MF Global’s rapid demise because of large, bad bets on sovereign debt are having some dire effects on Chicago’s trading pits.
For Heather Koch, co-owner of the nine-member proprietary trading firm, Icarus Trading, MF Global’s meltdown and the subsequent freezing of Chicago Mercantile Exchange accounts are a nightmare. The Icarus commodity options and futures traders, who cleared all their trades through MF Global, can’t hedge any of their positions to protect their exposures, because the collateral is frozen by the bankrutpcy court and trustee involved in the case.
“It’s definitely costing us money,” says Koch, although just how much is hard to say. “We’re trying to figure things out. We still have a lot of salaries to pay and huge overhead. I feel like I went to lunch and returned to find someone stole the keys to my house.”
Koch’s firm wasn’t included in the bulk transfers of some 60 percent of the funds on deposit that the bankruptcy court initially allowed the CME to make, and she isn’t sure why.
The stakes are growing. Those trading on margin are in danger of falling under margin limits if the value of their collaterial should fall after they’ve moved some of their money to another clearing firm, Koch says. “It could cost them a lot of money.”
She says the CME should’ve shut down operations in the wake of the meltdown, or at least let customers move their funds. “The CME should have had a grip,” Koch says. “CME shut down for the snow storm last February. Why didn’t it shut down for this?” She says she thinks of her account at the CME like a bank account. “A publicly traded firm should be prepared for it.”
Koch recognizes that to some degree, the CME’s hands are tied by regulators. Koch hopes they allow the exchange to move more money in the next few days.
Andrew Stoltmann, a Chicago attorney on LaSalle Street, says he received 15 calls relating to MF Global last Thursday alone and that two clients, both futures traders for their own accounts, have $100,000 and $250,000 frozen in their accounts. It is being heard the US Bankruptcy Court in the Southern District of New York (Manhattan).
“I think there is a lot of regulatory blame to go around,” Stoltmann tells Institutional Investor. “FINRA should’ve been on the scene in early summer, the SEC in June and the CFTC should’ve been on the scene to begin with, and ultimately the CME.” He says he expects to be involved in the “tsunami of litigation” stemming from the case for a long time.
Options broker Noel Blue, although not personally hurt by MFG’s failure, says floor traders besides Icarus are hemorrhaging money daily. Blue says the CME is being unfairly singled out for blame, because the bankruptcy court and trustee were in control of the funds.
Late last week, the CME transferred another 5,300 or so MF Global customer accounts and more than $410 million of collateral to other qualified clearing firms. The CME plans to transfer remaining accounts from MF Global as the court permits. That permission was expected as this item went to press.
But Blue says that won’t be the end of the story even for those customers whose funds were transferred. “Many who were lucky enough to receive checks for their frozen funds either cannot find a bank that will accept the checks, or the ones that were deposited have bounced,” Blue says.
