CHICAGO/NEW YORK Commodity brokers raced on Friday to bring on board thousands of customers of bankrupt rival MF Global, facing a tight deadline to see that trading positions and collateral frozen since Monday are margined or liquidated.
Following a court order on Wednesday, the MF Global trustee has worked with the CME Group and a handful of other mostly independent futures commission merchants (FCMs) to move the bankrupt broker's 50,000 or so commodity accounts in bulk to new clearing firms, along with 60 percent of collateral.
On Thursday, the CME said 5,300 accounts -- about one-third of the total held at the CME -- and $410 million in CME clearing-held collateral had been transferred, and that the process would continue throughout the day. It was unclear how other exchanges were proceeding.
Facing a Friday evening deadline to transfer accounts or have them closed out, traders and brokers worked through the night to get customers trading again.
"It's a Herculean task to get this done. At least from our perspective the accounts that we agreed to take, we got the lion's share of those through," said Paul "Pete" Anderson, president of INTL FCStone and CEO of FCStone Group in Kansas City, one of the six brokers who had been pre-selected to take positions.
Some brokers said the share of transferred collateral had risen, although clients still would need to put up more cash.
"We're getting approximately 75 percent of the required margins in cash from the exchange. The trustee is holding the other 25 percent for bankruptcy proceedings," said a senior executive with one of the appointed FCMs. He said the firm is "chasing customers to get them margin compliant."
While traders in theory have five days to increase their escrow, brokers may require full margin in as little as 24 hours for unfamiliar customers that may be a risk, he added. And many customers were frustrated that excess collateral and cash on account at MF Global was still stuck there.
"They are not transferring cash, that's a problem. Hopefully, that will change by next week," said Dennis Gartman, a veteran commodity investor and commentator.
MF Global Chief Executive Jon Corzine resigned as regulators kept searching for the $633 million that authorities say may have been misappropriated from segregated client accounts at the biggest independent FCM in the United States. The segregated accounts were supposed to be untouchable.
Corzine, 64, former New Jersey governor and ex-chief of Goldman Sachs & Co, stepped down as CEO four days after MF Global filed for bankruptcy. The firm's leveraged $6.3 billion bet on euro zone debt had scared away clients and counterparties.
MARKETS QUIET BUT ANXIOUS
There was little sign yet of mass liquidations analysts feared may ensue as traders rush to raise up to $1 billion in additional margin with new brokers.
But with margins due Friday evening or later, forcible liquidation looming on Monday morning, and thousands of accounts still unsettled, dealers were jittery.
"It seems that without MF (Global) in there...no one wants to be held with big positions, if and when these accounts are allowed to trade. It's better to have a lighter position on, in the event that you get a move in the markets," Bill Raffety, senior analyst for futures brokerage Penson Futures in New York, said of the day's light trade in soft commodity markets.
By midday, trading activity in key oil, grain and livestock markets was a third or more below the daily average.
Initially, the CME anticipated that many of MF Global's segregated client accounts totaling some $5.5 billion would be transferred to one of six FCMs, according to a letter to the Commodity Futures Trading Commission: ABN Amro Chicago Clearing, ADM Investor Services, Dorman Trading, FCStone, RJ. O'Brien, and/or Rosenthal Collins Group.
But several other brokers have worked to get in on the action. While the specifics remain in flux, the bankruptcy judge on Thursday rejected one request by a fund to move its accounts to a specific broker who was not on the original list, although the first order appears to allow clients to transfer positions, but not collateral, to a broker of their choosing.
Sources familiar with the process said Newedge, a top 5 broker owned by two French banks, and independent Penson Futures both received an influx of new clients. But one senior industry source familiar with the process said FCMs who had not been chosen to accept new accounts were told that no further transfers would be permitted for a week.
It's a boon for smaller firms like Dorman Trading, which caters principally to the "locals" in Chicago. Founded by Bernard Dorman, who has been trading on the Chicago Board of Trade since 1956 and calls himself one of America's oldest floor traders, the firm had only $113 million in client funds.
The company has taken on 400 to 500 new accounts from about 200 customers with some $7 million in margin, mostly from the professional traders with whom they traditionally compete.
"We're traders. You may want to pick a guy's pocket between 9:30 and 1:30, but at 2-o-clock you're happy to go buy him a drink in the bar downstairs," said Marc Nagel, the chief operating officer. "These were our friendly competitors and now they are our friends and partners."