MF Global took money from the pool of collateral that it was supposed to be posting against clients' futures positions with the CME. Here, what this means for the company's customers.

This article is an update for all of those Minyanville readers and beyond who have asked me to provide clarity on the situation with MF Global (MF) and explain what's going to happen to the money of MF Global's clients. To get up to speed, please see the first two articles I penned: Is This the Second Coming of Bernie Madoff? and Uncertainty Abounds in Continuing MF Global Saga.

Please note: You are not about to read facts provided by anyone of importance or otherwise, but rather a thesis based on my extensive cumulative reading and a couple of chirping beaks.

MF Global stole $633 million from customer-segregated accounts. It seems as if it took money from the pool of collateral that it was supposed to be posting against clients' futures positions with the CME.

What does this mean? My current understanding is that cash and fully paid-for securities are fine. Meaning, if you had an account with $100,000 and have one long silver contract that's maintenance margin is $18,500 (the collateral), you have that amount posted in a collective pool of MF Global customers who have similar collateral requirements. This is the area where the theft took place. The rest of your account, namely $81,500 is held in what's called your "cash account." This is the area I believe is still safe.

Today, tonight, or tomorrow, there will a court order transfer of, I believe, 150,000 accounts with open positions in order to avoid a mass liquidation of over $100 billion in total futures contracts value. Remember, your collateral buys you a specific amount of product. In the aforementioned case, one silver contract is worth 5,000 ounces so the total value of that is roughly $170,000 USD based on current prices. The collective sum of MF Global's customer positions in those terms is where the $100 billion figure is coming from. Apparently there is some rule that a position not able to be traded (or something of that nature) for four days must be liquidated, and this is why all of the efforts now are toward getting these customers' accounts unfrozen by transferring them to another futures commission merchant (FCM), or clearinghouse.

This transfer is then going to essentially debit 40% of the collateral (I'm unsure if it's initial margin requirement or maintenance margin requirement) from the customer's account and keep that value with the old FCM, MF Global. This deduction will obviously be sufficient to cover the stated $633 million shortfall by the CME. The hope here is that all cash balances in excess of any collateral requirements will accompany the transfer.

My take in layman's terms: If you have big open positions, you are most at risk and will have a longer process in recovering your money. Those that have large cash balances or securities in the form of physical certificates for fully paid for or delivered commodities at the COMEX are likely to be very happy sooner than later.

I know this is very confusing and upsetting. The CME and CFTC have failed miserably. Our regulators, as a dear friend says, "were the confused kids in high school." A bold statement that all client funds would be guaranteed in a timely manner should have been released on Monday. I think the CME has grossly underestimated the collateral damage to the industry.

(Side note: A supreme conspiracy-theorist thought would be that Jon Corzine was sent in to do just what he did -- take most from the speculators, as those are the ones with smaller cash accounts, to curb speculation. Perhaps that's why the Obama administration hasn't mentioned anything yet, though I had to sit through Senate hearings galore to save the smaller Chrysler Company. But I digress.)

In any event, it will be interesting once the accounts are transferred to see just how much liquidation takes place. If it doesn't, then you know that human complacency is still extraordinarily high. Additionally, the CME Group is a private corporation. It seems to me like a big short. Trust me, I was a big player in this space, and I'm not even sitting that bad off right now relative to some, and I am never coming back. That is, unless:
  1. Customer monies are returned as expeditiously as possible.
  1. Jon Corzine (rumored to be in the lead for the Secretary of the Treasury job when Tim Geithner was going to resign), his top officers, and the back office people that processed these crimes -- certified ones that routinely take tests to maintain their licenses -- all face tough criminal charges. The world is watching. A deterrent must be set, and set strong.
  1. And the harder part: The CME and CTFC must admit the scope of their failures, and more importantly, provide substantive proof that there are systems in place to prevent a theft like this from an advertised and federally required customer segregated account in the first place. This will likely take a serious overhaul of all systems, and even then, there will be those that will always wonder.
This was a very bad week for the futures industry. I'm not quite sure the industry knows that yet.

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