Whither Futures Market?

Terry Flanagan

Disarray in the wake of MF Global’s collapse prompts calls for redress from market participants and regulators.

With six months passed since MF Global’s collapse and as much as $1.2 billion in client money still missing, market participants are questioning the once-vaunted segregated accounts they relied on and proposing solutions to bolster the market’s integrity.

“I for one am scarred in terms of my confidence in the integrity of the operational controls supervised by the Chicago Mercantile Exchange, the Commodity Futures Trading Commission, and the banking community,” said John Brynjolfsson, managing director at Armored Wolf, a registered investment advisor that manages a commodities investment sub-advisory assignment for Eaton Vance and an offshore macro hedge fund.

Prior to founding Armored Wolf in 2009, Brynjolfsson worked at Pacific Investment Management Co. (Pimco) for 19 years, where he managed several of its largest funds. The alternative-investment veteran’s reaction to MF Global’s implosion and the rash of unanswered questions since then is shared by many other futures market participants.

“The fact that customers at a minimum have been extremely delayed in recovering those funds, and there’s a good chance they lost substantial funds that were in a (Futures Commission Merchant) collateral account — it’s a big black mark on the industry,” Brynjolfsson told Markets Media.

Attempted remedies to prevent a similar meltdown have so far been restricted to technical fixes by CME Group, which runs the biggest U.S. futures exchange and the self-regulatory organization that oversees most FCMs. Most of those fixes are pending.

Since MF Global’s October 31, 2011 bankruptcy, numerous government bodies and private groups representing different corners of the futures market have weighed in on how to bolster the integrity of the market and especially segregated accounts. Previously, futures players had touted segregating customer funds from FCMs’ own collateral as, safer, more effective and a less cumbersome approach in bankruptcy proceedings than the security market’s insurance coverage of $500,000 per account provided by the Securities Investor Protection Corp., but the MF Global saga has introduced cracks in that façade.

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