Is your futures account safe with MF Global stock slide today?
March 17, 2008
For hundreds of thousands of futures market investors out there who see MF Global at the top of their daily account statements, today’s market activity provided a little scare.
The scare came from the stock of MF Global (NYSE listed as MF), the largest broker of exchange traded futures and options, which was down nearly 80% at one point today. Rumors started flying that MF global was having a liquidity crisis of its own, and fresh off the heels of Bear Stearns losing 90% of its value in a few short days, short sellers attacked MF Global’s stock. Was this a run on MF Global? Were all of its customers pulling their money? Would this be another Refco situation?
For those who don’t remember, Refco (one of the largest futures clearing firms at the time) saw their entire business unravel in a matter of weeks after their CEO was charged with fraud, causing a crisis of confidence not dissimilar to what just happened to Bear Stearns in which clients started heading for the door in droves, which in turn caused Refco to not have the necessary capital to run its business.
There were a lot of questions this morning surrounding MF Global, and not a lot of answers…….causing more than one of Attain’s clients whose account is held at MF Global to call in asking if his funds were ok.
As we told him, and will tell you - all such futures customers who hold their accounts through MF Global, your funds remain 100% safe, as they are in a segregated funds account at non affiliated banks. Customer funds are not considered an asset of MF Global's, and MF Global can not use customer funds to meet any debt obligations, pay fines, etc.
Even if MF Global' stock went to "0.00" and the firm went bankrupt, the introducing brokers such as Attain who use MF Global as a clearing firm would still be able to execute your trades and your funds would still be in their segregated accounts. I liken it to flying on United Airlines when they had gone bankrupt. The airline doesn't get to take your luggage and sell your belongings to meet their debts, and their planes don't randomly fall out of the sky. They remain operating and servicing their customers.
What Happened?
From what we have heard by MF Global employees, and we can put this in the rumor department until verified, the initial impetus for the MF Global sell off today was a massive unloading of positions by Billionaire investor Joe Lewis.
Mr. Lewis, as you may have read in today’s headlines, made a very bad bet on the now nearly defunct Bear Stearns – amassing a position of over 11 Million shares at over $100 per share. The subsequent collapse of Bear Stearns stock down to JP Morgan’s buyout offer of $2 has apparently left Mr. Lewis with a loss of over $1 Billion.
That loss, as our sources tell us, precipitated a fire sale by Mr. Lewis of some of his other holdings to raise capital. And those other holdings just happened to include a substantial stake in MF Global’s stock. Whether or not that started the selling, the rumors started flying once MF Global’s stock was headed lower, and that only facilitated more selling, and more rumors. It didn’t help matters that just weeks ago, a rogue trader at MF Global had lost over $140 Million doing unauthorized trades. Rumors of all kinds surfaced, from everything that Mr. Lewis was a large client of MF global and had large losses there, that there were liquidity issues due to exposure to bad debt, and that there was another rogue trading incident; but all seem to be at this point, just that, rumors.
MF Global finally did come out with a statement saying their financial position is just fine, thank you, and that Mr. Lewis was not a client of the firm. And then several futures exchanges, including the Chicago Mercantile Exchange, ICE, and NYMEX tried to come to MF Global’s rescue, coming out with statements saying that MF Global (most likely the largest customer of each) remains in good standing and continues to meet all of its obligations to the clearing house.
At the end of the day, the stock had rallied slightly to end down 65%, and there very well may be no basis behind the sell off at all. But as can happen with these types of things, it is not the truth, but the perception of the truth which ultimately matters. Meaning that even if everything is fine at MF Global – if there is a crisis of confidence among its customers and they start to see large outflows, they could quickly be in a situation where everything is not ok.
What is a Clearing Firm? Why are they in the picture?
A seeming simple question which has come out of all of this is what exactly does a clearing firm do, and why does a firm like Attain need to open its accounts through a firm like MF Global? The answer to that question goes back to where futures contracts are traded. Futures contracts are traded on regulated futures exchanges such as the Chicago Mercantile Exchange (home of e-mini and full size S&P futures) and New York Mercantile Exchange (home of Crude Oil and Gold futures).
In order for anyone to trade a futures contract on one of these exchanges, they must be a member of the exchange. But with millions of different firms and individuals wishing to trade these products, it is impractical for each and every one of them to be a member of each exchange. For one thing, it's darn expensive, with recent seat prices going for several million dollars.
So without each and every individual willing or able to become a member of the various exchanges, several members created clearing firms to place the orders of individual clients and firms interested in trading futures. The clearing firms then "clear" these trades, which is a fancy way of saying they do the trade on the customer's behalf - then assign the trade to the customer - all the while making sure the customer has enough money to be putting on the trade, etc.
For a firm like Attain Capital which trades across nearly 15 different futures exchanges, it is impractical to become a member of each exchange, and we are therefore an Independent Introducing Broker with multiple clearing arrangements across the futures industry. The clearing firm acts as an intermediary between Attain and its customers and the various futures exchange, with the clearing firm owns the expensive memberships allowing them to transact business on the exchanges on the customer's behalf, while Attain deals directly with the customer and uses the clearing firm to process customer trades.
What if MF Global goes Bankrupt?
As MF Global’s stock swoon today attests to, the chance of any clearing firm going out of business or closing its doors is always present, unfortunately. But the futures industry has been set up to combat the dangers to your account should your clearing firm (or brokerage firm for that matter) go out of business. The secret to protecting your money is that investment accounts are held in segregated accounts. This small distinction may seem obvious, but it is of the greatest importance - as it means it is not an asset of the firm you are dealing with (the clearing firm or your brokerage firm), rather an asset of yours.
The Commodity Exchange Act requires that funds deposited by a customer with an FCM be maintained in a "segregated" account for the exclusive benefit of the depositing customer. The term "segregated" refers to separating the funds of all the customers (treated as a class) from the FCM's own funds (sometimes referred to as "proprietary" funds) which the FCM uses in its own operations.
So that if a firm does go bankrupt - there is no claim on your money. If MF Global’s stock goes to 0.00 and they are bankrupt, they can not pay their debts with your money. They have no access to your money except to post it as margin on the exchange when you place a trade.
Where things get sticky, and where 99% of the problems are in the banking, brokerage, and financial industry is when your money is not in a segregated account. When you write a check to John's commodity fund, for example - the money is then under control of the manager - not you, and it is not in a segregated account. This small point is the most important point in understanding how all this works.
If MF Global were to go bankrupt, generally, in such circumstances, cash in customer accounts is promptly transferred, along with the customers' open positions, to a solvent clearing firm (FCM) even before a trustee is appointed to administer the bankruptcy. After such a transfer takes place, the customer is free to transfer his funds and open positions to the FCM of his choice.
The beauty of the segregated accounts protection, is that it was actually put to the test at the end of 2005, when one of the largest clearing firms in the world, Refco, went bankrupt in the matter of weeks. Attain had hundreds of clients with accounts at Refco, and not one of them lost money or was negatively impacted in a any way (maybe a few nervous moments watching the news). In short, the system worked as it was supposed to, on a grand scale.
Too Big to Fail?
Beyond the segregated accounts, a more powerful motive for protecting client assets is the responsibility of all involved to keep the system running. If a clearing member blew a couple hundred million dollars betting on short S&P options - and was forced to sell its seat, liquidate all assets, etc - and threaten in any way individual client assets, either the US government or the other clearing members would step in.
This is because the system requires two parties to be successful. If party A has $100 MM in profits on its books due to taking the other side of trades Party B initiated - and Party B couldn't cover 100% of that loss - then Party A would in fact have lost $100 MM, in turn making them default on other monies it owed, in turn causing other defaults, etc.
The clearing firm's actually guarantee the other side of all trades, and don't do so just out of the kindness of their hearts. They actually make each clearing firm post margin each day and settle up for their trading each day. So the money needed for "trading" is all at the exchange each day - guaranteeing that the other side of the trade will be made good.
This threat of the counterparty going bankrupt was the threat posed by the failing hedge fund Long Term Capital Management in 1999. Those were not regulated futures positions, thus not guaranteed, but the Fed invited the major banks to meet, and they came up with a multi-billion bail out package so that the whole system would not fall apart.
The following link to the National Futures Association lays out some more information on the safety and protection afforded futures based investment accounts:
http://www.nfa.futures.org/investor/Storybehind.asp
Attain Clients:
With many of Attain’s clients having their accounts opened through MF Global, we would like to again reassure our clients that there is no danger to their funds held at MF Global due to the segregated funds structure laid out above.
Further, while we don’t believe anything is going to happen to MF Global, even if they were to go bankrupt, Attain has clearing arrangements with several other clearing firms and can seamlessly move your account to those firms without any time out of the market.
Please don’t hesitate to call or email us with any question or concerns you may have.
- Jeff Malec
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.
Feature | Week In Review | Chart of the Week | Top 5 Systems |
Feature | Week In Review | Chart of the Week | Top 5 Systems |
***Overview***
US Stocks were up and down last week news that Bear Stearns had to be rescued by the Fed & JPMorgan Chase caused stocks to sell off on Friday. In a deal completed over the weekend JPMorgan offered to purchase the remnants of the once proud Bear Stearns Companies Inc. for just $2 per share. This is a far cry from the $150 per share price the stock had in March of last year. For the week SP futures closed near breakeven after losing just -1.20 points while NASDAQ futures managed to stay in the black at +0.54%. Elsewhere Dow futures were up +0.77%, Russell 2000 futures saw gains of +0.57%, and SP Midcap 400 futures were up +0.53%.
Treasury futures rallied higher on credit concerns with the benchmark US 10 year note gaining +1.37% while 30 year bond futures saw gains of +2.09%. In currency trading the US Dollar continues to look very week with the US Dollar Index futures falling -1.83% last week. Eurocurrency futures hit new highs against the Dollar after gaining +2.05%, while the Swiss Franc closed higher than the Dollar for the first time ever at 1.0006 on Friday; a weekly gain of +3.02%.
In commodity trading, energies continue to grab headlines as Crude Oil futures gained another +4.57% last week. Heating Oil futures +5.43% and Natural Gas +1.30% also traded higher for the week. However RBOB Gasoline futures finished he week nearly unchanged after a big sell off on Friday. Metals also pushed higher with Gold futures +2.60%, Silver futures +2.00%, Palladium futures +3.92% and Platinum futures +1.68% closing in the black. Copper futures moved lower losing -2.38%. Grains were mixed with Wheat futures climbing +8.75% and Corn futures +2.19% while Soybean futures fell -3.98%. Finally in the softs Sugar climbed +1.35%, Coffee was up +0.50% and Cotton fell -2.44%.
***CTAs***
Believe it or not, there were not too many significant changes for CTA managed accounts despite the increased volatility of a historic week. Below are few CTA sector updates and estimated returns through Friday's close.
As noted last week, the most significant sector returns MTD have been seen in the currency sector - with the Federal Reserve pumping another round of capital into the markets and the prospects of still lower interest rates keeping the US Dollar's slide going vs. foreign currencies. This has rejuvenated the directional trend for Forex mangers to jump into, as K3 FX remains ahead 5%, Wallwood up 3.33%, and Devrim improving to an estimated 2% gain for March. Fit Fx is giving back aprox -1.5%.
Outside of the currency markets, we are seeing two types of trends evolving with diversified strategies. One, long term trend followers are very much feeling the daily swings of the commodities markets as most mangers are heavily invested on the long side in the energy, metal, and grain sectors. As an example, Vision Capital Management was down approximately 14% in the first week of March after reaching an equity high on March 3rd - as of Friday they were ahead an estimated 12.5% for the week.
The second trend we're seeing is that short term diversified traders are capitalizing on the heightened volatility and possible topping out of commodity prices. As an example Attain Portfolio Advisors main program is ahead 2.75% for the month and APA Modified is ahead 4.75%. Should commodity process turn over quickly (possibly a start today), our expectation is that this program will have an opportunity to react more quickly to a change than a traditional trend following strategy that waits for long term moving average exit (80 days as an example).
Finally, this week (Thursday) is option expiration for the stock index option sellers. Coming into the day today option prices were largely inflated based on the Bear Sterns news and risk of a complete market meltdown over the weekend - as of the end of the day today we saw several of these positions gain 50% and expect most to expire later this week.
As a reminder you can view 100's of CTA results and rankings on our website by selecting "CTA Performance" and then "All Programs". Here is the link to get you started http://www.attaincapital.com/cta_performance.
***Day & Swing***
Day and swing trading systems found success last week with big moves in both directions, and it doesn’t seem like the volatility is going away anytime soon, which should play right into the hands of system traders.
Starting with the swing systems, Signum TY had a stellar week and tacked on another $3,375 on its current long trade (2 contracts). Signum EBL was close behind with profits of +$2,520 on its long position (2 contracts). Tzar ES also had an impressive showing with profits of +$2,157.50. The system entered the week with a long position, reversed short after Tuesday’s massive rally and is currently holding short. Tzar NQ made a more modest +$1,028.08 following a similar sequence of trades. Ultramini YM had two trades for a profit of +$770 while Ultramini ES lost -$467.50. Bounce eMD and eRL lost -$744.61 and -$888.17 respectively each from one trade.
Moving on the day trading systems, Keystone SP had a nice run with profits of +$2,050 per contract. The system traded six times last week and was able to capitalize on the early swings in the market, generally fading the initial direction of the market. Compass SP was conservative with just one trade for the week but made +$1,950 on a short trade from Monday. Waugh eRL was active with five trades for a profit of +$1,766.
Other day trading results were BounceMOC EMD -$744.61, BounceMOC eRL -$888.17 and Rayo Plus Dax -$9,653.94.
***Long Term***
Soft commodity, metal, and interest rate sectors continued to be the target area for Long Term trend followers, but the battle between the inflationary frenzy versus poor economic virtues kept many other commodities in a volatile state, especially with the continued fall by the U.S. dollar to record low levels.
The food/grain sector were mixed as the corn and what posted decent gains for the week on renewed ideas that U.S. plantings would be skewed toward soybeans hampering the latter’s price activity. Aberration is currently long Corn making $7037.50 (open trade), long Cotton making $1315.00 (open trade). Relativity is currently short Hogs making $2,350.00 (open trade).
Rate futures ended the week posting strong gains on ideas that the upcoming FOMC meeting will produce yet more interest rate cuts as weakened U.S. economics continue to hinder growth. Aberration is currently long TY with a current gain of $11,949.12 (open trade), and Long the Euro Bund losing -60.00EU (open trade). Both Aberration and Relativity are Short the U.S. Dollar Index making $2,540.00 (open trade) and making $375.00 (open trade).
The Metals were back gunning for recent highs last week as flight-to-quality support stemming from poor economic performances from the U.S. and abroad spark strong support. The industrial metals ebbed last week on worries the boom in Asian economies could give way to weakness in other parts of the world. Aberration is long mini-Silver making $4312.00 (open trade).
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can
carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for
everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading
losses are material points which can adversely affect investor returns.
Feature | Week In Review | Chart of the Week | Top 5 Systems |
Hypothetical Model Accounts using Computer Generated and Actual Client Fills.
| Rank | System Name | 90 Day Return | Return in Dollars | 90 Day Drawdown | DD in Dollars | Min Investment (k) |
| 1 | Signum EBL | 20.99% | $8,395.65 | 4.86% | $1,943.91 | $40 |
| 2 | TZAR ES | 25.24% | $7,571.20 | 11.45% | $3,435.00 | $30 |
| 3 | Theta v1 DAX | 34.97% | $9,266.03 | 16.61% | $4,401.80 | $27 |
| 4 | TZAR NQ | 18.90% | $5,671.11 | 11.24% | $3,372.80 | $30 |
| 5 | Waugh ERL | 38.79% | $3,878.54 | 41.23% | $4,122.88 | $10 |
Figures listed are as of 3/17/2008.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked Trading Systems offered at Attain over the past 90 days using a risk adjusted ratio which equals the period return divided by the period DD.
The % returns in the trading system table above are hypothetical in that they represent returns in a model account. The model account rises or falls by the exact single contract profit and loss achieved by clients trading actual money pursuant to the listed system's trading signals on the appropriate dates, or if no actual client profit or loss available - by the hypothetical single contract profit and loss of trades generated by the system's trading signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The % returns reflect inclusion of commissions, fees, and the cost of the system. Commission and fee cost = # of monthly trades * $50.00 ($30 for eminis). The monthly cost of the system is subtracted from the net profit/loss prior to calculating the % return. For systems with one time purchase costs, the monthly cost is calculated by dividing the purchase cost by the number of months in the reporting period.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
THESE PERFORMANCE TABLES AND RESULTS ARE HYPOTHETICAL IN NATURE AND DO NOT REPRESENT TRADING IN ACTUAL ACCOUNTS.