Monday 8th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

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The lessons of MF Global’s collapse

Friday, 09 December 2011
The lessons of MF Global’s collapse Corporate bankruptcies are always messy, but what happened in the aftermath of the demise of US brokerage MF Global has left commodity markets so bruised that it will be an uphill struggle to restore investor confidence. It goes beyond clients of the failed broker getting their money back. Instead, it has a become a wider crisis of confidence within the commodities futures industry. How can that confidence be restored in the wake of one of the biggest failures on Wall Street since Lehman Brothers? By Vanya Dragomanovich. http://www.ftseglobalmarkets.com/

Corporate bankruptcies are always messy, but what happened in the aftermath of the demise of US brokerage MF Global has left commodity markets so bruised that it will be an uphill struggle to restore investor confidence. It goes beyond clients of the failed broker getting their money back. Instead, it has a become a wider crisis of confidence within the commodities futures industry. How can that confidence be restored in the wake of one of the biggest failures on Wall Street since Lehman Brothers? By Vanya Dragomanovich.

In London the volume of trade in key base metals has almost halved since the collapse of MF Global, says Robin Bhar, commodities analyst at Credit Agricole CIB. “We are still waiting for the fallout to subside,” says Bhar, adding that trading has not been helped by the deepening of the eurozone debt crisis  and the ongoing weakness in parts of the global economy.  

In the US the worst affected markets were oil, natural gas and agricultural futures trading on the Chicago Mercantile Exchange (CME). Some people who have been hurt by the collapse are talking tough: “We are in a bankruptcy hearing and our money is being treated as if we were the company’s creditors, which we are not,” says John Mayer, board member of the Commodity Customer Coalition (CCC), a 7,000-member group of former MF Global clients which includes fund, commodity trading advisers and individual investors.



“My money has effectively been stolen and now I am told that I am free to open an account somewhere else. So that somebody else can steal my money too?” asks Mayer, adding that the resentment of commodity investors about the way they were handled in the wake of the company’s collapse has deterred a large number of them from coming back into commodities.

Andrew Lamb, chief executive of CME Clearing House in Europe, says that one of the key lessons to be learned is that clearing houses should have more legal power to transfer collateral in client accounts when an intermediary collapses and that clearing houses need to be ready for  “military-style operations to marshal clients’ money.”

The first signs that there was something seriously wrong at the company emerged in the spring when US regulators noticed that the broker had removed some of the assets it had pledged as collateral on repo-to-maturity debt transactions. By August, the Financial Industry Regulatory Authority had asked the firm to boost its capital levels because of its exposure to European debt.

The situation eventually boiled over after October 25th when the company reported rising losses in the third quarter. In quick succession its shares were sold down by over 50%. Ratings agency Moody’s Investors Service cut the company’s debt ratings to a step above junk. At the same time, MF Global began talking to a potential buyer; but those talks collapsed as it became apparent that there was a shortfall of money in the company’s accounts. By October 31st the company had filed for Chapter 11 at the US bankruptcy court in New York, listing assets of $41bn and liabilities of $39.68bn. Within hours MF Global’s staff was barred from trading, including on the CME, where it carried its biggest exposure, and within days from the London Metal Exchange, the Intercontinental Exchange and a host of almost 30 other exchanges.

The worst fallout has been in the US where regulators found that there is potentially more than $1.2bn missing from segregated client accounts. In Australia, a regulatory loophole, which is now likely to be addressed by Australia’s securities regulator, allowed MF Global to effectively pool client funds for hedging purposes, something that is forbidden under the UK or US regulatory regimes.  “There has been no evidence of something similar in the UK,” says Monica Fiumara, senior spokesman at KPMG, the administrator for MF Global’s European operations. Regulators are still trying to piece together how the shortfall actually came about. The Commodity Future Trade Commission’s (CFTC’s) Scott O’Malia admits that “at this time, we have not identified the cause of the segregation shortfall”.

MF Global’s situation is unique in respect of missing funds from segregated accounts. There have been bigger bankruptcies in the past, notably Lehman Brothers, or the collapse of commodities broker Refco in 2005. However, client funds in segregated accounts were always safe and were eventually returned to their holders. “We always thought that the concept of segregated accounts was sacrosanct, that money from such accounts could never disappear. There have been bankruptcies before, but ever since the Chicago Mercantile Exchange was formed in 1870 nobody has ever lost a single penny from a segregated account. That certainty is now gone,” says Mayer.

What made the situation worse for commodities investors is that all futures accounts were frozen, leaving the markets to move against locked-in traders. Then when about 10% of the accounts were moved to other futures brokers by the CME, the margin deposits with MF Global were not transferred. The exchange was in a bind, and could effectively only transfer the collateral it controlled itself.

Commodity investors have to deposit a level of margin with a broker to ensure that they are able to pay for all their future transactions. Smaller investors frequently put up almost the maximum of their finances in the account to be able to leverage their trade.

With margin deposits still in MF Global, a lot of investors had no way of raising additional cash which they needed to deposit with a new broker, and they hastily closed out their accounts. On top of that, new brokers asked for a higher margin because of the risk involved.  A total of $410m has been transferred; meanwhile some 5,000 accounts were placed with ten other clearing firms that trade on the CME.

The CME thinks it has come under misplaced criticism for its handling of the fallout from the collapse. In a terse statement issued on November 17th, the CME said: “In response to inaccuracies reported yesterday, CME Group confirmed today that it followed CFTC requirements and CME rules and procedures in reviewing MF Global’s segregated funds statements and coordinating that review with the CFTC.  CME was advised in the early hours of Monday, October 31st that there was an actual shortfall in the segregated funds account and was told the CFTC was advised concurrently.  Shortly thereafter, CME Group discussed the shortfall in a conference call with the CFTC and other regulators.  CME Group is confident that it complied with all its obligations as a designated self-regulatory organisation (DSRO) pursuant to the Commodity Exchange Act.”

The CME’s Andrew Lamb says the exchange’s hands were tied on the issue and that the decision was made by the trustee, James Giddens, who handles MF Global’s accounts. “A clearing house can only transfer with client positions the collateral that it holds. If they are held at an intermediary, like MF Global, they are not accessible by the clearing house—the only collateral that can be ported is the collateral that it has possession of,” says Lamb. However, he notes that in future clearing houses should have more legal right to protect the clients’ money.

Those MF Global’s commodity clients that had open positions retrieved between 4% and 20% of the money they had with the company, depending on how much margin they had deposited with the broker, explains CCC’s Mayer. “I only got 5% of my investment back,” adds Mayer, who is a long-time commodities investor. “You can see how I would find it galling,” he says.

Clients who had no open positions but only held a cash deposit had no access to their money for the first two weeks but then the release of $520m was negotiated that will give cash clients around 60% of their money back. What will happen with the remaining 40% remains an open question.

In Europe, where the administration of the company’s assets has fallen to KPMG to handle, none of the clients’ money has yet been returned. When KPMG took over there were approximately 1.6m open positions across 30 jurisdictions. Since then, positions on most of the big exchanges have been liquidated, as have over-the-counter (OTC) positions in metals and plastics, while other positions have been moved to other brokers.

Richard Heis, KPMG’s joint special administrator, explains that the delay in returning clients’ money stems from the sheer volume of accounting entries the administrators had to make and the fact that now that MF Global UK has been cut off from exchanges and clearing houses “a significant amount of book squaring needs to happen manually”.

The administrator has been discussing with the UK Financial Services Authority whether it would be feasible to distribute some money to clients but it has said that the final distribution won’t happen until all client risk positions have been liquidated or transferred and all claims have been validated.

However, a few companies stand to benefit from the demise of MF Global. One of them is US broker INTL FCStone, which is said to be in the process of buying MF Global’s ring dealing seat on the London Metal Exchange (LME) and taking over the company’s metals trading team. MF Global had share holdings in the LME valued at around $8.05m and now that several exchanges have expressed an interest to buy the LME, those shares could shortly become worth much more.

Another part of MF Global’s operations that is likely to attract a buyer is the company’s over-the-counter diesel and fuel business, a lucrative but less visible part of MF’s energy operations. Even so, the winners are too few compared to the sea of traders who had their fingers burnt in the process and who point to exchanges, clearing houses and regulators as the ones who should have protected them from the fallout.

The soul searching has already begun and CFTC’s O’Malia says that the situation has highlighted areas that the commission should re-examine, including “the manner in which it ensures that intermediaries are complying with segregation requirements and its role in protecting customer positions and funds in the days leading up to and following the insolvency of an intermediary”.

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