The interesting thing about this year’s US government shutdown/debt ceiling fiasco was the extent to which markets chose to ignore the chaos in Washington. Indeed, taper tantrum proved much more destabilising then the system’s brief flirtation with a self-made US default. (Perhaps because it was clear from the onset the bluff was not executable?)
Now that the threat is behind us (until next time), there is also a general perception that we got away from the episode relatively unscathed.
Alas, it was not necessarily so. Collateral markets did wobble. Read more
Here’s an unintended consequence of the government shutdown that the Republicans may not have envisioned: commodity market turmoil.
John Kemp of Reuters makes the excellent point on Wednesday that the shutdown, if it continues, will soon hit important government data statistics services such as the CFTC’s weekly commitments of traders report and even potentially the EIA’s weekly inventory figures. Read more
Derivatives Broker 1:
HI MATE,JUST HAD [Yen Desk Head] BACK ON RE LIBORS,HAD A LOT OF COMPLIANCE PRESSURE RECENTLY DUE TO THE CREDIT PROBLEMS, WE BOTH NEED TO BE A LITTLE MORE SUBTLE IN OUR “VIEWS” .. .IE’ I THINK THE FWDS ARE SUGGESTING THIS 6MOS LIBOR SHOULD BE LOWER …. ETC. MY E-MAILS ETC. NEED TO BE WORDED MORE CAREFULY Read more
Presenting the CFTC order against RBS, as part of the bank’s $325m settlement with the regulator over allegations of “hundreds” of attempts at manipulation of Libor (notably Yen Libor):
The massive flaws in the method of setting Libor and similar rates are probably familiar to most FTAV readers by now — as are the challenges of coming up with a better replacement.
The review led by new FSA chief Martin Wheatley set out to either “strengthen Libor” or “find an alternative to Libor”. Read more
By now everyone is well aware of the flaws associated with the Libor-setting process. As yet, however, no alternative has been deemed full-proof enough to replace it.
The search for a better system, however, is on. Read more
The statements of CFTC and Department of Justice in the US, and FSA in the UK, are out concerning Barclays’ $200m, $160m, and £59.5m fines respectively for “attempted manipulation of and false reporting of LIBOR and Euribor Benchmark rates”. The FSA fine is the largest the agency has ever imposed.
From the CFTC statement: Read more
As part of the Dodd-Frank Act, various types of participants in derivatives markets need to be defined. According to the jersey one ultimately gets as a trader of interest rate swaps, credit default swaps and so on, different regulations may apply.
(Where “security-based”, regulator equals SEC, otherwise CFTC.) Read more
FT Alphaville drew attention on Thursday to an alleged whistleblower letter that arrived in the CFTC’s mailbox this week.
The author of said note claimed to be a JP Morgan employee with inside information about the bank’s (supposedly less than honest) activities in the precious metals market. He wrote that he was whistleblowing because he no longer had faith or belief that what the bank was doing for society was “bringing value to people”. Read more
Not all whistleblowers are good, you know. Not all whistleblowers are real.
The CFTC really should have a spam filter for the likes of The 1st Whistleblower of Many. Read more
Companies will be able to sell up to twenty times more derivatives than originally planned before they are counted as swap dealers by regulators, the FT says. In the original regulations, firms had only been allowed $100m before hitting the rules’ threshold, but this amount is now likely to be $2bn. While the amount could change further ahead of a key CFTC vote on the rules, energy and commodities firms have fought against being swept into the definition, which carries tough requirements on dealers’ capital and disclosures.
Take a moment to imagine what it must be like to be an American regulator. There are plenty to imagine being: the OCC, the Fed, the CFTC, SEC, FDIC, and that thrift one, until it subsumed into the OCC. Got one?
Investigators have tracked down almost all of MF Global’s missing client funds, but haven’t disclosed their progress publicly because it may complicate retrieval of the money, NYT Dealbook reports. The root of the problem lies in a conflict between one team of lawyers pressing to recover cash for clients, and another seeking recovery for creditors. Some funds from MF Global’s futures client accounts were paid out to securities customers leaving the broker, Dealbook adds. Meanwhile, MF Global’s former chief risk officer is expected to reveal his warnings about the broker’s sovereign debt trades in Congressional testimony on Thursday, the FT says.
Investors and traders reduced their bets on 13 key commodity contracts by 19 per cent in 2011, according to a WSJ/Dow Jones analysis of data from the CFTC. The exodus was the biggest in at least 12 years, outpacing the flight seen in 2008. Open interest in 13 key commodities dropped to 8.7m contracts at the end of last year, from 10.7m contracts at the end of 2010. It came from a range of commodities—from crude oil to copper to cotton. All categories of traders contributed to the decline, including hedge funds and producers and consumers of raw materials. Index funds and other investment products often used by retail investors also showed outflows in the last months of the year, according to Barclays Capital.
US financial regulators have raised the idea of extending investor safeguards proposed for certain derivatives to the futures markets as they probe missing customer funds at bankrupt broker MF Global. Investors in cleared swaps are set to receive stronger protection than futures traders in a vote by the CFTC on Wednesday, reports the FT, but two commissioners on the five-member body are now questioning the fairness of that approach and are opening the debate as to whether the same rules should apply to both swaps and futures, a move likely to provoke a backlash from the industry. Jill Sommers, a Republican and Bart Chilton, a Democratic commissioner, both told the newspaper they believed the regulator should consider whether futures customers should not receive the same protection as swaps users. Meanwhile, the WSJ reports that Jon Corzine, the former chief executive of MF Global, is looking for office space in New York City. Citing a person familiar with the situation, Mr Corzine is said to be interested in viewing the offices of John Carris Investments; reportedly for a space, not for a job.
US financial regulators have raised the idea of extending investor safeguards proposed for certain derivatives to the futures markets as they probe missing customer funds at bankrupt broker MF Global. Investors in cleared swaps are set to receive stronger protection than futures traders in a vote by the CFTC on Wednesday, reports the FT, but two commissioners on the five-member body are now questioning the fairness of that approach and are opening the debate as to whether the same rules should apply to both swaps and futures, a move likely to provoke a backlash from the industry. Jill Sommers, a Republican and Bart Chilton, a Democratic commissioner, both told the newspaper they believed the regulator should consider whether futures customers should not receive the same protection as swaps users.
MF Global’s bankruptcy trustee has asserted client privilege in declining to hand over documents about the failed broker to regulators, the WSJ says. Louis Freeh’s office said it was prepared to waive the privilege if the CFTC, which is probing the loss of customer funds from MF Global, discussed the issue with them. However, the dispute threatens to slow down the customer funds investigation, which is already in its third month, Reuters adds. The CFTC is also investigating the role of the CME in verifying the safety of the funds held at MF Global, NYT Dealbook reports.
The Commodity Futures Trading Commission is looking at the actions of CME Group as part of the regulator’s inquiries into the collapse of MF Global, says NYT Dealbook, citing people briefed on the matter. CME operates the main exchange used by MF Global, and also served as the commodities brokerage’s primary regulator. It has come under criticism after $1.2bn in customer money disappeared from MF Global. The CFTC is reviewing whether CME’s efforts to verify the safety of customer funds were sufficient, the report says, while CME has said that MF Global may have intentionally produced inaccurate documents. CME has not been accused of any wrongdoing, and the review of its actions may not produce any findings, it says.
Agencies who investigated MF Global before its collapse will give different accounts of when they first became concerned about its trades, when they appear before a Congressional hearing later on Thursday, the FT reports. Terry Duffy, chief executive of CME Group, said that MF Global seemed to be in “full compliance” with segregating its customers’ funds until the day before its collapse, only for CME and CFTC auditors to be told on 2am on the day the broker filed for bankruptcy that some funds had been transferred. The CBOE said it was receiving data from the broker in August, while Finra said it had been watching MF Global’s trades in euro sovereign debt since May. A”turf war” may meanwhile be opening between Chicago and New York prosecutors on bringing criminal charges over the collapse, Reuters says.
US regulators have adopted more stringent restrictions on how futures brokers and clearing houses can use customers’ funds as federal investigators continue to look for an estimated $1.2bn still missing from client accounts at failed brokerage MF Global, says the FT. The Commodity Futures Trading Commission (CFTC) voted 5-0 on Monday to approve a rule that largely prohibits firms from using customers’ cash to invest in foreign sovereign debt or to finance in-house bets by other units or affiliates through repurchase agreements. The CFTC had planned to finish the rule months ago, but delayed action as a result of strong opposition from Jon Corzine, says NYT DealBook. Meanwhile former employees of the collapsed broker-dealer are suing Mr Corzine and other top MF Global directors, accusing senior management of “misrepresentations and fraudulent conduct”, reports the FT separately.
On Thursday, the US House and Senate approved legislation to fund a handful of government departments to the tune of $128bn while other departments will continue to be funded at 2011 levels in the next year, the WSJ reports. The current funding for government operations is due to expire on Friday at midnight. President Obama is expected to sign the legislation by way of direct machine imprint of his signature as he’s currently in Indonesia attending a summit. The bill gives $205m of funding to the CFTC, $100m less than Obama had sought for the agency that is writing rules to implement Dodd-Frank. The agency had been asking for additional funds in order to be able to complete the massive regulatory task it is faced with.
Eleven days after MF Global filed for bankruptcy and the search party for around $600m of customer funds is still hard at work.
But it wasn’t meant to be this way. Client funds are supposed to be segregated in such a way as to be easily identifiable and transferable in the wake of exactly this type of event. The ability to protect client assets, and by extension minimise disruption to the markets, is at the heart of ongoing reform efforts prompted by the financial crisis. Read more
All US futures trading firms will be audited in the wake of the search for $600m of missing customer funds from MF Global. The CFTC, which is searching for the missing money, will audit many of the nation’s largest futures commission merchants, NYT DealBook says, citing a person briefed on the decision. Exchanges like the CME Group will examine smaller firms to ensure they are keeping customer money separate from company money. The WSJ takes a look at the hunt for the funds. Meanwhile ICE has joined the chorus of commodity traders calling for MF Global’s bankruptcy court to release billions of dollars in cash frozen in their accounts, reports Reuters, by writing to Manhattan bankruptcy Judge Martin Glenn, to warn of the “systemic implications” and “moral hazard” of rewarding customers who had held onto their positions — and are now trading with new brokers — while penalising those “who acted quickly and responsibly to reduce their exposure”. The trustee overseeing the liquidation of MF’s brokerage moved to deflect mounting pressure to give back more of that collateral while the search continues for some $600m of missing customer funds, saying he could not yet legally release individuals’ funds. However Trustee James Giddens’ spokesman said a legal team would seek court approval on an expedited claim submission process for customers.
CME Group, the US exchange operator and supervisor of MF Global’s futures brokerage business, has accused the failed broker-dealer of moving customer funds “in a manner that may have been designed to avoid detection”, the FT reports. MF Global left a $633m shortfall in what are supposed to be protected customer funds, the Commodity Futures Trading Commission said on Wednesday. The disclosure came as lawyers for MF Global’s bankruptcy trustee raced to arrange the transfer of thousands of commodities accounts before the law requires their liquidation. The Federal Bureau of Investigation is also looking at the matter, according to people familiar with the situation. The company declined to comment. Martin Glenn, bankruptcy judge, approved a plan to transfer wholesale at least 50,000 customer accounts linked to CME to other US futures brokers. James Kobak, a lawyer for the bankruptcy trustee, said that without the plan, accounts would “need to be liquidated in a matter of hours or days”. It was still unclear why the money was unaccounted for.
MF Global broke rules on keeping customer money separate from its own trading accounts, according to the CME Group, which acted as self-regulatory body to the collapsed broker-dealer as well as hosting its trades, the FT reports. According to people familiar with the situation on Tuesday, the Commodity Futures Trading Commission was investigating MF Global’s accounting – after regulators discovered an alleged shortfall in client funds of several hundred million dollars – and the Federal Bureau of Investigation was looking into the matter. MF Global declined to comment. But a lawyer for MF Global told a New York court on Tuesday that “to the best knowledge of management, there is no shortfall”. Kenneth Ziman told the bankruptcy court that most of MF Global’s US assets were held at its brokerage unit. Regulators have not ruled out the possibility that all the clients’ funds will ultimately be accounted for as the firm’s positions are unwound but believe MF Global has, at the least, broken rules on segregating funds. For more on the off-balance sheet trades which prompted MF Global’s sudden need for cash see FT Alphaville.
What complications might the alleged commingling of accounts have for the bankruptcy of MF Global?
Well, let’s ask… MF Global! Read more
MF Global used client money to trade from its own accounts in violation of government rules, reports the AP citing a “federal official”.
The discovery of a reported $700m hole in MF Global client accounts — which according to the Commodity Exchange Act and the Securities Exchange Act should be segregated from the firm’s proprietary trades — jettisoned the rumoured takeover of Jon Corzine’s brokerage by rival Interactive Brokers, according to various media reports. Read more
MF Global became the largest US casualty of the eurozone crisis as it filed for bankruptcy protection after making big bets on the European sovereign debt market, the FT reports. The broker-dealer, run by Jon Corzine, an ex-chief executive of Goldman Sachs and a former New Jersey senator and governor, admitted defeat on Monday in its attempt to stay in business after an 11th-hour deal to sell itself to Interactive Brokers Group fell apart. It is the largest failure of a US financial firm since the collapse of Lehman Brothers in 2008. Several people close to the last-minute talks said due diligence raised questions about whether the firm’s commodities book was fully funded. They said the shortfall appeared to have been as much as several hundred million dollars. The Securities and Exchange Commission and the Commodity Futures Trading Commission said MF Global reported “possible deficiencies in customer futures segregated accounts held at the firm” as it told regulators a sale had fallen through. According to Bloomberg, the firm listed debt of$39.7bn and assets of $41bn in Chapter 11 papers filed on Monday. For more on the nature of MF Global’s proprietary flavoured repo-to-maturity trades which initially spooked the market, see FT Alphaville.
The US commodity regulator approved sweeping new constraints on speculation in food, energy and metals, in a decision riven along party lines, the FT reports. The limits on the size of positions in futures and swaps markets will curb banks’ and investment funds’ ability to trade commodities, though the rules were watered down after lobbying by Wall Street. The reform will put the US at the forefront of the clampdown on investment in commodities, an increasingly popular bet on global growth and hedge against inflation. Assets under management reached an all-time high of $447bn in August, according to Barclays Capital. The Commodity Futures Trading Commission on Tuesday finalised the rules in a 3-2 vote, with the agency’s three Democrats forming the majority. Michael Dunn, a Democrat, said he reluctantly backed the new limits in order to “follow the law”. Republicans dissented harshly, with commissioner Scott O’Malia suggesting the rule was vulnerable to legal challenge. The European Union is mulling similar caps, but Brussels is unlikely to mandate position limits in the face of intense pressure from London, a key trading centre. Paris is pushing for a global agreement during the Group of 20 summit next month.
The US investigation into alleged manipulation of interbank lending rates is focusing on possible violations of a commodities law that has previously been used to send financial executives to prison. The FT, citing people familiar with the probe into the setting of Libor and Tibor, says US authorities are modelling their investigation on an earlier prosecution of three energy companies for violations of the Commodity Exchange Act, which resulted in criminal settlements and prison terms of up to 14 years. Under the act, it is illegal to transmit a false report that would affect the price of a commodity. The interbank lending probe, led by the CFTC and the Department of Justice, is examining possible collusion between traders and bank treasury departments in 2007 and 2008. It has also drawn in investigators from the UK, Japan and the EU to examine whether Libor and Tibor were rigged at the height of the financial crisis.