Monday, December 12, 2011

Guest Post: An MF Global Client Ready to Throw in the Towel on Futures Trading

From SD reader and former MF Global client Andy:
A firsthand account of a complete loss of confidence in the paper futures markets, in the wake of the CME/CFTC refusing to make MF Global clients whole after their assets were stolen and rehypothecated by MF Global.
Read as a gold and silver futures trader discusses what he was told by his introducing broker could be done with his assets, vs. what very clearly has been done with them, and the conclusions he draws regarding returning to trading futures vs. turning to the only true safety of physical ownership of gold and silver.

I'm getting confused about what MF, a Futures Clearing Merchant (FCM), is allowed to use my brokerage account for. Lets assume a simple example:

1.Cash I put in my account $100
2.Portion allocated to initial margin -17
on a silver contract
3.So called cash "surplus" 83

A. MF could legally take my collateral and invest it in certain prescribed assets (eg Treasuries, AAA rated corporate/sovereign debt etc). The income/capital gain from such investments was for MF's benefit, which allowed it to offer cut rate trading commissions, which benefited customers, which was the rationale behind this CFTC rule. But what amount was allowed to be thus invested - was it 100 or was it 83? If it was 100, then my silver contract counterparty's security of 17 was at risk - surely that can't be right? And if the same was being done with my counterparty's 17, then my security was at risk?

B. Now I read about hypothecation, and rehypothecation, and I don't technically understand it. Using the simple example above, can anyone explain how my $100 is further utilized by MF, over and above the investment allowed under A. above? I read that in the US, 140% of my account can be further used by MF as collateral for hypothecating......what exactly that means I can't work out!!

C. In the UK, there is no 140% limit, in fact no limit at all. Was MF allowed by the CFTC to transfer my $100, originated and based in my US account, to it's UK subsidiary, via an inter-company loan account, where it could escape the 140% rule? Does that mean the USA 140% rule could be so easily loopholed - surely the CFTC would not allow it?

D. There is so much talk now, but nowhere can I find a simple arithmetic example of how my $100 is used, and to what risk of loss it is exposed. When I signed my MF account forms, it seems I gave permission to MF to do these things with my $100. My introducing broker assured me my $100 was "segregated" and at no risk. In light of these new facts coming to light, it seems the word "segregated" had absolutely no meaning when it came to the risks of loss my $100 was truly exposed to. Is it possible that the professionals in the Futures Industry knew all these things, but chose to not fully inform customers, and that the hypothecation merry go round was always known about, and is actually "surprise information" only to the customers? This thing stinks, and the entire Futures Industry is on shaky ground now. I have my 60% returned from MF with a new FCM, but am fearful of continuing with Futures, because I have no way to fully understand my risk of loss. This is bad, really bad. The outcome of the HSBC/Fine lawsuit may have profound implications on gold/silver prices - so I'm stuck and paralyzed into inaction and indecision, except the realization that physical ownership and possession is the only true safety.