NEW YORK, (Reuters) – Almost two weeks after the bankruptcy of commodities firm MF Global, customers at rival firms are all asking the same question: How safe is my money?
MF Global’s collapse is confronting clients across the industry with the harsh truth that while their accounts may be termed “segregated” that does not mean they are off-limits from trouble at a commodity futures firm, much less backstopped by any government insurance fund.
MF Global revealed to regulators during its Oct. 31 bankruptcy that it was short perhaps $600 million in customer funds – money which the firm was supposed to keep in “segregated” accounts maintained under a raft of laws and regulations.
The concerns among investors have reached such a pitch that futures exchange operator CME Group announced late Friday that it will provide a guarantee for $300 million of the missing money in the MF Global case.
“I’ve lost a good deal of money already over this. Now I’m a big boy who should have known better, with over 25 years experience in the futures industry, but what they were doing with client funds is to me outrageous,” said Stuart McClellan, an independent trader from Norfolk in the United Kingdom, who previously worked for Schroders in London.
McClellan has more than $110,000 tied up in MF Global, which he doesn’t know if he will get back.
“Using the excess collateral in clients’ funds to trade is not illegal, but to my mind it’s immoral. There is a huge risk,” he said.
Futures commission merchants, as brokers in the industry are known, have always been allowed, with certain restrictions, to invest customers’ so-called “excess margin,” or the funds in their accounts over and above the collateral required to maintain trades. The brokers then book any profits for themselves.
Segregation simply means that customer deposits can’t be mixed with the firm’s own money or used to cover firm expenses.
They must always be available for customers to trade with or withdraw at a moment’s notice. In other words, customer segregated money isn’t some big cookie jar for the firm to dip into when it is short on cash.
“That is what is so shocking about MF Global’s situation,” said Michael Greenberger, a former director of the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) and now a law professor at the University of Maryland.
