MF Global customers fume as funds, trades frozen

Date: Thursday, November 3, 2011
Author: Theopolis Waters and David Sheppard, Reuters

Joe Ocrant, a veteran livestock trader, is livid.

His accounts frozen, unable to trade with his bankrupt broker and denied access to the Chicago trading floor, his frustration over the failure of 230-year-old MF Global was turning to rage as regulators said it may have misappropriated

some $600 million in customer funds.

Ocrant remained hopeful that somehow his collateral at MF Global would be returned. In the meantime, like so many others, he was left idle, unable to transfer or liquidate his trades.

"I am aggravated and upset.... I feel fairly confident my customers will be made whole. The question is how long the feds will tie the funds up so they can't be used," said Ocrant, president of livestock-focused fund Oak Investment Group.

It was a common tale across the markets.

As the initial chaos surrounding the collapse and bankruptcy of one of the commodity market's leading brokers slowly subsided, former customers fumed over the slow and frustrating process of moving their traders over to rival brokers or returning the cash used to back them.

Some hope for a more rapid resolution appeared near after U.S. Bankruptcy Judge Martin Glenn in New York late on Wednesday approved the transfer of customer accounts to other brokers, which should speed the process.

Before MF Global brokers stopped processing transactions earlier on Wednesday, customers faced a Hobson's choice: close out positions they might otherwise maintain, or put up a second hefty dose of collateral.

A total of 150,000 customer accounts were effectively frozen on October 31, more than a third commodity accounts, according to the court filing on Wednesday. That is too much diversity for any single broker to take on, and six other brokers were named likely to take the accounts.

MF Global, as a clearing broker, was responsible for taking the collateral required to back the trades it placed on exchanges. Getting that collateral back was proving difficult.

Tales of vague responses, unanswered telephones and confusing plans spread among the many independent introducing brokers, local traders and small-scale hedgers that made up a sizable share of MF Global's business.

"I'm confident that eventually this will be sorted out but for the moment when you call MF Global and the call doesn't get answered for two to three hours, how do you think customers feel? They can't open new positions which is not good in these volatile markets. You either liquidate it or sit on it," says Matthew Bradbard of MB Wealth Commodity Brokerage in Florida.

COLLATERAL DAMAGE

In theory, up until earlier on Wednesday, customers could call MF Global brokers and close out their trading positions or arrange to have them transferred to another broker, a process that was being partly facilitated by the exchanges.

In practice, MF Global has not been able to cope with the mad scramble to liquidate or hand over positions.

"The problem is there are only five people on their 'give-in' desk at MF and 30,000 screaming customers," said one hedge fund manager.

Additionally, with MF Global in bankruptcy, the collateral it was holding to back those trades -- typically 5 to 10 percent of the face value of the contracts, some $5,000 or up to nearly $20,000 per contract -- was stuck at the broker.

As a clearing broker, MF Global would have been holding three types of customer funds in its segregated accounts: 1) the minimum margin required to clear trades on the exchange; 2) additional margin over and above that sum that the broker itself may have required of smaller or less credit-worthy customers; 3) any excess funds over and above the collateral that customers would have simply left on account.

Brokers have been loath to take on new positions without the payment of new margin.

Sean McGillivray, Vice-President at Great Pacific Wealth Management in Grants Pass, Oregon, relayed a typical story.

Since MF Global declared bankruptcy on Monday, he has tried without success to move $5.5 million in funds tied to commodity futures positions to a rival broker, RJ O'Brien, one of the biggest independents after MF Global.

But as he's discovered, while brokers are happy to take the positions, he'll need to stump up new capital for margin.

"For us to move positions without collateral, that's basically worthless," he told Reuters.

He said the allegations of missing money had added complexity to what is meant to be a relatively smooth process of moving funds from one broker to another.

"We seem to be in the dark on the regulatory side, from the MF Global management side and also from the exchange side."

Every day the complexity grows.

With prices gyrating, the amount of margin that traders are required to post fluctuates daily. For loss-making positions, that means an even higher collateral requirement than on Friday, when MF Global was last operating. For profitable trades, that means more money due back from the broker.

SMALL TRADERS HURT MOST

MF Global was a leading broker in the U.S. commodity markets, claiming the No. 1 most active spot on the key New York oil and metals markets and the No. 2 spot at the Chicago Mercantile Exchange's grain and financial pits.

It acquired a sizable number of smaller local customers when it took over much of the business of Refco, a once-mighty broker which failed six years ago.

Those smaller customers are scrambling, since few had relationships with other brokers or extra capital to manage their trades. Many independent commodity brokers have been eager to lift some MF Global customers, but not for free.

"The policy is we'll take positions from MF Global only if the client will margin them," said Pedro Dejneka, director of business development RJ O'Brien, one of the firms that was subsequently named likely to take on some MF Global accounts.

"It's tough for them, not every client from MF Global has the extra money to do this as it's still tied up. You want to be able to help the client out but you just can't take the risk. They need to double-margin."

It is not clear exactly how much money is trapped at MF Global, and the company's brokers have been unable to offer much reassurance to clients.

"I think my broker at MF has been as helpful as he is allowed to be and has been answering in the boilerplate that they're being allowed to say." says George de Luna, an independent energy trader.

"I asked, aren't the accounts segregated and they should be okay? and the broker answered: 'In the theory, yes. That did set off alarm bells."