03.26.2015
By Terry Flanagan

Protecting Customer Assets: A Futures Industry Imperative

The protection of segregated customer funds in futures brokerages made headlines with the 2011 collapse of MF Global, and the issue remains contentious as regulators and courts continue to dole out settlements related to the company’s bankruptcy.

“The most important issue for the industry is consumer protection, especially margins,” Drummond Gill, a commodities trader with Chicago-based League Trading, told Markets Media. “We’ve had issues with the likes of MF Global and Peregrine blowing up. It shouldn’t take the amount of time it took for these small hedgers and investors to be able to get their money back. There is a role for effective regulation. In some ways they haven’t gone far enough.”

Gill will speak about commodities trading and investing at Markets Media’s Canadian Trading and Investing Summit, which will be held April 1 in Toronto.

On Wednesday, James Giddens, trustee for the liquidation of MF Global, filed a motion seeking approval to make a second interim distribution of approximately $461 million on allowed unsecured general creditor claims, which would bring total distributions on those claims to 72%.

“This is another significant milestone in the MF Global Inc. liquidation as we continue winding down the estate,” Giddens said in a release. “When MF Global failed, the prospect of any general unsecured distribution was in doubt. I am pleased that today we are in a position where unsecured general creditors are now about to recover a substantial majority of their claims.”

The case of MF Global has brought to the forefront the issue of so-called rehypothecation, whereby collateral posted by a brokerage client (e.g., hedge fund) is used as collateral by the broker for its own purposes. In general, hedge funds pay less for the services of the broker if their collateral is allowed to be rehypothecated.

“It’s hard for brokers to make money in a low rates environment if they’re not allowed to ‘rehype’,” Gill said. “So maybe some costs will have to go up to provide those protections, but in the long run they will be a benefit for the industry.”

Gill, a veteran trader who has worked for ScotiaMocatta, a unit of Scotiabank and a leader in precious and base metals trading, finance and physical metal distribution, views the futures industry from a banking perspective. “Most just look at it from the brokerage, retail, managed futures side,” he said. “For me, I’ve seen the futures industry grow from the institutional side as a hedger.”

The industry has changed in the sense that it has moved from the floor to electronics, and there have been some issues as a result of that. “The liquidity and other types of volume signals that were available on the floor are not really available as much anymore,” Gill said. “There has been a need to move to something that is more cerebral, rather than what you’d say on the floor are street smarts. As a result, the character of the market has changed. Some would say it’s for the better, some would say it’s for the worse.”

He continued, “Certainly the market has become for efficient, more transparent and has been able to allow for the development of new and interesting products that will help investors. I don’t think you necessarily see that in the managed futures business. The efficiency is there and the potential for driving and creating interesting products are available there. They just haven’t quite filtered down yet to the retail side as much as they could have.”

Featured image by Alexandr Bakano/Dollar Photo Club

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