We feel sorry for MF Global Forex clients after Man Financial filed for Chapter 11 Bankruptcy on October 31, 2011.
“What?!?!?”, you say in disbelief. “Man was a registered FCM (Futures Commission Merchant) with the CFTC (Commodity Futures Trading Commission) and a member of the NFA (National Futures Association)!”
So what? That’s just a mouthful of acronyms. After a bagful of Draconian regulations enacted by the US government against the Forex industry since the REFCO bankruptcy in late 2005, they only managed to obliterate practically every small FX firm out of existence in the United States, leaving the larger ones, like MF Global, standing and equipped with the likes of Jon Corzine to take customers (including those who traded Forex with Man Financial) for a Ride!
The Good News is that there’s a way for Forex Investors to Protect themselves, but first…The Scoop!
MF Global Bankrupt – Corzine Prop Trading $900-Million Screw Up
Former New Jersey Governor and former CEO of Goldman Sachs, Jon Corzine became the Chairman and CEO of MF Global on March 2010.
Continuing his tradition of making big proprietary trading bets at Goldman, Corzine loaded up on about $6.3 billion in European debt at Man Financial, consisting of bonds issued by Italy, Spain, Belgium, Ireland and Portugal; betting on making a windfall once Europe emerged from its debt problems. The blatant gambling blew up in his face, causing MF Global to file for Chapter 11 Bankruptcy protection on October 31st.
But it get’s Better!
MF Global Under Investigation for Missing Customer Funds
While Man Financial was trying to strike a last-minute deal to save the firm from Corzine’s losses, a minor, little detail was discovered: Customer funds were Missing!
How much exactly, no one really knows. Is it $900 Million, $950 Million, $700 Million? No one is quite sure yet, and the government (CFTC) is investigating, since these accounts had to be segregated (separated) from company capital by law. Neither do they know what types of customers the funds belonged to. Were they from MF Global’s Forex accounts, future’s customers, securities (stocks and bonds) customers or a combination?
Your guess is a good as ours, but the information on the next section regarding account protection will startle you.
Forex Account Safety – Protection from CFTC and NFA Brokers?
By law, in accordance with the Commodity Exchange Act (CEA), MF Global (being a futures broker or FCM) needed to account for clients’ money and investments separately from the firm’s capital.
Because Man Financial apparently didn’t do that, when regulators discovered the shortfall in customer accounts, an investigation of MF Global took place for violation of CFTC rules requiring segregation of client money.
That’s all fine and dandy, but are MF Global’s Forex Accounts protected then?
Let’s take a look at the language used by the US regulators themselves to get an idea of the degree of Safety for Forex customers under the NFA and CFTC umbrella.
In the Comments of the National Futures Association on CFTC’s File No. S7-17-01 (relating to the treatment of customer funds), which they addressed in a letter to the SEC (dated December 5, 2001), the NFA said:
“The futures industry’s primary protection against customer insolvency losses is the CEA requirement that futures commission merchants (FCMs) segregate customer funds from their own funds…As a result, as long as funds are properly segregated, customer funds are protected against insolvency losses.”
But in their “Trading Futures, Options on Futures and Forex FAQs” page, the NFA states under “How is my futures account protected?“:
“Finally, even though an FCM is required to segregate customer funds, customers still may not be able to recover the full amount of any funds in their account if the firm becomes insolvent and there are insufficient funds available to cover the obligations to all of its customers,” which is the case with MF Global, due to the proprietary trading losses Jon Corzine generated with the firm’s European bet.
So it is possible, although not guaranteed, that Man Financial’s Forex account holders may get their money back. But see if you feel the same way after you read the excerpt below from page 15 of the NFA’s, “Trading Forex: What Investors Need to Know” publication (image of page 15 also provided):
“In the event your dealer declares bankruptcy, any funds the dealer is holding for you in addition to any amounts owed to you resulting from trading, whether or not any assets are maintained in separate deposit accounts by the dealer, may be treated as an unsecured creditor’s claim.”
It is therefore obvious, that Forex accounts are not afforded the same level of protection as Futures, even though protection for Man Financial’s Future’s customers is not a sure thing either, especially if it is discovered that the missing accounts were not properly segregated and the losses from Corzine’s prop trading bets leave insufficient funds to cover all customer obligations.
So is there no way to give Forex customers the peace of mind that comes with knowing that their funds would still be there if their Forex broker goes bankrupt?
Yes there is.
It’s called a Forex Trust Account (read the blog post, “Is your Forex Account Really Safe?“), and it’s a service that we make available to all our customers regardless of their account size, in addition to complete segregation of their accounts at Barclays Bank (Ranked the #1 most “Superconnected” and powerful company in the Global Economy by a recent University of Zurich study).
The Big Buzz with Proprietary Trading and MF Global
After the MF Global debacle involving Jon Corzine’s failed attempt to turn “Man” into “GoldMan,” “prop trading” has become more of a buzz phrase than ever.
For those that still don’t know what is is, “Prop” or “Proprietary” trading involves investing the firm’s own capital to make a profit (as opposed to investing client capital via Managed Accounts or self-directed accounts, where investors call their own shots).
Even though we are not a Forex Proprietary Trading firm per se, we have the flexibility of using prop trading as an Incentive for our Traders Wanted program.
But don’t be misled. “Prop Trading” is not a bad word just because Corzine was a reckless gambler. In the book, “Goldman Sachs: The Culture of Success,” author Lisa Endlich shows that Jon Corzine’s appetite for risk and willingness to tolerate large losses was one of his main characteristics; so this speculative mentality was not something he was a stranger to prior to his short stint at MF Global.
We, who train and employ prop traders, believe that making a $6.3 Billion leveraged bet by hoarding European bonds and hoping for a recovery is not prop trading at all. It is just plain Crazy. It is like investing all your savings in the national lottery and expecting to win. Successful trading is about taking a calculated risk with an exit strategy that won’t break the bank if the trade goes sour. It is not a crap shoot.
Nevertheless, if the media and regulators have already convinced you that “prop trading” is the “devil” and must be destroyed, and you just can’t shake the brainwashing out of your head, Don’t worry.
Regardless of all the prop trading and Corzinian swashbuckling we do, our Forex Customers will remain unscathed. The Barclays account segregation and Trust Account structure are designed to protect clients in a bankruptcy.
So you can rest peacefully at night…Your Account is SAFE. Good night MF Global!