Tuesday, November 15, 2011

MF Global: The Search for Missing Assets... AND when will Assets be Transferred?

It is now the middle of November, and it has been several weeks since the MF Global bankruptcy on October 31, 2011.  There have been numerous articles detailing the news and sometimes sensationalizing speculation about the MF Global debacle.  In this article, we give some background, update relevant news, and summarize thoughts we have heard from alternative investment industry participants – on how the industry can move forward.

Website Links to the Major Parties
Here are several important links (Trustee, CFTC, CME) involved with the MF Global bankruptcy and asset transfer.  These sources typically post factual and relevant information:
MFGlobalTrustee.com – this link forwards to:
CFTC – The Commodity Futures Trading Commission page on MF Global:
CME – The Chicago Mercantile Exchange page on MF Global:
Recent MF Global News

The links above, along with several informative articles on the MF Global situation have been archived at this blog: z-Trader.blogspot.com.  Below are several recent news articles related to the MF Global bankruptcy and customer asset transfers.  More specifically, many are interested in the search for missing customer assets – and when the bulk of assets will be transferred.
Here are some excerpts from a recent article on the continuing search for missing MF Global Assets.
“(the) CME Group pledged $300 million to help accelerate the release of customer cash and other collateral from MF’s bankruptcy…”
“In addition to helping make customers whole, some additional assistance may be appreciated by the 1,000-plus MF employees fired on Friday…”
“The case of the firm’s missing $600 million also continued this week.”
Read more here:
Here are excerpts from a detailed Forbes article on what may have transpired.
“When did MF Global exploit the customer segregated accounts and why?  How were the proceeds used to stem the firm’s deepening insolvency?”
“Based on the sequence of events described… I believe that MF Global transferred assets, not cash, from customer segregated accounts to a “house” account sometime late Wednesday or early Thursday.”
“I’ve given those who executed the ‘nuclear option’ to save MF Global the benefit of the doubt.  I believe those executives used all available legitimate means to raise cash first, including trying to sell proprietary assets, as CNBC reported, and exhausting existing credit lines.”
Read more here:
Below are excerpts from an interesting article that discusses JP Morgan tactics, as one of MF Global’s main creditors. 
“Similar in nature to one’s bank account or stock market account, JP Morgan is trying to sweep titled segregated accounts into the assets of MF Global into the bankruptcy courts.”
“The analogy is very simple.  Let’s say you have a bank account in your name.  The bank makes bad business decisions.  Then a company like JP Morgan makes a claim on your personal assets that happen to be at the bank.  How would you feel?  How safe do you think your money is?”
Read more here:

What Now?
At this point, many investors and interested parties want some action – and many investors and industry participants hope the process of transferring the bulk of the assets starts very soon.  With the whirlwind of media information swirling around, here are several key questions and thoughts:
  • SIPC protection:  There has been speculation about SIPC protection.  The general consensus is that this protection exists for securities accounts, but not necessarily for futures accounts.  But what about T-Bills?
  • It appears that MF Global used a loophole to invest customer assets in "sovereign debt" – and then used the "segregated accounts" to cover margin calls.   
  • The Trustee has stated that they need to understand everything before they start transferring assets.  Others are clamoring for the quick release and transfer of MF Global customer assets. 
  • In the name of the integrity of the business, and practicality, industry participants hope asset transfers for the bulk of client assets start very soon.  Assets cannot be held hostage for this long.
  • Some industry insiders feel that JP Morgan Chase, as a major player in the financial industry, will feel the pressure to help make customers whole.
  • Many hope that the industry and regulators will work to maximize the “integrity” of the business and financial marketplace.  It is always best to maximize client trust and regain customer confidence. 
  • It has been several weeks, and many are surprised that the large majority of assets have not yet been transferred.  If 11% of assets in segregated assets are in question, why have 85% of assets not yet been transferred?  
Lessons – and Moving Forward
  • Many investors typically prefer less government regulation, but some sort of checks and balances would be a good thing.
  • Where applicable, it is best not to have all of your "eggs in one basket."  That is, if possible and practical, it is good to diversify your brokers.  It is especially good to have more than one broker and more "outs" for your trading positions.
  • Although some point to CFTC rule (1.29) that allows the use of customer assets for “sovereign debt” – most people would recognize that the intent of the law would not allow the use of highly leveraged positions.  
  • There are many offsetting responsibilities and wants.  The Trustee is trying to do the right thing.  All interested parties want to access their assets as soon as possible.  The industry wants to maintain the integrity of the marketplace.
  • With the increased pressure on JP Morgan and regulators to move forward, many expect progress and asset transfers in the near future.  
  • In times like these, it reminds us that it is important to know who we are doing business with – including financial advisors, hedge funds, and even our financial institutions.
In the end, many in the investment industry hope that the Trustee, industry, and exchanges will start the transfer of the bulk of the assets very soon, and make the customers "whole" soon after the dust settles.  This will do a lot to sooth customers and regain a measure of faith and confidence in the financial industry.

This is a summary of relevant information surrounding the MF Global bankruptcy and does not necessarily represent the views of the authors nor the z-trader blog.  

For additional articles by z-trader contributors, please visit:

Carlton Chin, CFA, is chief investment officer at Adamah Capital, a specialist in managed futures and quantitative & alternative investment strategies.  Alternative assets offer diversification to traditional portfolios of stocks and bonds.  

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