By Matt Reese
“MF Global is a futures commission merchant, they executed trades and helped client accounts and client funds for trades on the futures markets,” said Matt Roberts, an agriculture economist at Ohio State University. “A couple months ago, it became known to the market that MF Global had taken a large position, about $6 billion, on European sovereign debt in some of the relatively risky countries. When the market found out about this, some people became very concerned about MF Global being able to survive potentially large losses there. That caused some people to start withdrawing money and that caused a reduction in their credit rating, which caused others to withdraw their money. MF Global had to put up more collateral on their trades and it very quickly turned into a death spiral for MF Global, causing it to declare bankruptcy roughly a week after this became known.”
As much as $1.2 billion in MF Global customer funds have gone missing since the bankruptcy, which has shaken the trust that agriculture place in futures trading. Historically, futures commission merchants have protected customer funds and margins by segregating consumer funds used for trades from the broker’s funds.
“When we talk about the guarantees offered by the clearinghouse, those guarantees do not extend to the failure of your own brokerage. If you have excess cash, keeping it there in your margin account is not the best way to do it. It is not a bank, even though it acts sort of like one. Get your excess funds out of that and put them in a bank where they have a federal guarantee,” Roberts said. “Experts in securities law are not surprised by this outcome. They understand that in a bankruptcy like this, client funds will get tied up. For the users of this service, though, it was not well known and this was a real lesson. There is a tremendous amount of frustration and anger towards MF Global because these customer funds that are supposed to be segregated were tied up in this European sovereign dept trading.”
Roberts also said that, while the individuals affected by this learned some important lessons, there were other broader ramification of the MF Global bankruptcy.
“We should be angry with the regulators for the sole fact that it is not clear that anything that MF Global did was actually illegal according to some rule changes that took place a few years ago,” Roberts said. “The biggest impact of this is going to be felt by the futures market. This has shaken to the core the investors’ faith in the futures markets. There has been a tremendous disappointment that something like this could occur.”
Glenn Harsh, in Delaware County, was one of those farmers affected by the bankruptcy, though his scare was only a short one.
“There were a few days there where we weren’t sure what would happen, but it was made whole,” Harsh said. “We had very little cash sitting there because of the timing, luckily. They did send our money quickly so we’re sitting in pretty good position. We are going to be lot more vigilant now about making sure we have those accounts cleared out more often.”
Many in the agricultural community did not fare so well.
“Either directly or indirectly many farmers and some elevators had accounts with MF Global. When it went bankrupt, those funds in those accounts and the positions got tied up. After a month, many of the funds had not yet been released,” Roberts said. “At this point, most of the futures or options have been transferred so people can get to those again. But, over the November Crop report, there were many market participants who had market futures that could not do anything with them because of the bankruptcy of MF Global.”
Fortunately, the strong agricultural economy can handle the challenges associated with the bankruptcy, Roberts said.
“Luckily, right now the overall agricultural economy is pretty strong and it can weather this. We’re lucky this happened now and not in 2007 or 2008 when we were in a big credit crunch. Then it could have been catastrophic,” Roberts said. “For the industry as a whole this is very minor. For those people who are affected, this is very real and very frustrating. There are people with tens or hundreds of thousands of dollars tied up with this. I don’t think this is going to threaten anybody’s solvency, but it is going to cost a lot of people a lot of sleep at night.”
Regulators have responded with a Congressional hearing investigating the matter and some proposed legislative changes.
“My number one priority is to make sure that customers who have been devastated by MF Global’s collapse get their money back,” said Senator Debbie Stabenow, Chairwoman of the U.S. Senate Committee on Agriculture, Nutrition and Forestry. “The bankruptcy of the firm has not only devastated thousands of customers — including farmers, ranchers, grain elevators, small business owners and others — it has shaken their confidence in the market.”