Commodity brokers rushed on Friday to finish transferring thousands of customers from bankrupt rival MF Global, shifting their attention to the delicate task of ensuring new clients' margins are topped up by next week.
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 over to new clearing firms, along with some of their collateral.
The CME said it expected to finish transferring all 15,000 accounts and about $1.45 billion in CME Clearing-held collateral related to all its exchanges by the end of the day. MF Global was the most active broker on the CME's New York Mercantile Exchange and COMEX, and No. 2 in Chicago.
The IntercontinentalExchange Inc, home to the European benchmark oil contracts and soft commodities in New York, said it may auction off MF Global's client positions in the UK market on Saturday, while its U.S. clearing house worked with the trustee to move positions in bulk to other brokers.
The Liffe exchange, where MF Global's position as a top 3 broker of soft commodities has eroded in recent years, said clients needed to shift their accounts quickly or they would be closed out. But LCH.Clearnet was not allowing clients to take out collateral.
Facing a Friday evening deadline to transfer accounts or have them liquidated, officials and brokers worked through the night to get customers trading again. By Friday afternoon, many reported that the bulk of the transfers had been done -- but most customers will need to top up millions in margin.
"The accounts we have here are actively trading as we speak," John Streich, chief executive of Penson Futures, told Reuters. His was one of 10 FCMs chosen to take over the positions, up from an initial six named earlier this week.
But there is still hard work ahead. And many customers were frustrated that excess collateral and cash on account at MF Global was still stuck there.
"The accounts did not come over fully margined, and we were aware of margin deficit and the amount of the deficit upon transfer," he said. "That's where the clients are, of course, upset ... (but) their frustration should be with MF Global."
Two sources who had been briefed by the CME said accounts would be transferred with 75 percent of the margin required to back the trades, up from 60 percent proposed in the earlier court order. That still left a hefty 25 percent chunk of cash that clients would need to raise quickly.
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.
"It's wrecking the ag industry," said Lynn Wagnon, a broker at Wagnon Commodities in Coldwater, Kansas. He said 200 of his customers' accounts had been transferred, but they were now scrambling to come up with $800,000 in additional margin.
MF Global Chief Executive Jon Corzine resigned as regulators searched 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.
Conflicting accounts emerged on Friday afternoon as to whether the funds had been found in a JP Morgan account.
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 rushed to raise up to $1 billion in additional margin with new brokers.
But with margins only due later Friday or next week, forcible liquidation looming on Monday morning, and thousands of accounts still unsettled, dealers were jittery. Great Pacific Wealth Management, an MF Global client whose accounts were transferred, was told it could not offset or liquidate positions for a day, said vice president Sean McGillivray.
Some were bracing for a potentially wild ride once electronic trading resumes on Sunday evening, a typically thin trading period when forced orders could roil prices.
"If clients have access to their accounts they are going to try to do everything they couldn't do during the week," said one MF Global employee. "It will be a thin session, it could be Niagara Falls through a garden hose."
Just minutes before the close of New York and Chicago trade, activity in key oil, grain and livestock markets was sharply below the daily average. Gold futures activity was near the lowest this year, and soybean volume was just one-third the norm.
"There's some unwinding, but most people are like a deer in headlights," said one commodity fund manager.
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 worked to get in on the action too, including Newedge, a top-five broker owned by two French banks, and independent Penson Futures, sources said. 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."
(Writing by Jonathan Leff, reporting by K.T. Arasu, Karl Plume in Chicago; Jeanine Prezioso, Barani Krishnan in New York; Marcy Nicholson in Ottawa; and Emma Farge in London; Editing by Dale Hudson, Marguerita Choy and Jim Marshall)