Archive

from MacroScope:

MF Global hangs over futures conference

MF Global is front and center at the U.S. Futures Industry Association's annual conference – and hanging around attendees' necks.

A schedule of networking events tucked behind participants' name badges mistakenly advertises MF Global, the failed brokerage run by former Goldman Sachs CEO Jon Corzine, as the sponsor of a café on Wednesday and Thursday. The firm was a big player in the industry and sponsored the café, a centralized meeting point, last year.

Eurex took over as the sponsor after MF Global collapsed. It is correctly identified in other promotional material at the three-day conference in Boca Raton, Fla.

A Eurex representative referred questions about the mix-up to the futures association. The association declined comment.

The mistake keeps MF Global's bankruptcy in the face of industry members upset the collapse has hurt confidence in futures markets and reduced trading volumes. It also reinforces the large position MF Global held in the sector, where it specialized in commodities futures trading.

The firm failed on Oct. 31 after making bad bets on European sovereign debt. Some $1.6 billion is still missing from customer accounts.

Industry members are crafting proposals to rebuild trust in the markets, and reforms are a hot topic of conversation at the conference.

from MacroScope:

MF Global: back to the futures

The implosion of MF Global Holdings Ltd, the largest independent U.S. futures broker until it filed for bankruptcy protection on Monday, calls to mind the collapse of Refco – which in its time was the largest independent U.S. futures broker – after revelations that Refco’s CEO had defrauded his investors. (London hedge fund company Man Group Plc bought Refco’s futures brokerage just about six years ago, and later spun off its brokerage and renamed it MF Global.)

But now that questions are arising on the whereabouts of assets that clients entrusted to Jon Corzine’s firm to back their futures trades,  it may also be worthwhile to bear in mind the bankruptcy of another futures brokerage – that of Sentinel Management, in 2007.

Sentinel was a different kind of futures brokerage than MF Global. The company largely managed money for other futures brokers, delivering outsized returns that, Sentinel's bankruptcy trustee says, were juiced up by improperly using customer money to secure bank loans that went to fund risky trades.  When the credit crisis hit in the summer of 2007, the scheme unraveled, and Sentinel quickly plunged into bankruptcy. Sentinel managed about $2 billion in customer assets; about $600 million of it was never recovered, and clients are still wrangling over how to divvy up what remains.

Futures brokers are required to keep their customers’ funds in dedicated accounts to protect them from being used for anything other than client business. At Sentinel, customer funds were allegedly moved from those protected accounts to other accounts so they could be used as collateral for loans to Sentinel’s  own trading operations. What happened at Sentinel “is one of the biggest regulatory violations you can commit,” explains Sentinel’s bankruptcy trustee Frederick Grede, because keeping customer accounts separate is a bedrock of the futures industry.  “It is so rare that when you first look at it, you can’t believe that it happened.” (Update: Sentinel's former owner and head trader both deny they mixed client accounts with the house account.)

Still, it does happen. In fact, Refco was slapped with a $1.25 million fine in 1994 and another $925,000 fine in 1996 for failing to segregate customer funds. But no customers lost money because of it. At Sentinel, it appears they did.

MF Global has not been accused of any wrongdoing, but on Tuesday its exchange regulator, CME Group Inc, said it was “not in compliance” with requirements to keep customer money separate from the firm’s other money, and the Federal Bureau of Investigation was showing preliminary interest. UBS analyst Alex Kramm says:

Money is supposed to be segregated at all times. If it’s not, clearly something was not right.

from Commentaries:

Churning is out at Citi

Citi is kicking the commission habit for its remaining brokerage customers.

The big bank says it is shifting away from charging commissions on customer trades and going towards a more customer friendly, fee-only business model. The change applies to investment advisors working out of Citibank branches.

Earlier this year, Citi entered into a joint venture with Morgan Stanley, which took over the day-to-day operation of its once mighty Smith Barney wealth management business. That venture largely already operates on a fee-only business.

The move away from commissions is a welcome one. And it should avoid situations in which brokers try to drum-up needless trading activity in customer accounts--simply to generated higher revenues.

By contrast, fee-only brokers generally charge a flat fee to customers based on the dollar value of the assets they have invested.

The move to a fee-only business model is consistent with the Obama administration's call for brokers to be held to a fiduciary duty when investing for their customers. In other words, the Obama administration, as part of its regulatory reform package, wants brokers held to a higher standard for the investment decisions they make for customers.

These days there is a lot to complain about with Citi and I've been more than critical of the way Citi CEO Vikram Pandit is managing the bank's affaird. But this decision to kick the commission habit is good news and Citi should be applauded for making the switch.

from Funds Hub:

Barc-ing up the right tree?

As the credit crisis has unfolded, many banks have trimmed their prime brokerage units' lists of hedge funds clients in an effort to reduce lending and risk as fast as possible.

However, as often happens, caution by some becomes a business opportunity for others -- many smaller hedge funds, for instance, complain about the difficulty in getting a prime broker these days.

Barclays Capital president Jerry del Missier told Reuters this week the investment bank wants to take advantage of the shake-up in the industry.

"It (the hedge fund industry) has clearly shrunk, but competitors have left the market at a faster rate than the market has contracted so we are taking a bigger share of the market," he said.

"We already have a top five market position and we're confident we can move up to the top three."