I find the “MF Global rule” confusing, and to understand it I have to start with some very basic basics. Let’s say I put money in my account at MF Global, which I want to hold as cash or a cash-like thing, because I need it to provide margin for my futures positions. That money is “segregated,” meaning that in some loose sense it belongs to me and not to MF Global, but MF Global can invest it. Now, because I am ignorant, I had to stop here and ask, “why do they do that?” In general, there are two plausible answers:
(1) Because they want to make money for you, or
(2) Because they want to make money for them.
Now I didn’t know which was the right answer. Answer (1) would be like your brokerage firm, which invests your cash sweep into things that make money and then pays you that money. It is a marketing thing: you’re more likely to choose a brokerage that pays you a decent return on your cash sweep. But it turns out that MF Global actually lives in regime (2): they invest your money not to market how they make money for you, but to make money for them. If MF Global puts your $100 into a popcorn popper and $101 comes out, they keep the $1. Continue reading »
DealBook today dug up some neat stuff on MF Global that, if you let it, will make your head hurt and fuel your conspiracy theories about Goldman alumni:
Months before MF Global teetered on the brink, federal regulators were seeking to rein in the types of risky trades that contributed to the firm’s collapse. But they faced opposition from an influential opponent: Jon S. Corzine, the head of the then little-known brokerage firm. … The agency proposing the rule, the Commodity Futures Trading Commission, relented. Wall Street, which has been working to curb many financial regulations, won another battle.
What they’re talking about is a proposed revision to CFTC regulations 1.25 and 30.7, proposed about a year ago, which would have cut back on the securities that futures commission merchants like MF Global can purchase with segregated customer money. In the olden days, and also now, FCMs could put that money in a variety of safe and safe-ish and mock-safe investments, including notably foreign sovereign debt. The proposed changes would cut back that list dramatically, eliminating foreign sovereigns. A summary of the changes is here.
Besides foreign sovereign bonds, the CFTC also tried to get rid of “in-house” repos and reverse repos, in which futures merchants used segregated customer cash to fund their own securities portfolio. As the CFTC explains it:
Continue reading »
Remember Vincent McCrudden? He’s the guy who arrested in January after years spent threatening to murder, among others, Mary Schapiro, Richard Ketchum, Gary Gensler and various other SEC and CFTC officials. In one email to a CFTC staffer he wrote, “You fucking corrupt piece of shit! I have let so many of you fucking corrupt mother fuckers off the hook for doing this to my life. You my friend are not getting away with this. I am going to do this my way no and you, you corrupt mother fucking piece of shit are the first on my list! laugh mother fucker…I am going to make you a test case!” In another, vivid imagery involving a midget was used. In yet another, the chief operating officer of the NFA was told “It wasn’t ever a question of ‘if’ I was going to kill you, it was just of when.” For a while, McCrudden also had an “execution” list on his website and encouraged people to help him cross the 47 names off the list, telling them, “Go buy a gun, and let’s get to work in taking back our country from these criminals. I will be the first one to lead by example.”
Vincent is set to be tried next week and his attorney has come up with a two part defense: 1) everyone wants to see US financial regulators dead. 2) McCrudden wasn’t threatening so much as he was dialoguing about the flaws in the regulatory system. Continue reading »
Former Commodities Exchange chairman Martin Greenberg is suing former NBA star Alonzo Mourning’s charity after he won $1 million for hitting a hole-in-one at its golf tournament — then was denied the prize after it was claimed the course had been improperly shortened. Greenberg hit the hole-in-one at the Alonzo Mourning Charities tournament at Donald Trump’s National Golf Club in Briarcliff Manor, NY, last August. But the insurer backing the event refused to pay up, claiming Greenberg’s required 150-yard shot had actually traveled only 139 yards. [NYP]
According to the complaint, McCrudden noted on his website, which has since been scrubbed, “There are no good ways to execute this plan. These people have got to go! And I need your help, there are just too many for me alone [.]” (He also provided a list of the people he intended to cross off, including Mary Schapiro, Richard Ketchum and Gary Gensler, among many others.
The word is out on the Obama administration’s plan for derivative regulation. CFTC Chairman Gary Gensler outlined the plan before the Senate Committee on Agriculture, Nutrition, and Forestry today. Derivative dealers can look forward to new rules surrounding, “capital requirements, initial margining requirements, business conduct rules and reporting and record keeping requirements.” In his testimony Gensler stated that the new rules aim to achieve four main objectives:
• Lower systemic risks;
• Promote the transparency and efficiency of markets;
• Promote market integrity by preventing fraud, manipulation, and other market abuses, and by setting position limits;
• Protect the public from improper marketing practices.
Regarding the highly scrutinized world of customized derivatives, Gensler set out four criteria for determining whether or not a derivative contract qualifies as customized and therefore avoids the requirement of trading through an exchange:
•The volume of transactions in the contract;
•The similarity of the terms in the contract to terms in standardized contracts;
•Whether any differences in terms from a standardized contract are of economic significance;
•The extent to which any of the terms in the contract, including price, are disseminated to third parties
And so it begins.
Commodities slumped across the board today. Most market watchers are saying that aid for the mortgage markets encouraged some investors to move money from commodities to bonds. But commodities traders had more on their minds than bonds today, as rumors of additional margin requirements made their way across trading desks via instant messaging and phone lines.
What sparked concern was a rumor that the futures exchanges or regulators—or maybe both—were considering raising margin requirements for “non commercial” commodities traders—especially non-com energy traders. Non-commercial traders speculate on the price of commodities but do not ever take delivery of the commodities. Amaranth was a non-commercial trader, while Exxon-Mobil is a commercial trader.
The Commodity Futures Trading Commission, which is charged with overseeing trading in futures contracts, does not set margin requirements. This responsibility falls on the exchanges, such as NYMEX and the CME, which are viewed as having a better, ground-level view of the market’s volatility and risks. Spokespeople for the CFTC said they had no plans to begin regulating margin requirements.
A move to increase the margin requirements for non-com traders could be aimed at diminishing price-volatility, and might reduce commodity prices. This, in turn, might be viewed as aiding a faster recovery as investment dollars would be re-directed at areas of the economy that fuel growth. What’s more, it might tamper—or at least obscure—inflation fears by reducing prices in things like oil and gold.
The exchanges rarely distinguish between commercial and non-commercial traders, however. Market watchers DealBreaker contacted were skeptical that they would put in place such a distinction now. One economist also said that the move could actually fuel volatility, at least in the short term, by obscuring efficiency-creating arbitrage in the markets.
