03.29.2012
By Terry Flanagan

Commodities Sector Braced For MF Global Fallout

MF Global’s downfall and ongoing scrutiny may spur regulation to ease investor fears, but practitioners have felt little change in liquidity and execution.

Yesterday marked another court date for the fallen derivatives brokerage firm MF Global. Christine Serwinski, an MF Global executive, is scheduled to tell lawmakers her account of what happened with the missing $1.2 billion in customer funds on the morning of October 31, 2011.

According to a Bloomberg News story released last week, an email discovery confirmed that MF Global chief executive Jon Corzine directly authorized a transfer of $200 million from a segregated customer account to cover a corporate overdraft on October 28 of last year—three days before the firm declared bankruptcy.

“As market participants and regulators continue to soak in the aftermath of MF Global’s demise, regulatory talk about rules in creation to protect commodities’ investors have surfaced,” according to Dave Kavanagh, president of Grant Park Fund, a managed futures firm. “Much remains to be clarified regarding the missing funds, which poses an uncertain outcome that may or may not spur further regulation,”

Managed futures practitioners, such as Greg Anderson, the chief investment officer of Princeton Futures Strategy Fund, welcomes any future measures to protect investors and isn’t worried about the impact pending regulation would have on buy side investment professionals.

“It’s great if [the regulators] can find a better way to do things and protect investors,” Anderson told Markets Media. “But I hope people don’t associate the MF Global bankruptcy with managed futures because there really wasn’t any flaw on the managed futures side. This was more about corporate governance.”

The Commodities Futures Trading Commission (CFTC) has already passed a so-called “Corzine Rule”, which will prohibit investments in certain foreign securities—a rule which MF Global had strongly lobbied against, prior to its demise. “I think the final outcome of the customer funds at MF is still far from over,” said Anderson. “Based on that outcome you may or may not see further regulation.”

In the days following MF Global’s bankruptcy, Anderson noted that customers asked a great deal about his association with the firm. Questions about the firm’s exposure to MF Global, as well as its ability to recognize red flags from sell-side service providers, were rampant.

“We’ve always paid attention to the quality of our custodians, as well as the checks and balances at our clearing firm,” said Anderson. “We utilize resources to see how our service providers can deal with corporate governance issues as they come up” Anderson noted that MF Global’s fall-out is truly a byproduct of the failure of corporate governance, not necessarily an issue of liquidity, or trading the market—which is quite deep.

“In the grand scheme of things, there’s been no change in liquidity of the futures market,” he told Markets Media. “I’m extremely sympathetic towards the customers that lost money, but $1.2 billion is not that big in terms of the overall market. The main issue that MF Global left us with is uncertainty.”

The lack of transparency exemplified by MF Global’s corporate mishap is not an isolated incident. Plenty of firms have experienced similar situations and “move on”, according to Anderson.

Similarly, other buy-siders that implement managed futures strategies have noticed no change in terms of futures execution.

“Liquidity and quality of execution still remains intact,” said Ed Egilinsky, head of alternative investments at Direxion, an alternative investor. The firm structures its managed futures strategy through a 40-act mutual fund which already has “transparency, daily pricing and the ability of clients to get in and out on a daily basis”, said Egilinsky.

For Kavanagh of Grant Park, managed futures managers will still have a strong ability to provide returns to investors but market participants will notice the most change in “the way product sponsors deliver returns”, telling Markets Media that “it is really still too early to tell”.

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