Two years ago on Halloween thousands of U.S. grain farmers got the scare of their lives when broker MF Global collapsed and more than a billion dollars of their money went missing.
MF Global customers have now, through a court-appointed trustee, recovered about 98 per cent of the money, which had been in supposedly “safe” margin accounts. The balance is expected by year’s end.
The U.S. futures industry has also stepped up its audit trails of customer accounts at brokerages and banks and required more regulatory paperwork.
All that has been a treat for MF Global customers. But looking back at Thursday’s anniversary of the debacle, U.S. grain hedgers fear there is little assurance they won’t be tricked again. What is haunting them is that, lacking realistic alternatives, they must still use the U.S. futures market and futures commission merchants (FCMs)to hedge price risks.
“They really don’t have an alternative,” said Dave Smoldt, vice president of grains and oilseeds business for Intl FCStone, one of the firms that has picked up some former MF Global customers. “If you take in 13-14 million bushels of grain in 30 days, somebody has to hold on to it. So you’re going to have to hedge it.”
Jim Berg, an Ohio farmer and veteran commodities broker, agrees.
“Nobody is doing anything different. Maybe keeping the amount of excess margin down at houses,” Berg said. “We need the markets. We’re alright until the next violation. The next time, the trust is broken.”
That makes many farmers and brokers who trusted MF Global very nervous.
They say little has changed fundamentally to prevent another mega-broker bankruptcy. There has been no reform of the bankruptcy laws that protect customer funds. The futures industry has yet to establish an insurance fund to reimburse customers in cases of malfeasance or fraud by brokers. And no one at MF Global, they point out bitterly, has ever been charged with any wrongdoing.
“Customers still don’t have 100 per cent of their funds yet from MF Global,” said John Roe, one of the founders of the Commodity Customer Coalition, which works to recover MF funds.
“While there are additional protections to customers and regulations that will make this more difficult to do, that doesn’t mean it can’t be done again, and it certainly doesn’t mean it won’t happen again.”
Confidence in regulators got another blow on Wednesday, when the Commodity Futures Trading Commission voted new rules to protect customers, but included a provision that will likely mean a doubling in the margin required for “safe” segregated funds, the very type diverted by MF Global two years ago.
“By requiring farmers and ranchers to pre-fund their margin requirements, they would be forced to do something they would rather not do, which is put more money at an FCM rather than less,” Gerry Corcoran, chief executive of RJ O’Brien, the largest independent U.S. commodities brokerage, said in an interview.
The Commodity Customer Coalition’s Roe echoes that sentiment.
“What the CFTC has basically done through the residual interest rule is ask customers to double down on a system they don’t trust,” said Roe, who was also an MF Global customer.
Ghost of Halloween past
On Oct. 31, 2011, the global commodities brokerage run by Jon Corzine, a former New Jersey governor and U.S. senator, and a former Goldman Sachs Group Inc chairman, suddenly filed for bankruptcy, freezing more than 150,000 accounts worldwide.
Investigators later discovered that, in order to cover exposure to risky European sovereign debt, MF Global had in its hectic final days improperly tapped segregated customer funds. This was money put into accounts by MF Global customers as good faith deposits to settle their own trades.
The collapse raised questions about not just government regulators, but the clearing houses of the markets themselves, centered on the CME Group Inc markets. It was an unprecedented loss of “safe” customer funds.
Agricultural hedgers — country grain elevator operators, livestock producers, ethanol makers, farmers and ranchers — were among the hardest hit since MF Global, which had grown through acquisitions, including such major players as Refco, cleared the bulk of their business.
“MF was one of the biggest. We thought it couldn’t go down. When it did, it created a lack of trust in any other house you cleared through,” said J.B. Daughenbaugh, a merchandiser with Alliance Grain in Gibson City, Illinois.
The good news since the collapse is that the futures industry has beefed up regulations on how segregated funds are invested. Brokerages must now have written rules governing the maintenance of such funds. Top executives at brokerages must personally approve withdrawals of 25 per cent or more from customer funds. Banks must also confirm daily segregated funds in cross checks with brokerage accounts.
But despite all the improvements, grain hedgers are still haunted by the ghost of MF Global.
“The number one thing that has not been done is to insert the Commodity Exchange Act verbiage into the bankruptcy code so segregated fund restoration to customers comes first in an FCM liquidation,” said Jeff Hainline, head of Advance Trading, which cleared hundreds of customer accounts through MF.