Has the US-based futures trading market suddenly gone banana republic? That's what it looks like today, because the customer accounts of bankrupt primary broker-dealer MF Global have been transferred to other brokers -- without all of the money.
As of this morning, the bulk of MF Global customer accounts were transferred to Chicago-based futures brokerage R.J. O'Brien, but, according to the Chicago Mercantile Exchange and R.J. O'Brien Websites, customers only received enough equity to cover the active trades in their accounts. The rest of the money is being held with the MF Global Trustees as part of the bankruptcy process. The company is also being investigated for what looks to be hundreds of millions of dollars missing from segregated customer accounts.
And check this out: If your account was in 100% cash, zero money was transferred. It's all stuck with the MF Global trustees, to await a feeding frenzy of lawyers, bankers, and general legal mayhem resulting from MF Global's bankruptcy.
Here's how it looked to me, an MF Global customer: Overnight, my account was transferred with one active trade (so far still profitable) -- but the account is missing approximately 75% of the cash or equity. The reason for this, as explained by the R.J. O'Brien Website, is that an "agreement" between MF Global Trustees and the CME was such that only enough cash to cover the live trades was transferred.
Not only that, but every single MF Global customer with a live trade is getting a margin call today. From the O'Brien Website:
Former MF Global customers transferred to R.J. O'Brien were delivered with approximately 75% of the maintenance margin requirement related to their accounts. As a result, every former MF Global account faces a margin call. No excess equity was transferred.
All former MF Global customers must wire R.J. O'Brien additional monies to bring their account above its initial margin requirement or liquidate their current trading positions.
If the account did not contain a trading position, former MF Global customers must wire or mail R.J. O'Brien funds to initiate trading because no excess equity was transferred.
In other words, the customers that were best off were the ones who were using maximum margin, or leverage. They would have gotten all their money. And the ones holding the most cash got very little of it. There is only a vague explanation of why so much money was held back. Again, from O'Brien:
What will happen to the remainder of my account balance at MF Global?
RJO does not have control of the remaining segregated funds.
If you have questions or need more details, please visit www.mfglobaltrustee.com.
There is no explanation of how to find the missing money, other than "Go ask the MF Global Trustees." So the former MF Global customers find themselves this morning in a situation where their positions (which had been locked up for a week) were transferred, minus a random amount of cash, with forced margin calls, and left to their own devices to find the missing money.
One former MF Global broker, who is now helping manage accounts at R.J. O'Brien, told IU, "Nobody has any idea why they did it like this or what's going on... The communication from the top is so bad, it's not even clear why it's being done like this. Is the CME trying to kill their entire futures business? They should have done it in a way that made the customers whole."
Now, I'm a relatively small customer, so I wondered what happened to other people. Andrew Abraham, of Abraham Investment Management, has written a letter to the US Congress, saying hundreds of thousands of dollars of his money is now locked up with the MF Global trustees.
And David Kotok of Cumberland Advisors asks where the New York Fed was in all this mess, and why it took so long for it to terminate MF Global's primary dealer status.
Bottom line? As another one of the brokers I used at MF Global, who is now working for R.J. O'Brien put it, "It's very messy." That's the understatement of the day. The New York Fed, the Commodities Trading Futures Commission, and the Chicago Mercantile Exchange have a lot of questions to answer. The regulators didn't help the customers at all, and the sanctity of customer segregated funds has been cracked.
And the bottom line? There's still no explanation of how much of MF Global's customer money is gone -- or where it went.