MF Global collapse leaves farmers angry

Feb 10, 2012

—CME’s attempts to sooth financial injuries called “window dressing”

The Chicago Mercantile Exchange (CME) Group Inc. is trying to pick up the pieces with ag investors in the wake of MF Global’s downfall.

Under fire from critics and lawmakers calling for CME to be stripped of its oversight powers, CME has announced the creation of a $100 million fund to protect farmers and ranchers in the event of another CME-member bankruptcy. The proposed fund would not cover losses sustained from the collapse of MF Global.

MF Global was at one point the largest independent futures brokerage in the world. It traded in futures as well as securities. Most of its futures and commodity trades were conducted through CME. CME is the primary clearing house for ag-related futures trading as well as overseeing farmers’ and ranchers’ hedge fund accounts.

MF Global was forced into bankruptcy Oct. 31, 2012, following Moody’s and Standard & Poor’s respective downgrades of its credit rating. The downgrades came on the heels of the group’s extensive losses sustained on risky bets on debt bonds from failing European economies and record quarterly losses associated with the venture.

Spooked customers who pulled their money, and demands by trade partners for larger collateral sums, exposed MF Global’s inappropriate use of customer accounts to fund trades. Group leaders sought to sell the firm last minute, but buyers were put off by the size of MF Global’s deficit, its less than aboveboard trading behavior, and the fact their books didn’t add up.

Ultimately, the group declared bankruptcy and left customers and bankruptcy officials looking for billions in missing customer funds. MF Global CEO John Corzine has been quoted in numerous places saying he has “no idea where the money is.”

About 72 percent of the missing customer money has been located and returned to affected customers since the collapse, but there is still an outstanding $1.2 billion in customer funds yet to be returned.

Some sources claim the money has been located in other customer accounts or the banks into which MF Global dumped large sums in the few days prior to their bankruptcy. Others still claim the money as missing. Suggested reasons for the discrepancy include purposeful withholding of information to the public in light of ongoing and potential litigation.

CME has been heavily criticized for their part in MF Global’s financial injury to clients.

MF Global did most of their trading through CME, and the Exchange was MF Global’s primary regulator under the industry’s system of self-regulation. Some lawmakers have called the arrangement a clear conflict of interest and demanded CME be stripped of regulatory duties to better protect customer interests.

Other calls for reform include a procedural change to give priority to customers over lenders in cases of Exchange members’ insolvency.

This latter detail stems from ongoing conflict in settling MF Global’s bankruptcy. Lender JP Morgan is demanding its loan to the company be settled before customers get their money.

CME has responded to the criticism and calls for external regulation—not to mention its dependence on agricultural investors—by creating a $100 million fund to protect farmers and ranchers from potential future bankruptcy issues.

The proposed insurancelike fund is slated to open Mar. 1, 2012. It would cover $25,000 per individual account, and $100,000 per cooperative account in the event a CME member or other market participant goes under.

The aforementioned amounts would be supplied to affected customers if collective customer losses remained under $100 million.

In the event of a CME member going bankrupt and the collective customer losses exceeding the provisional funds, customers would be compensated on a prorated basis according to their stake. The plan is intended to serve as a protection for future issues impacting ag hedge fund clients.

Despite calls for CME to compensate MF Global customers, the fund will not cover losses suffered from the current debacle.

Some have commended CME’s move. At their recent annual convention, National Cattlemen’s Beef Association Vice President of Government Affairs Colin Woodall said he was pleased and called it a good first step. Woodall went on to note CME made the move on its own accord, and that fact speaks volumes for the Exchange’s commitment to protect its ag customers.

Still, many are decrying the move as too little, too late, and little more than appeasement to regain market confidence.

“They [CME] are trying to save face,” said Troy Vetterkind of Vetterkind Cattle Brokerage, LLC. “They’ve done a lot since the fallout of all this, and the $100 million safety net is trying to restore confidence in the market, but it’s lost a lot of stability in this whole mess. There’s a lot of money still missing.”

In a recent Reuters article by K.T. Arasu, ranchers hit by the MF Global loss called the $100 million plan little more than “window dressing.” Others pointed out that—based on the size of their hedge fund investments—in the event of another situation on the scale of MF Global, a prorated compensation would be “woefully inadequate.”

Vetterkind said he foresees the futures market to be slow and customers wary at best if something isn’t changed.

“We’ve seen trade volumes go down. People have left the market and not come back. Until someone can show this will never happen, you’ll continue to see a decline in market participation.”

Customer and industry outrage over the whole proceedings plays a big part.

“This is a terrible blow to the industry, yet nothing’s really been done. No one knows where the money is and no one’s been held accountable. That’s a huge issue and it’s causing a lot of outrage,” Vetterkind said.

Vetterkind called the issue of proposed reform and regulation of the futures industry a sticky topic. He cited problems with the Dodd-Frank rules put in place after the 2008 banking collapses to prevent events exactly like the MF Global scandal.

“I don’t think government involvement in the market will improve things. It hasn’t in the past. But does the CME need to be doing some different things? Yeah. They need to be worrying about their ag customers a whole lot more, he continued.” — Kerry Halladay, WLJ Editor