Sunday 23rd November 2014
NEWS TICKER – FRIDAY NOVEMBER 21ST 2014: The director of the National Security Agency, Navy Admiral Michael Rogers, says he expects to see adversaries launch a cyber-attack in the next few years aimed at severely damaging America's critical infrastructure. "I fully expect that during my time as commander, we're going to be tasked to help defend critical infrastructure within the United States because it is under attack by some foreign nation or some individual or group," Rogers told the House Select Committee on Intelligence this morning (EST). Rogers, who also serves as commander of the US Cyber Command, says the government is better prepared to defend against those attacks than it was two years ago.On November 24th, the Federal Reserve will conduct a fixed-rate offering of term deposits through its Term Deposit Facility (TDF) that will incorporate an early withdrawal feature. This feature will allow depository institutions to obtain a return of funds prior to the maturity date subject to an early withdrawal penalty. The Federal Reserve will offer eight-day term deposits with an interest rate of 0.29000% and a maximum tender amount of $20,000,000,000. The penalty for early withdrawal is 0.75%, the minimum tender per institution is $20,000,000,000 - The Straits Times Index (STI) ended +29.72 points higher or +0.90% to 3345.32, taking the year-to-date performance to +5.70%. The FTSE ST Mid Cap Index gained +0.64% while the FTSE ST Small Cap Index gained +0.83%. The top active stocks were SingTel (+0.51%), UOB (+1.37%), DBS (+1.64%), Keppel Corp (+0.22%) and OCBC Bank (+1.16%). The outperforming sectors today were represented by the FTSE ST Basic Materials Index (+1.70%). The two biggest stocks of the FTSE ST Basic Materials Index are Midas Holdings (+1.72%) and Geo Energy Resources (+3.02%). The underperforming sector was the FTSE ST Technology Index, which gained +0.16% with Silverlake Axis’s share price gaining 0.41% and STATS ChipPAC’s share price unchanged. The three most active Exchange Traded Funds (ETFs) by value were the IS MSCI India (+1.70%), SPDR Gold Shares (+0.34%), DBXT MSCI Singapore IM ETF (unchanged). The most active Real Estate Investment Trusts (REITs) by value were Suntec REIT (unchanged), Ascendas REIT (unchanged), CapitaCom Trust (+0.89%) - In an interview with US online service Careers Info-Security News Greg Shannon, chief scientist at the CERT Division of Carnegie Mellon University's Software Engineering Institute says that to defeat cyber-adversaries, cybersecurity professionals should adopt a contrarian attitude, says. "Having that contrarian point of view allows you to get into the mindset of the adversary," Shannon says in an interview with Information Security Media Group. "How would this technology work if it did something the designer of it didn't think of?" he asks. "Certainly, that's the way the adversary is thinking, coming up with new attacks, new threats. They're looking at an app, a piece of software or some websites, [and they think] 'What can I do here that the designer didn't think of? Is there a way to get information through channels, through tricks that weren't anticipated? Is there some frailty of humans that I can exploit to get information out of them that they wouldn't normally give me?'" – Raiffeisen Bank International warned in an analyst conference call yesterday that profits in its Russian business would be challenged in Q4 versus Q3. The bank’s Chief Financial Officer Martin Gruell said higher risk provisioning and increased operating expenses could cut profits in its single most profitable market. "I would expect the fourth quarter to be a bit lower than the third quarter," he said. He believes the worst of the rouble's devaluation is over, but explained that the impact on the group’s capital from the dip in the ruble, could push RBI's core capital below 10% of risk-weighted assets by the end of this year - The performance of the Dutch residential mortgage-backed securities (RMBS) market remained stable during the three-month period ended September 2014, according to the latest indices published by Moody's Investors Service. The 60+ day delinquencies of Dutch RMBS, including Dutch mortgage loans benefitting from a Nationale Hypotheek Garantie, decreased to 0.95% in September 2014 from 0.98% in June 2014. At the same time, the 90+ day delinquencies decreased to 0.72% during the three-month period compared with 0.75% in June 2014. Cumulative defaults continued to increase to 0.54% of the original balance, plus additions (in the case of Master Issuers) and replenishments in September 2014, compared with 0.47% in June 2014, says the ratings agency. Cumulative losses slightly increased to 0.11% in September 2014 from 0.10% in June 2014 – According to a Clearstream client bulletin on November 18th, the US Internal Revenue Service and the US Treasury published an amendment to the current temporary regulations (TD9657) regarding FATCA. The amendment impacts Foreign Financial Institutions (FFIs) who have entered into an agreement with the IRS to become a participating FFI. It amends the determination date and timing for reporting with respect to the 2014 calendar year.

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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