Can MF Global Collapse Make the Industry Change?

[TheNegotiator 13]

It's possibly a little early to be thinking about this right now, but it seems to me that the brokerage and clearing industry is likely to come under much scrutiny in the light of the current goings on at MF Global. People are sure to be worried about their money even if they aren't with MF Global and are likely to reassess the amount of margin they leave with their clearer. If MF can go down, why not anyone else right?

 

So my question to you guys is what exactly would you want to see change in the industry, with your clearer, or even with your broker? Anything small or large can be pointed out. Voice your opinions!!!

[TheNegotiator 13]

Well, let me point out one thing to start with. In an attempt to mitigate risk directly associated with leaving money with a clearer, you'll likely see people attempting to spread their money better. They'll likely leave less as a percentage with clearers they perceive to be more risky and put more money with those they see as safer. This in itself could alter the risks if people tend to do the same and more money gets piled into certain places. What it could mean though is clearers and brokers see money moving and they want to hold onto it. So what'll that mean? Incentive in all likelihood. Low commissions, better service maybe.

 

One thing I'd like to see is online flexible automated access to accounts. I much prefer to be able to work this way for example with online banking, but then when I need to I can still get hold of a person to speak to. Maybe this is available for some.

[SIUYA 11]

In this day and age with instant transfers and computing power you actually wonder why we need clearing firms.

The exchange sets the margins, the platforms (broker) charges access to the exchange, and we as the customer should allow the exchanges to be able to debit and credit an account held with a bank which might actually be safer.

That way you know exactly what margin is required - it goes directly to the exchange - if you day trade - you might need a minimum amount at the exchange that the broker can monitor.

The only real difference is that you have instant access to your money and only require the minimum to trade.

Now people might say you can keep the minimum at your broker - yes thats true and thats exactly what you should do, however if you trade larger size and hold positions transferring funds all over the place is not efficient. Plus this might only work effectively with exchange margined zero sum game products - in equities it already does as you can hold the equities in your own name, and you assume the equity risk.....

(now obviously various jurisdictions and antiquated banking systems and other various regulatory reforms make this probably impossible, but as I see it the technology should not be an issue.)....just an idea.

 

Regards what they can do - just the above - totally segregated accounts. If a company fails, equity holders and bond holders dont get bailed out - no problems, but client money should be segregated....totally - many say they have but in reality dont, and the reason for this is largely as they take the clips for funding that pays for the reduced brokerage and access to margin. (this is generally not needed when margins are set by the exchanges - unless the broker gives you extra leverage)

One issue you will always have if fraud is involved is that only through internal processes can fraud usually be picked up - as by its very nature fruad is deliberately hidden. The speed with which MF revealed its problems and the collapse also highlights the issues in regulating compnaies such as this when fraud may/may not have occured....and thats why CEOs and others in charge of the firm should be held more liable for such events - in this case I think they might be.

[TheNegotiator 13]

So maybe the issue is just down to lame regulators and lower personal consequence for executives? I just don't know though. I think that if we're not careful, rather than think of what can be done to change things properly, there'll be a swing in the other direction. Where as before there was less and less, maybe going forward there'll be more and more regulation. I don't see that as automatically a good thing.

[SpideySense 10]

Capitalism is about life and death; success and failure.

 

Look at the new product growth cycle with large numbers of companies jumping on mid cycle then failing when things tighten up.

 

Its a good thing.

 

Trying to fix capitalism by bailing companies out ... that's the bad thing.

Trying to fix capitalism by regulating the wrong things ... that's stupid as well.

 

Capitalism ... productive but not always pretty.

Democracy ... not as bad as the alternatives.

Prison ... the right place for a number of finance industry execs.

[SIUYA 11]

a good description of the system flaws....and why if they are serious they can fix them.

 

Guest Post: MF Global Shines A Light On Monetarism's Incapacity To Enhance The Real Economy | ZeroHedge

 

not to be confused with capitalism (which I support) and corporatism (a whole other kettle of fish affecting more than the finance industry)

 

Basically - the things you need to regulate most is the amount of leverage and the accounting for risks.

 

These things allow/encourage people to time and time again take risks with money they dont have - (note - while leverage is fine, excessive leverage is not.). Too often accounts take into consideration the idea of values - not of exposures to risk, and they can too easily be hidden.

 

I have said it before and I'll say it again - there should be no such thing as creative accounting..... fraud is very hard to stop (it appears this may have occurred in MF), and its encouraged when people get access to the instruments that allow them to massive leverage themselves with little personal risk, but when its encouraged under the guise of "its legal" then it makes the head spin.

To those who defend these practices and system are the ones that allow it to continue, how often have you heard "everyones doing it".....

regardless of how many protests there are......

(an accountant once tried to defend creative accounting once under the argument - these are extremely complicated issues that often we dont follow - WTF...k ...scary)

 

The accountants are to blame :rofl:

 

So as to the question of can it make the industry change....probably not if the core problems are not addressed.....

 

(disclaimer - blaming accountants is in jest, but there is a practical point that the issues supposedly being regulated are in my belief not the real issues which will cause lasting beneficial change)

Plus....these guys are arguing over how much of a short fall there is....thats scary - everything should be reconciled quickly and easily these days so its either there or its not (referencing client account balances which were MEANT to be segregated and given every client gets instant access to their supposed balances what was MF doing?)....now the lawyers and accountants are involved watch them milk the teats.

[TheNegotiator 13]

How can things really change when you have these greedy money ossessed guys willing to sell their own Grandmother if they think they'll make a good profit? Operating within the technicalities of the law is a big problem. People purposely sail so close the the wind that much of what they do shouldn't be legal. But they will always attemp to exploit the system. So the only way to stop them is to closely monitor what's going on. Trouble is, the money to do this just isn't there for the most part.

[SIUYA 11]

  TheNegotiator said:

How can things really change when you have these greedy money ossessed guys willing to sell their own Grandmother if they think they'll make a good profit? Operating within the technicalities of the law is a big problem. People purposely sail so close the the wind that much of what they do shouldn't be legal. But they will always attemp to exploit the system. So the only way to stop them is to closely monitor what's going on. Trouble is, the money to do this just isn't there for the most part.

 

exactly - no matter the regulations, no matter the types of controls at the front end....some people are either frauds, or are tempted enough and incentivised enough to commit fraud....hence you need to head them off at the pass, not through regulation just saying you cant do this and that, as it will be ignored, but through checks and blanaces that make it harder to get away with things....such as good/better more transparent and accurate accounting standards, total segregation of accounts, checks on PL AND Cashflows at the same time.

You cant stop fraud - you can only make it harder to commit, easier to pick up and when committed leaving less damage.

Silly example in case; a programmer stealing the rounding error off millions of bank accounts....most people wont notice, there is no leverage involved, only really picked up by looking at the accounts.....

still fraud, but less damaging :0

[TheNegotiator 13]

I think these issues run so deep though that it'd be difficult to fix them as such. I really don't know what the ultimate answer is(it's not 42 unfortunately). No doubt we'll see more regulatory oversights and big BM type scams in the world of finance and beyond. The morale of the story is never take someone else's word for it, don't trust anyone and always have a backup plan!

[SIUYA 11]

  TheNegotiator said:

The morale of the story is never take someone else's word for it, don't trust anyone and always have a backup plan!

 

Sad, but increasingly true.

Unfortunately this lack of trust is a large part of what will kill any healthy functioning economy. There is a reason a lot of economies never really boom....a large part of that is that the people do not trust the institutions within that economy.

Think of South America, there is a lot of mistrust of the governments there and the previous nationalisation of wealth done last century, many wealthy Chinese are trying to take money out of China at present - dont forget the government is still not big on individual rights.

 

When the trust goes, so do a lot of other things we take for granted in a healthy functioning economy, which is why I despair when many take the buyer beware, dog eat dog mentality

 

Yes all these things are true, but do you really want to go down that path without the checks and balances, regulations that help protect and guide (not that I am a fan of bureaucratic regulations just for the sake of it) ....if so, be prepared for the consequences.

[TheNegotiator 13]

I don't believe in regulation for the sake of it either. Normally happens when govt's and officials have there hands forced by the tide of popular opinion. I think that lack of trust is a difficult thing for economies. But I can't see a way that it'll be avoided given the one very clear fact to come out of the last 4/5 years. People's values are based on money and accumulation of it rather than morales. It's basically Sodom and Gomorrah for a certain section of society.

 

The punishments for these kind of guys are also lame. What about BM? I reckon he shouldn't be in prison, but instead he should do something he personally would find really degrading. The punishments do nothing to discourage this kind of thing. Is JC gonna be in big shit? Well I wouldn't say things will be great for him, but as the former ceo of gs and gov of nj I just think he's too deep in the system for them to 'allow' him to burn. Anyway, individuals aside, there's no proper appropriate consequences for these guys imo.

[jackb 10]

  SIUYA said:

 

The accountants are to blame :rofl:

 

 

Are you serious or just being facetious?

[SIUYA 11]

  jackb said:

Are you serious or just being facetious?

 

read my post......

 

(disclaimer - blaming accountants is in jest, but there is a practical point that the issues supposedly being regulated are in my belief not the real issues which will cause lasting beneficial change)

 

I actually blame it on the global conspiracy perpetuated by those evil cellar dwelling whatsamacallits

[SIUYA 11]

I just caught the end of someone on Bloomberg TV who used to be with the SEC - talking about the same thing.

I will try and find a link or replay.

[SIUYA 11]

there are more blogs/articles/calls for the accounting systems/practices to be overhauled.

example:

MF GLOBAL AND REPO ACCOUNTING » Grumpy Old Accountants

 

So basically in answer to the question can it make the industry change - given its happened before, the sad state of history tells us - no.

[zdo 20]

Ya'll ain't gonna like this

 

Transcript for Ann Barnhardt Interview | FINANCIAL SENSE

[SIUYA 11]

yep.....seen her before. Problem is she clouds the issues with ideology - both political and religious.

[zdo 20]

Yes her allegations are probably groundless because she is a stupid cattle farmer clinging to her guns and bibles. Could you please refer us to another analysis of the CME's role, etc. where the source doesn't cloud the issues with ideology ? Thanks.

[SIUYA 11]

MF Global and the great Wall St re-hypothecation scandal

 

 

MF Global Customer: My Entire Account is Missing

 

Hedge Funds | HedgeWorld | The Definitive Hedge Fund Community

 

MF Global Mixed Funds, Transferred Abroad

 

Hedge Funds | HedgeWorld | The Definitive Hedge Fund Community

 

U.S. CFTC Tightens Limits on Brokerages Using Customer Funds

 

Hedge Funds | HedgeWorld | The Definitive Hedge Fund Community

[alibaba5055 10]

CME, burned by MF Global, 'monitoring' Knight Capital | Reuters

 

CME, burned by MF Global, 'monitoring' Knight Capital

 

(Reuters) - CME Group Inc (CME.O), which regulates Knight Capital Group Inc's (KCG.N) newly acquired futures brokerage, is "monitoring" the embattled trading firm after an error wiped out $440 million of Knight's capital.

 

Confidence in the futures industry's ability to safeguard customer funds has been shaken after two financially pressed futures brokers in less than a year have been accused of improperly raiding customer accounts for as much as $1.8 billion, despite regulatory oversight.

 

Misfiring technology at Knight, a large New York Stock Exchange market maker, caused a rush of orders on Wednesday for dozens of stocks, roiling prices and undermining already weak investor confidence in U.S. financial markets.

 

While securities regulators are looking into what went wrong on the trading side, the focus from the futures industry is on the estimated $411 million in customer funds that were part of Knight's purchase last month of floundering futures brokerage Penson Financial Services.

 

That amount is slightly more than Peregrine Financial Group reported having when its CEO last month confessed to stealing from customer accounts for years, in part to keep his company afloat.

 

Regulators say Peregrine's CEO misappropriated more than $200 million of customer money. The October failure of much larger MF Global resulted in a customer asset shortfall of $1.6 billion, the bankruptcy trustee has said.

 

CME, which was MF Global's main regulator, has blamed misdeeds by management at both firms for causing the customer losses.

 

"We are monitoring the situation with Knight," a CME spokeswoman said, declining to provide details.

 

Knight said on Thursday it is "actively pursuing its strategic and financing alternatives to strengthen its capital base.

 

CME says it did everything possible to prevent customer funds from being misused at MF Global as that firm dealt with a liquidity crunch following revelations of a bet on European sovereign debt that investors worried would turn sour.

 

Within a day or two, CME had auditors on site checking MF Global's books, which showed customer funds were intact. Days later, CME found those books were wrong and MF Global had siphoned customer money from protected accounts to fund corporate needs, according to a CME account of the events leading to MF Global's collapse.

 

Knight bought Penson's accounts on May 31 for $5 million, plus a cut of future revenue, a Securities and Exchange Commission filing shows. Penson had $411 million in customer funds as of that day, the most recent report from the Commodity Futures Trading Commission shows.

 

It was one of a dozen or so independent future brokers that are only a fraction the size of the Wall street broker-dealers that dominate the industry.

 

Separately, securities regulators are looking into Knight's trading error, the chief of the biggest U.S. options market said.

 

"Our understanding is that the SEC and Finra are reviewing what happened yesterday," CBOE Holdings Inc (CBOE.O) CEO and Chairman William Brodsky told analysts. "We're obviously reluctant to get ahead of the regulators on this ... I really think we ought to let the facts come out and then see what happens."

 

Knight Capital, one of the largest firms that buy and sell stocks to provide liquidity to the markets, blamed a "technology issue" for the problem.