Tim Walker
Tim Walker

This month I’m going to take a break from the markets and look at upset and uncertainty caused by the failure of MF Global. Like many of you, I had funds with MF Global and last Friday I attended the Meeting of Creditors in Sydney.

(The following synopsis is taken from my notes of that meeting. Please note that I am not familiar with the application of the laws of bankruptcy, so while I have done my best to present the facts as I understand them, you should seek your own professional advice.)

MF Global Australia is a separate company to its parent in the U.S. However, the failure of the parent set in train a cascade of international events the Australian company could not withstand. Accordingly, the company went into voluntary administration and appointed the Administrators itself.

For traders, the biggest issue is getting our money back. We all understood that client funds were kept in segregated accounts and therefore assumed it would be a simple case of having the money returned. While the first part of that statement is true, the second part is not. To fully comprehend this, we need to know something of the global nature of financial transactions in the 21st century.

Client funds with MF Global were kept in a segregated account, in that they were separate from the books of MF Global but not separate from the money of other traders. The different trading platforms – CFDs, Futures, FX etc – were also kept separate.

The money in your trading account did not sit in a bank account in Australia, waiting to be returned to you on demand. For example, if you took a trade in a futures contract in the U.S., you had to pay a margin on that trade, which showed up on your account statement. But there is more to it. The money actually had to be sent to the U.S., where it stayed until the trade was closed and was then returned.

Similarly, if you take a CFD trade on an Australian stock, the CFDs have to be based on actual shares. In the case of MF Global, these shares were owned by Deutsche Bank. At the time of the collapse, a lot of the funds relating to the CFD trades - either still open or just recently closed - were still in the possession of Deutsche Bank.

In the case of Australian futures, the ASX terminated MF Global’s dealing rights as soon as there was a default under its agreement and took over all open futures positions itself. The process of closing these positions will take about three weeks since there were many in the illiquid markets on the SFE, such as grain and wool futures.

All this means that while there appears to be enough cash to cover everyone’s account balance, the majority of the money is not yet in the possession of the Administrators. They cannot start handing it out until they get it all back. This will take some time and is not helped by the lack of information coming from many of the overseas entities who hold some of the money.

Client balances also need to be finalised and this is easy for those with no open positions at the time of the collapse. Less clear is the situation for a trader who had an open position and was forcibly closed out. Should they be entitled to a better price or be able to recover lost profits? What if they take their cases to court and their claim is upheld? If this occurs, then the total nominal positions could be greater than the money that is actually in the fund.

A brief summary of the position is as follows:

  • MF Global client funds in Australia were kept in segregated accounts;
  • There is no evidence that this money was tampered with in any way;
  • It appears that there will be enough money to pay everyone in full;
  • Much of the cash, however, needs to be returned to the hands of the Administrators from the entities that currently hold it;
  • The process of finalising this and disbursing the money will take approximately three months.

The bottom line is that safety is a relative concept and that nothing is completely safe. You should always keep an eye on the brokerage company you deal with. If they are incorporated, watch the chart of their share price. Here is a weekly chart of MF Global Holdings on the NYSE:

click chart to enlarge

You didn’t need to be an expert chartist to see that the company was in trouble.

Don’t let your account balance with any broker grow too large. After a period of trading, withdraw some of your profits and reinvest them. You might aim to withdraw a percentage of every profitable trade.

Brokerage company failures are not new and we have seen a few over recent years. W.D. Gann himself lost all his money in 1913 when the firm of Murray Mitchell and Company failed.

Ultimately the only security we have in life is our own ability to create. This is why a Super Trader takes total responsibility for his or her own actions.

Knowledge is Power!

Tim Walker