The CME acts on MF customer accounts

Bruce Krasting's picture

Interesting development in the MF Global story after the close:

 

 

The $300mm is in the form of a guarantee. The objective is to get the Bankruptcy Trustee to release money owed to former MF customers. From the CME release:

"Though CME Clearing does not guarantee FCM-held assets, CME Group is willing to provide a $250 million financial guarantee to the trustee to give the trustee greater latitude to make an interim distribution of cash to customers now, given the monumental task he faces to sort through considerable data and claims in order to complete the MF Global liquidation and make distributions to creditors.”

Some thoughts:

-The amount of “missing” customer money is $600. So the CME is picking up the tab for half of the nut.
.
-This is a glass half full for MF customers. Yes, they are getting half their money back. But my read from this is that this other half is very much at risk.
.
-The CME steps up for $300 large and they don’t have to? Nobody does that. There is more to this offer than meets the eye.
.
-I can’t see how the CME can be held liable for MF customer losses. Therefore the money is an attempt to preserve the integrity of the exchange and to protect its members.
.
-It’s possible that the CME action was done with a gun to their head. Absent a fix (partial or otherwise) a systemic risk was (is) a consequence. The only one who could hold a gun in this discussion is Treasury.
.
-Has anyone noticed that Treasury has been silent on the MF story? I’ve been very surprised at this. It’s long since time that Geithner should have spoken publicly on this important development. The WH wants to steer clear of anything that smells like a bailout. The WH is ignoring its responsibilities.
.
-It’s (again) clear that there is a ton of cash sitting with the Trustee. The reason this money has not been forwarded to customers is that there is a claim against it. I can’t imagine how that can be.
.
-The most likely entity that is claiming the money is JPM. It’s possible that JP is acting on behalf of yet another party, but I doubt that.
.
-That this matter has now gone on for two weekends confirms to me that there are losses outside of MF. What shouldn’t have happened has happened.
.
-Early next week the Trustee will accept or reject the CME deal (I’m sure there are strings). If the Trustee does reject this (its very unusual) then there will be some fallout. If this happens, all of the customer money is at risk.
.
-I’ve thought from the beginning that this had the makings of a Black Swan. I’m not sure that the actions by the CME defuse the risk.
.
-If there is going to be a reaction (capital withdrawals from other brokers, liquidity issues in futures markets), it will be evident on Monday.
.
-If I had an account with a second tier broker I would take the money out. It’s easy to put it back in. It’s a disaster if you can’t take it out.
.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
ouchtouch's picture

ISTM that the money must have left the U.S.  If it was in any institution subject to U.S. court's jurisdiction, it would be clawed back into the bankruptcy estate.

JOYFUL's picture

excellent.

A succinct summary of everything anyone needs to know about this latest heist by the Bush-Clinton Kriminal Kartel....the whole "rest of the world"  is gaping in astonishment at how dupeable Amerikans have become to these sleight of hands....New American Century? Outsourced.

Freddie's picture

Hey Bruce - check out Sat NY Post.  They had an article about the MFW employees sacked without any severance.  One person said a grad student would never make that trade.  I think Corzine was a trojan horse taked with destroying MF Worldwide.  Who got the money? Obama 2012 campaign?

ThirdCoastSurfer's picture

So you think $600m is missing, but you know $300m is owed, so you pay the known, before the missing is verified, when you have no legal or moral obligation to do so but because it's "good for business"? 

If an arsonist should ever burn down my house I sure would sleep better knowing that the my HOA will cover my loss while the investigators are still searching for the accelerant!   

Conax's picture

 

Even Gerald Celente got burned.

I don't know much about the operations of these exchanges, but how can this debacle not be bullish for PMs? I would have expected a nice gain for both gold and silver this week. Silver just can't seem to break its leash and run.  &@#! ! #%

AldousHuxley's picture

That's why banksters have so much power. Banking is a natural monopoly as long as state sponsors only one form of currency.

 

With today's labor market, execs move around within the industry and spread corruption throughout the industry. What MF Global is doing is standard practice.

 

Even Marc Faber and Jim Rogers has to diversify into equities, bonds, currencies etc.....no hedge fund has 100% of assets in gold and commodities because they are not value add goods.

 

CME is just another casino. Most casinos have mob protection scheme + prostitution on the side. So it doesn't surprise that US spend half of your taxes on military and most executives on wall street have no morals against prostitution.

Why Not's picture

This may prove to be straightforward in that someone approved the co-mingling of customer funds with MF funds to meet margin calls a day or two before MF collapsed as lenders (banks, prime brokers, institutional investors) began to suspect an issue and refused to roll funding and instead asked for their money back. Corz had a huge balance sheet that was dependent upon short-term funding (low COF = bigger spread/earnings vs. funding with higher cost long-term borrowings). The hope/plan at MF may have been to co-mingle, then await for other MF funds to clear and unwind the co-mingle. The latter never happened, and the firm failed due to an inability to roll funding.

BK as always has great insight. Perhaps MF owes JPM for failed trades and inadequate collateral, or collateral that JPM thought it had but is now in dispute as the clearing broker. The same may apply to someone else. JPM can handle the loss and has no liquidity issues within Chase Bank or JP Morgan Securities (both subs of the parent JPM) regardless of how MF plays out. If the money is being claimed by others, then we may have the making of another electronic run on brokers/banks as BK noted beginning with second and third tier players. CME stepping up to help prevent a run is plausible, especially if the CME thinks it eventually gets in money back once MF is unwound in time.

Buck Johnson's picture

I've said this before, something is really wrong with MF and the media and the govt. are obfuscating the issue in order for no one to pay attention.  They are correct, the CME did this because the Treasury told them to do it in order to show that the market can be "trusted".  How much was MF levereged and how hard is it to move 600 million (I still say it's 1.5 billion like they said 2 weeks ago at the start and over the course of hours where changing) from the 6.5 billion that was the company.  You see all they have to do is look at what was taken out of those customers accounts and just replace it with money from the company.  But they can't because they are lying, because not only is the 6.5 billion we know is gone but also the 1.5 billion is gone and as he said whats left is probably being held by other entities that they owe.  Read this article, and it will explain more, but in the end they owe at least 39 billion and change and have 41 billion in assets (as MF says).  Are the clients going to get the money back into their accounts, they math doesn't work and the other creditors are well ahead of the clients because of how the bankruptcy precedings and also the contracts that where signed by the MF from the creditors.  In fact they aren't protected except by that CME and even then that is only backed when an unusual credit event happen and they only have 300 million and no where near the 600 million (really 1.5 billion, actually it could be 7.3 billion because that is how much money they had in clients accounts at MF and if they "co-mingled" stole the supposed smaller amount what to have stopped them to steal the 7.3 billion if they where in a bind which they where).

 

http://www.bloomberg.com/news/2011-11-08/mf-global-s-five-member-unsecur...

indio007's picture

That's an awful lot of words to basically say the where kiting a check on their Dad's bank account.

azusgm's picture

A run on the brokers doing business with the CME means a run on the CME.

'Bout time the CME stepped up with the money they had reserved for such a situation as we have here. They should have jumped in immediately before so much turmoil was allowed to build up. It's called self-preservation.

falga's picture

Why would a clearing house stand up for missing money of one of its principals?

Only possible answer: The integrity of the clearing house is at risk and if they do not save the MFGlobal domino, there are others....

This is not good news and judging by the panic move of Nov 4 and retraction of Nov 5 by CME on margins, better be careful here as the risk of a liquidity crunch in derivatives is real!

overmedicatedundersexed's picture

1,100 MFG workers fired friday..add that to the recovery of the economy.

Corzine killed the jobs at MFG - now on to national office to help Immelt add more jobs in the USA..

brave new world the sky is what color they say it is.

Metal Minded's picture

MFG was raped and murdered by GS and JPMC to stick it to the gold/silver bugs, and continue the Au/Ag price surpression. And all the bugs will do nothing but whine that dominatrix Blythe continues to stick her big red, white, and blue dildo in their asses. What a bunch of pussies!

Freddie's picture

+1

Go read the NY Post article on Saturday.  One fired employee said no grad student would make that trade that Corzine made.  He was a trojan horse put in MF Worldwide to destroy it.  Rahm and Gorelnick did the same things at Fannie & Freddie plus the Sandlers at World Savings as they dumped their bomb on Wachovia for tens of billions. 

Firing Pin's picture

Thank you scummy bankers for the unemployed. BTW, the author has it wrong imo...the CME is kicking in only 50 million to cover customer shortfalls (or about 7% of the total). The rest of the guarantee ($250 million) is a guarantee for other creditors.  So this $300 million is not to cover 1/2 of customer losses. Did the guy read the release???

Irish66's picture

The way the banks have been trading since this tip of the iceburg

tells me that GS has huge problems from this.  GS can hardly stay

above 100 the last 4 days.  I know it closed higher on FRiday

mind_imminst's picture

I agree with you Bruce, MFG is certainly a candidate for "black swan", IMO not because they levered up on Italian bonds, but because of the corruption possibly exposed by the bankruptcy. Co-mingling funds might be more widespread than people know.

 

My "black swan" event is the proposed non-trigger of CDS contracts with a 50% haircut on Greek Bonds. This cannot happen without creating extreme turmoil in the CDS market.

dcb's picture

dude, there are no black swans, they are all out there to see. when you have a

system that is over leveraged it's all a black swan. since the powers that be and the system doesn't want to reduce leverage (cuts down on bonus), and wants the taxpeyr to always eat it.

the cds isn't a black swan. the over leveraged situation once more rears it's head. it's simpple the financial system wants to pretned it doesn't have to do what needds to be done. the entire system is a black swan!!  it wasn't designed to be robust, it was designed for the players involved to make as much as they can get away with. they want it kept that way.

oldman's picture

dcb,

black swan: does this term cover the collapse of the machine from 2008 or from 2001 when it decided to invade Afghanistan or 1994 when it escaped Glass-Steagal------------or---------------?

Just joking of course, self-destruction is not a black swan; but the fucker is dead anyway, that beautiful machine that worked so well until it didn't. The tiles are just falling one after another off of the roof----Chicken Little is out of work.

Thanks for your comment   mine is just to underline it                      om

 

TheMerryPrankster's picture

Glass-Steagall died in 1999 courtesy of the Gramm-Leach-Biley act

http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act

 

Hence bankers want to party like its 1999.

The tiles are falling off, but it will be more like the Challenger accident. When the shuttle met the atmosphere with the missing heat tiles, think about banks burning up on re-entry to reality. They've been wrapped in a warm fuzzy  cocoon of 0% interest money from the FED, what happens if interest rates go up? Chain reaction

what happens if interest rates go negative?  chain reaction

so here we sit becalmed, sails slack waiting for the inevitable storm and most of us are merely slaves chained to our oars, rowing in the gallies. I suggest you find a way to loosen your chains, you might need to slip them when the boat sinks.

dcb's picture

I guess I didn't make my point correctly, the black swan may be that particular firm at that place in time, but if you look at the structure of the overall system there will be lots of "black swans". When there are a lot of black swans, they aren't black swans. it's a systemic system problem ,and if you read taleb he understands this. it's why those six sigma events happen all the time.

oldman's picture

dcb,
you made your point most succinctly and, also, left enough space for others to draw a conclusion that re-phrased it in their own manner. This is true communication and I thank you again om

dcb's picture

thanks for the kind words, I never have much faith in my writing skills

Onehunglo's picture

A "Golden Goose" then, that someone is deparately trying not to kill. ;-) 

TheMerryPrankster's picture

At this pont the goose is dead and they are just trying to keep the smell down and pretend long enough to unload the rotting carcase onto some greedy sucker.

Weekend at Bernies meets  Hitchcock's the trouble with Harry. Damn dead bodies just keep popping up in the middle of our glorious economic recovery. Could fearless leader be lying?

Cheyenne's picture

Outstanding as always, BK. To this lawyer, what jumps out is right here:

"The CME steps up for $300 large and they don’t have to? Nobody does that. There is more to this offer than meets the eye."

Commenters have correctly noted that TPTB (Treasury & Fed) are eerily silent on the whole thing. What a coincidence, as JPM has shown up in the MFG narrative thread at least twice now--first as suddenly having been found to be in possession of the missing client funds, then (voila) on the creditor's committee.

Lehman was crazy as shit. With a $600 billion hole in their balance sheet, their last days on earth were spent begging for $10 or $20 billion. Has that ever been explained by anyone without using the phrase "accounting fraud"?

And yet MFG seems even worse. It's almost as if there's a portal to be discovered under all the crazy detritus.

bigkahuna's picture

I have no idea who is impacted by this theft at mf. If there are dangerous people involved, that would explain why Corzine's whereabouts are unknown.

jbc77's picture

Great write up Bruce. Always enjoy your insight.

Lady Heather...UNCLE's picture

...Bruce...from New Zealand: thank you

MrPalladium's picture

It has been a week, and 600m is relatively easy to trace in that amount of time. I had $25,000.00 in an account with Lind Waldoc that suddenly was bought by Refco, which then suddenly became MF Global. The authorities know where the money is. The problem is that whoever has taken it as collateral is claiming that they are a bona fide purchaser for value who knew nothing about the fact that it was customer money, and that whoever pledged the customer funds without disclosure is liable.

I suspect that customers are pulling massive amounts of cash out of futures accounts and that CME feels compelled to act to staunch the flow. It is a desperation move since a 50% loss is still severe enough to justify withdrawal to a safer account. Ultimately the CME will argue a theory that the segregated customer funds cannot lose their character as segregated customer funds through malfeasance of a brokerage firm and that a fraudulent transfer is voidable by the customers. After all, it is the institutional lender to the broker who is in the best position to investigate the true source of the collateral he is taking. The equities are against JPM, and the politics of taking money from customers is overpowering.

But from the CME's standpoint the damage is done. There will be far fewer retail sheep for the pros to shear in the future.

 

disabledvet's picture

Blow up the exchange. That's some serious ones and zeros. Add the entire City of Chicago to the list of things this Administration has wiped off the map and see how pleasant the reelect is I guess. There's no RICO here either since this is how business is played..."New York style" as they say. Say hello to "The Banksters."

kaiserhoff's picture

Nice summary Pall.

I haven't been to all of Pubama's 57 states, but every state I have been to (including Illinois) has fraud statutes.  Some hair ball exchange rule won't over-ride those.  They should damn well know where the money is by now.  Unless they get a handle on this soon, they will be up to their asses in criminal charges and RICO suits.

JOYFUL's picture

"The authorities know where the money is. The problem is that whoever has taken it as collateral is claiming that they are a bona fide purchaser for value who knew nothing about the fact that it was customer money, and that whoever pledged the customer funds without disclosure is liable."

PalladLad, good to see there's still somebody out there with a pulse...this is the biggest single stolen money story since Bernie Cornfield's IOS, with as many potential loose ends and damaging consequences as Nugan Hand. zzzzzzzzzzzzzzzzzzzzzzzzzz

  Almost two weeks in, hardly a ripple in the press, the clients with the most upfront losses themselves vary in response from lassitude to weary resignation, and even on the putative epicenter of resistance, ZH, the punters seem unable to raise more than a few tired jokes and snide remarks...

"After World War II, one of the economic warfare specialists in Sir William Stephenson's SOE, a fellow named Ian Fleming, wrote a series of coded novels describing the efforts at world conquest of a "third force"-an ultramodern international crime syndicate housed in the resort islands of the Caribbean. The weapons of "third force" conquest were drugs, political assassinations, grand-scale blackmail, and economic war against the nations of the world."

 

Those stolen investor funds will be pulled through and laundered before the end of the month, and then the same perps will be back for more loot! Yup, so what, the financial world seems to be saying....been there, done that, saw the movie(You Only Live Twice?!?)

Earth to Merika....this is the Big One...first wave of a tsunami of corruption and laundered $ that will wipe out a bigger amount of the east coast population than the Canary Islands volcanic collapse tidal wave model.  This is not a test...if this were a test you would see a comforting confirmation that somebody still feared your reponse to their hand in your pocket....  Hello....hello, anybody still alive down there?

dcb's picture

the vast majority of ZH pundits are a bunch of trolls with nothing to add to any discourse. I think they like to hear themsleves speak. There appear to be few actual traders, as I have tried multiple times to have a discussion on the use of speed line or other techniques. there are the racists and ideology people. there also appear to be some paid plants to write nice things about "industry", the white house, or some other person taking the hit at the time. best example of this is on washington's blog. Guy does great research ad is in front of the regular media very often (only problem is cites himeslf too often) and gives gives access to local media we don't see (gulf oil spill),

 

Bruce as usual you make good comments, but think about it for a bit on just a philosophical level. MFG was a primary dealer, the bernank comes out quick but says "we aren't a regulator". Although they sure as heck can pick and choose who will be a primary dealer. Makes them look like shit, and as usual bernank falls asleep on the "regulatory" aspect of his job. for once I'd like to see that idiot talk about his other role as the head of a regulatory agency instead of monetary policy. regardless of what you think about monetary policy the agencies role as a regulatory agency is a complete failure and he is never taken to task for this, even when questioned by congress.

We can take this further. (by the way the NY times did a great seriies of pieces on MFG.

Lets take timmy. the guy who has had a role in reforming the system and making it safer. Kinda show they didn't do their job. It speaks volumes for endorssing many of the regulations that idiot has fought against (position and leverage limits, getting rid of too big to fail). It shows he hasn't done his job.

The white house. Corizine had big white house connections raised lots of buck for Obama and had connections. Not sure when MFg got it primary dealer thing, but it looks for sure as if he got favorable treatment from the commodities futures trading commission. he lobbied there against some positions the regulators wanted, and won. He of course lobied his old goldman companion Gensler there.

So in a nut shell this failure exposes all the things people have been saying is the problem with america that the status quo is doing every thhing they can to maintain.

political connects, favors, goldman associations, lack of regulatory oversight, failures that aren't supposed to happen anymore. Now add stolen funds.

The best way for the powers that be to act is to pretend it hadn't happened. the less questions asked the better. why bring up something that represents all you are attempting to maintain. Think about it. Now the money angle will keep it in the news, get that money back so perhaps people don't complain. the cme action makes them lok like a good guy,instead of a self regulating body of financial types they are. The would like to keep outsiders out of their little system. makes it easier to game that way. Think of the conflects of interest at CME. I can't begin and don't know them, but I bet they make the conflicts of interst at the fed look tame.

I think I have written enough for people to get the picture. corruption, financial excess, regulatory, politics, lobby, donations, this thing represents all that is wrong with the system and ows and the smart people out there should be seizing this and keeping it in the news if they want real reform. Best for them to pretend it didn't happen and hope nobody really start investigating the clear links.

 

kaiserhoff's picture

Agree about George.

What is speed line?  I mostly trade option spreads, retail, but always looking for an edge.

dcb's picture

I use this web site free stock charts.com, before I discovered this function I used to draw these many triangles and I discovered that the locus of where things crossed could be used is entry, top, support lines, etc I could knda of predict the market action. the site has a function (the speed line) that does this much easier. easy to move around, etc. you can use it to trade longer shorter time frames. I am rather certain the governing algo's use some variation of this to do their trades. hard to expalin, but amazing that you put the thing there is is good for tops, bottoms, support. I use it with the inverse funds going both ways, and the regular funds. I'l predict tops long time ahead, etc.

I ave a friend who is a professional trader saw him Weds I think. said we were going to have a big drop, he said he was huge long. then the next day (thursday) boom. you can use it weekly, hourly, daily. depending on your trade time frame. I do best when I just program the computer in advance to buy sell on the lines. hard to believe it myself, because it's so strange to do. but then you start to realize the point that is the top and bottom has already been decided in advance. somethings the path is a bit not on target, but it always gets there.  I wrote my friend on 11/1 next for s and p was 1276

one of my better ones. the strange thing is that when I place the speed line in the right place, it almost always lines up with other important trend lines. hard to explain. I just know the algo's almost always make it follow these lines.

disabledvet's picture

You're about to be annihilated. Have a nice day!

dcb's picture

yeah!!! dude if you only knew. the way I trade it also doesn't mattter which way the market goes because I have things programmed  in advance, and also use weekly lines. weds bought long again, shorts closed. it doesn't matter to me. covered any way the market moves.

say what you want, but I was posting my own charts on the site a long time ago.

N.B. the system doesn't work as well when there is high volumes trading on the down side and the retail secor in involved. I try to figure out these situations and adjust accordingly. If you really follow, these algo's all follow very predicatable patterns when running things. I admit I also pay attention to some indicators (macd, rsi), but the speed lines are the most accurate. I also do some other hand drawn lines, plus part is a gut feel.

hate to tell you, but I can't get cleaned. if we have big drops I have buys in for set programs on the inverse funds, if they go above I get stopped out,

the thing that has been bothering me the most is the us market, running up to where it shouldn't so the europeans sell in strength  we get these huge gap downs if I wasn't doing what I have been doing I'd be toast. I  only use an index and leveraged inverse funds of that index. No idiosyncratic risk.

you gotta be smart and if you trade a lot you can tell when the algo's are ruling the roost.  (low volume melt ups like we are having now!!!

JesusUp's picture

cough, cough

Lord Carrington

etresoi's picture

"I can’t see how the CME can be held liable for MF customer losses. Therefore the money is an attempt to preserve the integrity of the exchange and to protect its members."

The minute I read about rule 129 I knew there was no integrity and closed my account.  I will watch from the sidelines.

oldman's picture

                            @etresoi

"The minute I read about rule 129 I knew there was no integrity--------"

this oldman is ignorant of rule 129; would you please explain?                     om

kaiserhoff's picture

See Ilene's piece from yesterday, for whatever reason it's not coming up on my history.

Basicly it's a sweep on steroids, allowing brokers to pledge, hypothecate, do as they damn well please with "surplus" customer margin.  It's an open invitation for gambling with client funds.  I think the fraud statutes will eventually handle this, but it was the dumbest idea since Adam.  Stay tuned.  Lot's more to follow.

oldman's picture

Thanks, kaiserhoff

When I looked it up under CME it shows 'Rules 128 and 129 reserved'. now I know that 'reserved' means secret----and a good thing, too-----I don't think that you or I could get away with such a cheap trick       om

Christophe2's picture

Here's the link:

http://www.zerohedge.com/contributed/it%E2%80%99s-official-wall-street-f...

 

=> and I fully agree with your earlier conclusion: once you become aware of rule 1.29, it is insane to remain in any of these markets.

disabledvet's picture

I absolutely agree Secretary Geithner should have been out in front of this from the beginning and for exactly as is said here: "the appearance of impropriety" literally right next to the White House. "Propinquity" i think is the "political term." Only "this a nearness you want far, far, FAR away."

Dirtt's picture

So who is suspect?

TD Ameritrade/Thinkorswim?  Interactive Brokers? ETrade?

The bigger question is who could be next.

whisperin's picture

Bruce,

Could someone claim that the money was stolen and thus the money would have to be returned? I don't know if there exists another federal statute that could compete with securities law??

knukles's picture

With the benefit of many years participation whilst managing institutional monies at the major exchanges, the deal as always sold by and trusted in was that it was just such an experience where supposedly segregated client funds go a missing was where the Clearing Corp's backing came into effect, thereby ensuring the integrity of the exchange itself.

Sorry folks, but as far as I'm concerned, this has all the markings (not to mention the European meltdown... not as in minor shit, folks) of Lehman 2.0.  Remember, when the shit hot the fan with Lehman, et al, it took a good month+ before the implosion real and truly began.

The CME's and regulator's responses (much less the actions which should have been taken to prevent this shit) are absurdly deficient and delinquent.  Might just as well publicly condone criminal activity.  Might just as well.  This is an example of the system falling apart.  Not an if, and or but like the bank rescues, wherein many can debate (forget right or wrong for purposes, here) what should or should not have been done.  Might just as well condone Grand Theft Country for all's the appearance, let alone final disposition.

This is the Domestic Confidence Killer.  Europe's got theirs and the systems regardless of what anybody tries to sell you, are not detached, separate and isolated.
Get ready.
I keep telling everybody and writing it here, we are already there, mom.  It's not when are we gonna get there?  It's now already.

Believe in no-risk.
One more time, the smart money is gonna be the guy who didn't loose a lot.  Smart money comes out even.  Smart money has the liquidity to capitalize on the steaming piles of shit After the Disaster Has Befallen.

As was the advice given to a chap by Tony Soprano; "Run."