Market Curiosity: Exploring Markets And Systems

October 31, 2011

MF Global allegedly pilfered segregated accounts: Counter party risk back in fashion. (update 4, Nov 17)

Filed under: Just Watching — Tags: , — Jeff Fitzmyers @ 10:27 pm

In case some people don’t know, futures accounts are supposed to be completely segregated — basically meaning a broker can cease existing tomorrow and all accounts are fine. It’s what makes a futures account much “safer” than a bank account and/or a stock account — any other account. So if futures accounts have been messed with, this is not a grey area — it’s completely black and white.

Counter party risk was able to be controlled in 2008. Although this is round 2 and things are a bit more advanced with the Euro/Mark situation and 6 sigma price moves, etc., I assume the can could be kicked a few more months. The rest periods between crises should keep getting smaller and smaller if things really are going to blow up.

However, if the big private players choose to reduce counter party risk, they might dump some or all of their futures account(s) into physical gold and silver very quickly. Does no good to “win” on a position if your account is vapor. These aren’t sheeple slowly waking up and slowly moving fiat to hard assets. These people are used to making multi million dollar changes in minutes.

I can’t over emphasis the potential of this. People used to be able to dump money into a futures account and unless the currency collapsed or the world ended, it would be there for sure. Not now.

References
+ Someone Is Going To Jail For This: MF Global Caught Stealing Hundreds Of Millions From Customers?

October 1: Ticker Guy: Can You Survive It Being Over?

…there’s really nothing more-serious than grabbing client funds internally. It’s black-letter wrong, and it appears to have happened in the case of MF Global… I have to ask: Was that a political addition and where in the hell were the examiners that are supposed to be paying attention to what these firms are doing? If this is the result of “more-stringent” requirements can someone tell me why I should believe that any of the other Primary Dealers are in fact solvent and why I should not believe that they’re all doing the same thing?

More references
+ When will it all finally blow up?

October 1: Xiphos_Trading: Sabre: If CME members do not guarantee MF traders… you will see liquidity vanish; traders are now pulling capital from their accts.

Is this now different from 2008?? If you have a 10 million account, wouldn’t you have to be super ignorant to leave all 10 million in there to potentially vanish tomorrow??

Not that the process can’t be interrupted, prolonged, etc… It’s just that things are now officially primed. Most things are just-in-time and futures markets help everyone manage risk and smooth out supply and demand. If they lose liquidity, things by definition have to be more inefficient in some ways. Thus more and more 6 sigma events.

Guest Post: Increasing Volatility: Prelude To a Crash? Market observers have long noted that increasing volatility presages market crashes… Not only are the swings increasing in amplitude, the time between each move up or down is decreasing….

We will be temporarily out of the woods if/when the frequency and amplitude stop getting bigger.

November 1:

Ticker guy chimes in Let’s Consider The Possible …SIPC and FDIC insurance are only good in the case of isolated failures. If the entire system has broken down on a regulatory basis such that a primary dealer can filch allegedly-segregated funds — better than half a billion — and not get “caught” until it blows up you must assume that every nickel you have in a bank or trading account does not exist…

November 9:

MF Global’s Customer Assets – STOLEN – And Nothing You Hold In This System Is Safe
As suspected, MF Global brazenly took liquid assets like Treasuries and warehouse receipts, but not cash which would have been more quickly missed, from customer accounts to post as illegal collateral for emergency funding with a lender who must have known that they were receiving stolen goods.

Peter Brandt: I have been in the futures business since the mid 1970s. The industry always spoke about how client money was protected by the independent clearing corporations of the exchanges and by the segregated account banking arrangements.

This apparently false assumption of protection was reaffirmed in 2005 with the collapse of Refco due to reputed fraudulent activity by its CEO. While general creditors of Refco recovered slightly more than 30 cents on the dollar with the dust settled, Refco’s segregated account holders had full recovery – after some time delay… The failure of MF Global”s segregated account to be made whole would be the biggest financial disaster since 1929 and would spell the end of the futures industry as we know it. Folks in the financial industry should take this matter seriously — very seriously. Do not underestimate the importance of this matter.

November 17: WARNING 2: If you still have “money” in futures accounts or brokerage accounts, WHY?

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