Today the CME Group is expected to file with the SIPC appointed bankruptcy officials and federal authorities a plan for how to proceed with their part of the orderly liquidation of MF Global, specifically the movement of open futures and futures options positions to other clearing firms. Should the proposal be approved by the bankruptcy trustee appointed by SIPC, the bankruptcy court and the CFTC, or some combination therein, then positions and underlying margins will start to move. This would be different from the current situation where only positions can be moved at the previous day’s settlement price.
Positions are already free to move, but the cash to support them has been frozen, I had been told Monday. I have recommended to clients not to move their positions until we learned of when the cash was going to move, unless they will willing to put up new margins at the new clearing firm. The Price Group, my brokerage firm employer, has opened a new clearing relationship with ADM Investor Services and are moving accounts there and perhaps to other firms we have existing relationships with. I am recommending my clients move their accounts to ADMIS.
This plan from the CME would allow the underlying margins held at the CME Clearinghouse to move with the positions, meaning people would not have to put up double margins in order to continue to hold existing positions at their new clearing firm. However, the plan would leave behind any excess margin. Ironically, this benefits clients that are excessively leveraged, at least in terms of the percent of their account they are using for margin. Someone with $50,000 in their account, but with $50,000 of margin would have the whole account moved, reportedly. However, a client with a $50,000 account only using $5,000 in margin, would only be able to move that $5,000 to the new clearing firm with their positions.
It would probably be the case then that it would be better to move your positions and margins to the new firm. That way, you would have access to the margin funds for continued trading once you liquidate any of the positions. I have a feeling that if you liquidate at MF Global, you will not be able to move the previous underlying margins you had for those positions at this time.
Somehow the SIPC trustee seems to be winning the day in terms of driving the bankruptcy proceedings for MF Global. MF Global has both a Futures Commission Merchant and a Broker-Dealer license. The Broker-Dealer is reportedly whole, with no customer funds unaccounted for. There are reports that is not the case with the FCM, and the Broker-Dealer reportedly has a couple of hundred million dollars that belongs elsewhere. The bankruptcy trustee needs to figure out where that is before releasing those funds.
This is where things get a little smokey for me. In the case of a bankruptcy, customer funds that have positive balances are supposed to be able to be moved to another clearing firm. That has always been the case. In the case where some customer segregated funds are missing, there are CFTC rules that allow for a pro-rata distribution of customer funds. Thus, to use any number, if 10% of the customer segregated funds are missing, then the customer should be able to move 90% of their account. However, for some reason we have not been able to get to this stage yet. And I fear the competing regulatory regimes between how futures and securities are handled is the culprit. Like I said, the SIPC trustee and their bankruptcy filing for MF Global seems to be winning the day in court, or so I am told.
A New York Times story in DealBook references someone being briefed about the plan to move positions and margins. The CME and other clearinghouses need to be able to move the margins to encourage traders to move their positions to new clearing firms. Stories yesterday said the CME is helping to facilitate firms moving from MF Global to new clearing firms. Clearly, getting the positions (and money) out of MF Global is in trader’s and the industry’s best interests.
That is as much of the reported plan as has been shared with me by informed sources. I can’t tell what is going to happen in terms of release of any pro-rata funds distribution. I guess that depends on the investigation into the state of the customer segregated funds and getting any and all funds caught in other regulatory regimes to be distributed, or not. I would hope that would be sooner than later, but securities laws are different than futures so it is anyone’s guess.
We are in extraordinary times here and into unchartered territory. I characterized the situation to one reporter as “chaos, and not even organized chaos.” It is clear that there are lessons to be learned by the industry, regulators and customers. When the smoke clears, we shall explore those lessons. It is clear to me though that a firm’s disaster recovery plan should include a plan for this kind of disaster. Firms and clients were forced to improvise how to operate in a log-jammed environment of the biggest retail futures broker having their electronic access to exchanges cut off. This plunged the operations of the firm and its clients into an early 1980s mode, but without all of the phone clerks to be able to handle the order flow.
There are things that could be done differently. That is the great part of hindsight. It is 20/20.
See our MF Global MarketsWiki page for the latest developments.