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Protection in a post-MF Global world

Jeff Caldwell 02/15/2013 @ 9:29am Multimedia Editor for Agriculture.com and Successful Farming magazine.

The farmers and investors who lost money when MF Global Inc.'s leadership skimmed off client funds to retain market positions are a big step closer to seeing the vast majority of those dollars returned.

An MF Global liquidation hearing late last month dictated that 93% of original funds will likely be returned to "U.S. futures and options customers," according to a report this week from University of Illinois ag economist Paul Peterson. Those who invested in the form of stocks and bonds will recover all their losses, as they were covered by the Securities Investor Protection Corporation (SIPC).

The payback process has been snarled in legal proceedings since the MF Global impropriety was discovered in October 2011 because of the nature of the process framing the potential resolution, Peterson adds.

"For the past 15 months these three groups have been engaged in a tug-of-war over who is entitled to what, including a number of lawsuits and counter-suits. One unfortunate result of these legal battles was that each side needed to hold back a reserve of funds, rather than distribute those funds to claimants," he says. "In December the two US trustees finally settled their differences, largely in favor of the customers, and together reached an agreement with the MFGUK administrators in January. A distribution plan was filed with the court on February 4, and the following details are drawn from court documents filed by the MFGI trustee."

Though the process seems to be nearing its end, there are longer-term ramifications of the entire MF Global situation that could lead to greater protection for players in the futures and options trade, including farmers. But, don't count on an SIPC-like system for the futures business to be an a panacea for any future scenarios like the MF Global meltdown.

"Stock/bond customers will recover everything they lost, with the losses covered by SIPC. This has prompted interest in creating a SIPC-like fund for futures/options customers. [SIPC] currently has a $1 billion reserve fund, which has accumulated over the years from assessments on brokerage firms," Peterson says. "Since it was founded, SIPC has paid out more than $1.8 billion to over 767,000 investors. In the event of a brokerage firm failure, the firm's assets are distributed to customers on a pro-rata basis. Then any shortfall is made up by SIPC, up to a maximum of $500,000 per customer, including up to $250,000 of cash. However, it is important to note that SIPC does not pay anything in cases of fraud. Therefore, while such a SIPC-like fund for futures/options customers would have been useful in the MF Global situation, customers of Peregrine Financial/PFG Best would have been left empty-handed."

Even if it doesn't protect all futures investments from fraud like in the MF Global case, the establishment of an SIPC-like entity for the marketplace could go a ways in restoring at least some lost confidence.

"Futures and options volume at US exchanges fell by 13.2% in 2012, and many observers believe that in part this decline is due to a loss of customer confidence in the integrity of these markets," Peterson says. "While an industry-wide reserve fund is just one of several ideas under consideration, futures and options customers may remain cautious until some type of program is in place that fully protects their funds against these and other types of non-market losses."

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