When a disaster strikes, there’s a certain amount of breath holding that takes place until the damage is assessed. Will it be worse than we imagined, or will we find that things aren’t quite as bad as we had feared in our worst-case scenarios? Only once the panic has subsided and pieces picked up can we make that determination. And such has been the case of the financial collapse of the futures broker MF Global, except in this instance the “picking up” phase has dragged out for well over a year. But as the picture of what comes next has become clearer, it has also become rosier. The Wall Street Journal reports:
Trustee James Giddens, who represents customers of the failed firm’s brokerage unit, said MF Global customers in the U.S. who invested on domestic exchanges could receive up to 93 cents on the dollar of their cash back, according to the filing in the U.S. Bankruptcy Court in the Southern District of New York.
Getting 93% back is better than 81% (the previous estimate), but still worse than 100%. Nevertheless, 7% is a loss that, while painful, isn’t likely to be life-ending for many people. But the news could get even better, with a plan in the works that might mean full restitution for customers:
…A group of MF Global creditors filed a plan of liquidation for the failed brokerage firm. The proposal outlined a plan to pay back creditors of MF Global’s general estate within a year and could restore the accounts of brokerage customers to 100% within months, according to a person familiar with the group.
The filing was made by a group of creditors led by Silver Point Capital LP, Cyrus Capital Partners LP and Knighthead Capital Management LLC. Those creditors own about 65% of MF Global’s $2.2 billion in unsecured debt, according to the filing.
This could potentially be good news for PFG customers, too, by setting the legal precedent that futures customers get paid back first, before any proceeds from the bankruptcy go to general creditors. That’s the letter of the law written in the CFTC regulations, but with high priced lawyers fighting to get around the letter of the law – we’ll take whatever we can get that supports following it.
Of course, along with the sigh of relief that restitution would bring, there will still be reason for frustration. Even with 100% of the money returned, customers have still lost access to much of their money for over a year. If “protection” means getting you some of your capital back sometime in the next few years… well, that’s a pretty loose definition of the word, in our opinion.
So this news may be a spot of bright news in what has been a long gloomy story, but it should serve as a reminder of what’s at stake in the futures industry. It’s why we suggested that the CME purchase all PFG customer’s claims at face value after its collapse, it’s why we’ve been strong advocates of an insurance fund for futures customers, and it’s why Attain CEO Jeff Malec is running for the NFA board. Because even as we pick up the pieces from the disasters we’ve faced, we can’t lose sight of the work that remains to be done.
A Tectonic Shift in the Making: ICE vs CME
The CME’s mergers/purchases of the CBOT and NYMEX went a long way toward cementing their role as the world’s primary exchange for a variety of futures contracts – especially grains, livestock, and energies. Their importance in the global oil industry was bolstered by the fact that WTI crude, which is primarily traded on the CME’s exchanges, was the preferred global standard for oil futures trading. But nothing’s static in the futures world, and the CME’s grasp isn’t looking quite so cemented these days. A Dow Jones Business News article reports:
Part of this is driven by the market itself – WTI hasn’t been quite as useful an indicator of global oil prices due to a prolonged supply glut in Cushing, OK. The two tracked each other very closely up until late 2010, at which point the consistently lower price of WTI took hold:
Disclaimer: past performance is not necessarily indicative of future results.
And as more traders begin to view Brent as a better reflection of the global oil market, ICE benefits due to their larger share of the Brent trade.
This is just another volley in the growing global competition for futures volume, and ICE’s intention to purchase of NYSE Euronext (announced in December) may soon become a reality, as well. That move is awaiting only regulatory approval, and would be a huge boost to ICE’s ability to compete with the CME.
This is an industry where scale is incredibly self-reinforcing; the biggest investors in the field seek the most liquid exchanges, which in turn makes those markets even larger (and more liquid). It’s a positive feedback loop that could spell trouble for the CME if they begin to fall behind.
Of course, the CME isn’t just sitting back and watching – they’re pursuing their own effort to expand into Europe, in the hopes of claiming a larger share of the currency futures market from ICE. And they remain unrivaled in the US… but that may not count as much as it once did. The flurry of mergers and purchases over the last decade has narrowed the field, raising the stakes for this battle for a bigger share of the world’s futures markets.