As of midnight on Monday, MF Global, a brokerage firm, was about to be acquired by Interactive Brokers due to MF’s irrecoverable position. The deal fell through and MF Global has filed for bankruptcy. More surprisingly, at the final hours of the original deal’s negotiation, MF Global disclosed that approximately $700 million dollars in customer money is missing. In many cases, the announcement of missing money during acquisition talks is considered normal; however, the amount in question is much higher than expected. As the investigation is still underway, additional money is expected to trickle in to reduce the unaccounted for $700 million. MF Global believes that this money is “stuck in the system,” existing in banks.
Leading to MF Global’s downfall, the company had purchased large debt holdings from Eurozone countries with the expectation of quick profit through crisis resolution. Upon the revelation of such filings, MF Global was pressured to put up more money to support its trading positions, thereby destabilizing the company’s remaining cash.
Another contributor to the demise of MF Global was a downgrade to “junk status” (as determined by two rating agencies) after its loss of more than 67% of market value. MF Global, facing investor desertion and raised borrowing costs, could not stay afloat.
With the company devalued, a pending investigation and banks refusing to do business, MF Global’s only option was bankruptcy.
As a side note, brokerage firms, as regulated by the government, are not allowed to use customer funds for any purpose other than facilitating the direct buy and sell of derivatives between a buyer and a seller. Brokerage firm capital must be kept separate from customer money. In the case of E-Mini trading, for example, brokers require regulation that prevents the selling of courses, automated systems, etc.
What do you think?
Was MF Global gambling too much with the company’s assets instead of considering the finances of its customers?
Should brokerages be required to submit regulatory filings more frequently? Would this increase transparency?
Do you expect MF Global or its agents to be accused of a financial crime?
If anyone has used MF Global, what was your experience like with their services?
How does this impact you as a futures day trader?