MF Global bust erodes trust in brokerages

NEW YORK,  (Reuters) – Almost two weeks after the  bankruptcy of commodities firm MF Global, customers at rival  firms are all asking the same question: How safe is my money?

MF Global’s collapse is confronting clients across the  industry with the harsh truth that while their accounts may be  termed “segregated” that does not mean they are off-limits from  trouble at a commodity futures firm, much less backstopped by  any government insurance fund.

MF Global revealed to regulators during its Oct. 31  bankruptcy that it was short perhaps $600 million in customer  funds – money which the firm was supposed to keep in  “segregated” accounts maintained under a raft of laws and  regulations.

The concerns among investors have reached such a pitch that  futures exchange operator CME Group announced late Friday that  it will provide a guarantee for $300 million of the missing  money in the MF Global case.

“I’ve lost a good deal of money already over this. Now I’m  a big boy who should have known better, with over 25 years  experience in the futures industry, but what they were doing  with client funds is to me outrageous,” said Stuart McClellan,  an independent trader from Norfolk in the United Kingdom, who  previously worked for Schroders in London.

McClellan has more than $110,000 tied up in MF Global,  which he doesn’t know if he will get back.

“Using the excess collateral in clients’ funds to trade is  not illegal, but to my mind it’s immoral. There is a huge  risk,” he said.

Futures commission merchants, as brokers in the industry  are known, have always been allowed, with certain restrictions,  to invest customers’ so-called “excess margin,” or the funds in  their accounts over and above the collateral required to  maintain trades. The brokers then book any profits for  themselves.

Segregation simply means that customer deposits can’t be  mixed with the firm’s own money or used to cover firm expenses.

They must always be available for customers to trade with or  withdraw at a moment’s notice. In other words, customer  segregated money isn’t some big cookie jar for the firm to dip  into when it is short on cash.

“That is what is so shocking about MF Global’s situation,”  said Michael Greenberger, a  former director of the Division of  Trading and Markets at the Commodity Futures Trading Commission  (CFTC) and now a law professor at the University of Maryland.