Farm advisers say MF Global debacle erodes market confidence

INDIANAPOLIS Tue Nov 8, 2011 12:51pm EST

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INDIANAPOLIS (Reuters) - Agricultural bankers and advisers say the bankruptcy of giant futures brokerage MF Global has shaken the farm world's opinion of futures trading and action must be taken to restore confidence in the system.

Lenders, farmers and farm advisers at the annual meeting of the North American Agricultural Bankers Association here said they were not shocked that a firm like MF Global could run aground trading its own money in volatile world markets.

But the fact that hundreds of millions of dollars in "segregated" customer funds could disappear, with both the Chicago Mercantile Exchange and government regulators unaware, is the issue that will not go away, they said.

"Customer segregated funds have always been sacred," said Darren Frye, president of Water Street Solutions of Peoria, Illinois, which provides farmer services from hedging price risk with futures markets to crop insurance.

"If a company has financial trouble, they might have to go into Chapter 11 or cease to exist. But it's never affected client monies or positions in being able to keep transactions flowing. So this is the first time. It's unprecedented," Frye said. "I just think there needs to be greater accountability."

Large producers of grain, livestock and other commodities, and buyers of those goods, often use futures to off-set cash price risk, posting "margin" or collateral money as good-faith deposits to assure they make good on those futures trades.

Regulators including the Commodity Futures Trading Commission have launched an investigation into MF Global as they search for more than $600 million in missing customer collateral. But oversight of the giant broker's activities came in for some withering criticism at the ag bankers' meeting.

"That is one of the concerns we all have. Our ag producers in our area primarily sell their commodities four or five different places, and you hope those checks are good," said Matthew Williams, chief executive of Gothenburg State Bank and Trust Co in Gothenburg, Nebraska. "We do not in our shop do due diligence on the broker."

SPOTLIGHT ON CFTC, CME FOR REMEDIES

MF Global's risky trades on European debt helped trigger its collapse. The broker's exchange regulator, CME Group Inc, has said MF Global did not properly segregate customer funds from its own, a violation of futures market brokerage rules that left client funds vulnerable.

CFTC chairman Gary Gensler said on Monday that financial institutions should be allowed to fail from time to time, but that segregation of funds is a "core foundation" of futures markets at "every minute of every day."

The CFTC last year proposed tighter rules for use of customer funds, a move opposed by commodity industry lobbyists and their Congressional allies. But bankers at the meeting expected the MF Global debacle to give those rules a boost.

"I'm hopeful that now we can move forward" on the rule revision for brokers, Gensler said in Washington on Monday.

The identity of victims of the missing $600 million was a popular topic at the ag meeting, with bankers quizzing each other for what they knew and how much fallout came locally at lenders who had financed margin accounts at the failed broker.

One farm advisor who declined to be named said he placed the blame squarely on the CME and its clearinghouse.

"The Merc should have immediately stepped in and said: listen, we are the clearing firm. Segregated funds are segregated funds, and it's our responsibility to make sure they are segregated, and we're taking the hit - if there is a hit," he said. "In the meantime, it's given the whole industry a black eye."

A CME Group spokesman on Tuesday did not address the issue of the missing funds but said the exchange has been working diligently with regulators to sort out the MF Global mess and will continue to do so.

"We understand the frustration and the need for accurate information. We have been working diligently," the spokesman said of CME's work with the government. "As a result of this collaboration, we were able to transfer MF Global customer accounts and more than $1.45 billion of CME Clearing-held collateral to other qualified clearing firms."

Steven Turner of Baird Holm, an Omaha, Nebraska, firm that specializes in structuring agribusiness loans and handles farm bankruptcies, said the industry was waiting to see what CME and the CFTC can do to make customers whole on the missing funds.

"That whole business is about trust. It really is," he said of commodities brokerage. "If you buy or sell a futures contract and send your money, it just goes off into cyberspace. You trust that at the end of the day it gets closed out and you either owe money or you get money back."

Frye said many victims of the missing futures' funds were undoubtedly spread throughout U.S. agribusiness firms and farmers who were anxiously waiting for CME and CFTC to act.

"How it will impact rural America will be those individual accounts like a farmer, an elevator or a livestock operation, ethanol facility that had their trades there," said Frye.

"I could see a farmer saying I don't trust the big boys in Chicago or New York, this proves my distrust, and ... I don't know if I want to be part of that system," he said.

(Reporting by Christine Stebbins. Editing by Peter Bohan)

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Comments (2)
Jakk wrote:
What if there are other clearing firms commingling customers’ funds with their own? What if grain warehouses and metals vaults are being reserved with the truth? The risk profile of the commodites markets has increased significantly because market participants will have to reassess their current perceptions about the level of integrity in the US. After the MF Global debacle, it seems that such level has been lowered a notch.

Nov 08, 2011 2:33pm EST  --  Report as abuse
JimsZ wrote:
@Jakk

The integrity of these companies has been removed already via the banking industry. These same people made money on multiple sides of a theft and the taxpayers are stuck paying the bill, which I’m sure will happen with MF Global. It’s easy isn’t it? The FED deposits $600 million into JPM and JPM suddenly “finds” an account for MF Global there.

Nov 09, 2011 9:02am EST  --  Report as abuse
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