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Anger Builds Over MF Global Mess - And Spells Trouble

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It’s been busy in Lincoln, Nebraska, where David Fiala, president of the introducing brokerage firm FuturesOne, has been trying to help clients survive a wild week. Farmers, grain elevators, ethanol plants and feedlot operators trade futures contracts, and that trading dictates how they “operate every day, how they manage risk as a company and for their clients,” says Fiala. Right now, for example, farmers are harvesting crops like corn, and they use futures to market those crops.

But ever since the large and now infamous firm MF Global went bankrupt on Monday, with a reported shortfall of $700 million that was supposed to be in customer accounts, many of Fiala's customers have been in limbo. Because their trades were cleared through MF Global, their accounts were frozen, their positions left at the mercy of the market. Even though some have managed to set up new trades elsewhere, they had to leave money behind with MF Global. The futures market is technically up and running, but Fiala says that doesn’t matter if these Nebraska clients and others are left out of it. “The whole system works as a system. There’s a leak in the system right now,” he says.

There’s frustration building in Lincoln, as well as at hedge funds in New York and among independent traders in Chicago and elsewhere, all affected by the MF Global bankruptcy. With money and trading positions frozen or potentially lost, some people are feeling disappointed or even betrayed by the system and CME Group, the dominant futures exchange. “There’s a lot of anger out there,” says Michael Greenberger, a law professor at the University of Maryland and previously a director at the CFTC. If that anger persists, it could turn into  trouble for the futures business.

The futures industry has been able to hold itself up in the past few years as something of a white knight. When banks melted down in the credit crisis, CME Group trumpeted its markets as transparent and stable. The futures system was designed to curb a variety of abuses and had performed well for the better part of a century.

But MF Global has caused more paralysis than the futures markets have seen in years. When other intermediaries such as Lehman and Refco went bust, most customer futures accounts were transferred to other firms without incident. In this case, the bankruptcy filing caused futures accounts to be frozen – plus there’s that missing money. CME Group and its chief, Craig Donohue, have seemed to distance themselves from the problems faced by their customers.

The bankruptcy has also affected hundreds of local traders in Chicago who feed the market with trades. Those locals were initially locked off the trading floor. Bill Gruzynski, a longtime futures trader at CME, spent Monday calling MF Global to try to liquidate his accounts. It took two hours to reach anyone, then his orders weren’t executed for another two to three hours. On Tuesday, his trading firm was setting up accounts with new clearing firms but still had six figures tied up in MF Global. On Thursday he was waiting to hear where MF Global would be transferring the few positions he wasn’t able to liquidate. He says that from now on, he’ll work with more than one clearing firm at a time – probably three.

“Donohue and the CME, this was a colossal failure on their part,” said another trader who asked not to be identified. “They had 48 hours or more to fix this. And they screwed the pooch.” Others point out that CME was dealing with a situation of unprecedented complexity. “It’s understandable the frustration and aggravation, but I don’t see how the Merc could have handled it any differently,” says Michael Manning, who two years ago retired as the chief of Rand Financial Services, a clearing firm.

Ongoing anger could have adverse consequences. Critics in the past few years have complained that the futures markets have become too volatile. Some have argued they’re too speculative or even rigged. Now that what were considered fundamental, low-risk aspects of trading have been called in question, that could drive some customers away, says Greenberger. “Enough people may just wash their hands and say it isn’t worth it,” noting that he’s not saying this will happen, just that it could. He suggests that people could go looking for alternatives in the market - or stop trading. “It’s not only damaging to the CME, it’s damaging to the entire futures trading process,” he says.

Legally CME Group is probably off the hook, but the MF Global situation could cost it clout in Washington. “They essentially own the ag committees,” says an industry lawyer. “This will be interesting to see how things change, whether significant questions are asked about CME, whether ag committee members start to back away from CME.”

CME Group issued a statement saying the exchange “is working diligently” to get customer positions transferred to other firms. “We will continue to facilitate the transfer of positions and accounts of customers and affiliates of MF Global, and will also continue to assist the efforts of the CFTC and bankruptcy trustee to recover customer segregated funds held by MF Global.”

Less than a week after the bankruptcy, some people hope customers will soon be made whole. If that happens, customer anger could quickly blow over. But Frederick Grede, the trustee overseeing the bankruptcy of Sentinel Management Group, a futures broker that went bust in 2007, told Bloomberg that if MF Global is sued, it could take years for customers to get their money back. Fiala worries that “the mess is likely to grow.”  He says "the best course of action may be to shut the exchanges down” until confusion is sorted out.