A question has been raised as to if the clients of MF Global are insured on their losses as a client of a bank or securities firm would be under FDIC or SIPC? The answer is maybe. While there is no regulatory insurance agency to cover the losses of MF Global clients, the CME itself has a guarantee fund for losses. This fund is financed by the other Primary Clearing members. So all FCMs bear some burden of MF Global’s indiscretions. We believe it amounts to a $4BB Clearing Member “error Account” The answer depends on legal questions and accounting details: For example, are the segregated funds of a Clearing member’s clients guaranteed if those funds were lost due to fraudulent actions by that clearing member? In other words, do the other Clearing Members at CME have to pony up the lost money if MF Global lost it fraudulently as opposed to though market events and poor in-house risk management. If MF Global is found to be in violation of some CME rules, fraud, delinquency or otherwise, we believe CME’s other Clearing Members will put their collective political collateral into finding a way to not pay the money lost.
As we detailed 11 months ago, LCH.Clearnet now stands at the fulcrum of today's price action in Europe as the critical 450bps spread to Bunds on European sovereign debt - which will trigger considerable rises in margin requirements - is being aggressively defended thanks to the ECB's SMP. What is evident (and troublesome) is the confluence of the rally in Bunds (as Greece implodes) and unhedgeable risks in ITA bonds which means relatively aggressive buying in ITA bonds is doing little to improve spreads. With all eyes now on the spread (which stood at a measly +150bps when the LCH.Clearnet margin rules were set) as opposed to price, buying Bunds is perhaps the easiest and most liquid way to put pressure on the Italian bond market.
Looks like that 50% haircut may be insufficient. Who was the guy on CNBC was was buying Greek bonds a few days back on the "bailout"? And now, back to your regularly scheduled fiat ponzi system collapse.
As expected, following the complete failure of banks to institute an extortion cartel on debit account fees after two already defected, it was only a matter of time before Bank of America withdrew as well. Sure enough:
- BofA Drops Plan for $5 Debit Fee, Spokesman Says
Now, while this is great news for whatever deposits BAC has left (substantially lower than what it had at September 30, that's for sure), it doesn't answer the question - just how will the bank make money?
When sharing our perspective last night on why the alleged MF Global crime of commingling client capital with the firm's deficiency capital we asked, "What happens next? Why customers at all other brokerages, all other exchanges, afraid that their money will suffer the same fate as MF, even if they transact with perfect solvent clearers and agents, will proceed to pull their money, as they know they have nobody to trust but their own prudent and forward looking actions. Which in turn will start the kind of liquidity drain that killed not only Lehman, but froze money markets, and with that brought the complete capital markets to a standstill, only to be thawed after the Fed pledged multiples of the US GDP to rescue Wall Street in October of 2008." Sure enough, here it comes. "Reports of short falls of client money ... if true would be a disaster for all the smaller brokers and banks as nobody will trust them anymore," one London trader said. Reuters continues "MF Global filed for bankruptcy protection on Monday, putting a sudden end to Corzine's drive to transform the more than 200-year old MF Global into a mini Goldman by taking on more risky bets on euro zone sovereign debt. In Australia, trading in grain futures and options was suspended by bourse operator ASX Ltd , prompting concerns about the integrity of the country's agricultural futures market. "We're sitting out here with risk that we can't cover," said Jonathan Barratt, head of Sydney-based Commodity Broking Services. MF Global was one of the largest participants in the country's agricultural futures market. And it is all only going to get worse as the liquidity outflow avalanche is realized, following the market's most recent distraction with Europe.
Just two for now, but something tells us this is quite representative of the overall industry:
- Third Point Offshore Fund, Ltd.: October Net Return +0.8%
- Absolute Return Capital (ARC) – Bain Capital, LLC : October Net Return +0.7%
More as soon as we get the Month End HSBC report.
Market observers have long noted that increasing volatility presages market crashes. If you glance at a chart of September-October 1929, just before the crash that started the Great Depression, you will note the same sort of manic swings of euphoria and fear that have characterized the U.S. stock market over the past few months. Not only are the swings increasing in amplitude, the time between each move up or down is decreasing. Think of a series of wind storms that grow increasingly more violent even as the time between storms diminishes.
Yu Yongding: "Europe’s courtship of Beijing is moving to a more intense level. Klaus Regling, the chief of the eurozone bail-out fund, is in Beijing discussing possible support. Just a few days ago French President Nicolas Sarkozy conferred with Hu Jintao, his Chinese counterpart, to win Beijing’s support. They should not hold out their hopes too high. The two will have had a courteous hearing: China is willing and able to help. Since the beginning of Europe’s sovereign debt crisis, Beijing has repeatedly expressed its wish to offer “a helping hand” to Europe. Eurozone countries, however, have to understand that they will have to save themselves. Expectations of a “red knight” riding to the rescue are sorely misplaced."
Yesterday, the Chicago PMI miss led us to suggest that the ISM is next. Sure enough, today this other metric that had consistently beaten the negative HF economic data in the late summer was the latest to hit an inflection point, and miss substantially, with expectations of an improvement in the September number of 51.6 to 52.0 trounced, following an index print of 50.8. And while there was no major moves in the bulk of the index components, the Prices subcomponent saw an epic collapse, tumbling from 56 to 41. What does this imply for the S&P? Nothing good. But remember: correlation is not causation, a fact the Fed loves to abuse without pause.
Independent Strategy On "Greece The Ungovernable" - "Go short the euro and PIIGS debt — and hold on to your seats!"Submitted by Tyler Durden on 11/01/2011 - 09:59
The decision by Greek PM Papandreou to call for a referendum on the latest Greek bailout deal shows that Greece is becoming ungovernable. The PASOK leader made this decision because riots in the streets, increasing refusal by civil servants to implement the austerity measures and the likely loss of his majority in parliament made the survival of the government unlikely within weeks or months. So Papandreou has gone for broke. He hopes that by winning a vote on the bailout plan he can shut up the opposition both in parliament and on the streets. But this high-risk strategy threatens to bring the whole house of Euro cards down.
News is now coming fast and furious, with the latest locus of activity once again Greece, where we learn that there will be an emergency meeting in minutes, at 4 pm local. Dow Jones reports that early elections, and the referendum, will be discussed by the Greek cabinet, according to a government official. Supposedly G-Pap is trying to control the revolt in the socialist party. We fail to see how this is remotely good news, as early elections are merely another form of popular referendum which will simply delay the final outcome of the prevailing hatred toward the bailout, only with it it risks esclating the country closer to outright civil conflict.
We have discussed this a few times over the last year and as Greece begins to show signs of defection, it is perhaps worth considering what a spoiled and chided sovereign might do in a temper tantrum. Peter Tchir, of TF Market Advisors, puts it best this morning: "Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to "screw" the Euro and go it alone, it would be Italy. They don't like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible".