Insight: Two firms flourish in frenzied MF Global aftermath
The mad rush to move client money out of MF Global Inc. after its collapse left two firms with the bulk of customer accounts, while other brokerages emerged with only minor gains from the chaos of carving up a multibillion-dollar business.
The process, according to interviews with more than half a dozen industry executives, was a scramble: a patchwork of urgent phone calls, emails, "handshakes" and news gleaned from press reports read by executives who were asking - and being asked - to take on MF Global customers during a month-long effort to transfer more than 25,000 accounts and some $2 billion in collateral.
MF Global's fall presented a rare opportunity for any one of a dozen independent Futures Commission Merchants (FCM) to quickly gain valuable new customers from one of the world's most active commodity houses - a welcome boost for mid-tier firms who are fighting to survive in an industry beset by ultra-low interest rates and the advent of electronic trading.
The result: Two of Chicago's oldest, most venerable independent brokers saw a combined $1.2 billion increase in segregated customer funds in November, their biggest one-month increase in more than three years, according to a Reuters analysis of Commodity Futures Trading Commission (CFTC) data.
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GRAPHIC: Picking up the pieces after MF Global: http://link.reuters.com/zek46s
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R.J. O'Brien Associates, a founding member of the Chicago Mercantile Exchange that started trading in 1914 as a cash butter and egg specialist, saw a November inflow of customer accounts of almost $800 million, an increase of 31 percent. The gain was nearly five times its monthly average increase of $175 million over the past three years, the analysis found.
Rosenthal Collins Group, founded in 1923 as a grain broker, saw an increase of $362 million or 26 percent, nearly five times its three-year monthly average increase of $75 million.
One other - ADM Investor Services, the broker subsidiary of agribusiness firm Archer Daniels Midland Company - saw a $315 million rise, a more modest 13 percent gain in its funds.
But none of the other FCMs that agreed to take on MF Global accounts saw as large an increase in customer funds as RJO and Rosenthal, Reuters found, and some actually saw declines.
The task of divvying up the accounts fell to the CME Group, the world's biggest futures bourse and MF Global's first-level regulator. Few dispute the Herculean task it undertook to unfreeze trading accounts within a week, but questions over the handling of the process linger.
"I think the entire process should be transparent," said Mark Melin, a Chicago-based futures markets author and investor. "The expectation should be, 'Are they doing honest bidding and are they open to being transparent about how things were handled?'"
While the CME has been blasted over the past three months for its failure to act more quickly to protect customers amid the collapse of one of its most active brokers, its role in doling out customer accounts has been largely unexamined.
CME'S SOS
When MF Global declared bankruptcy on October 31 and reports surfaced that it had "lost" hundreds of millions of dollars of client funds, tens of thousands of traders' accounts and about $6 billion of customer funds were thrust into limbo.
The CME and the court-appointed bankruptcy trustee were put in the awkward position of having to arrange for the transfers of customer accounts - en masse - among competing merchants.
The fact that MF Global's client base was vast, diverse but typically quite small - from retail speculators to professional energy traders to agriculture hedgers and "introducing brokers" - meant that no single broker could or would take on all those accounts. Allowing individual customers to choose their new broker would complicate and delay the process.
So the exchange reached out to a number of different brokers over a period of days, effectively soliciting volunteers to take on the financial and administrative task of absorbing thousands of individual accounts, many of them underfunded - only two-thirds of the requisite margin was transferred with accounts.
The top 10 Wall Street broker-dealers, which control some 90 percent of all segregated funds catering to large-scale clients like hedge funds, corporations and merchant traders, showed little interest in dealing with the hassle of tiny accounts.
"We reached out to a broad range of firms and worked with those firms that most quickly confirmed they were willing and able to take significant customer accounts in bulk," CME said in a written statement to Reuters. "Not all firms were able to take on this significant obligation, but we worked closely to make the process as smooth as possible for clients and those that served as receiving firms."
In many respects R.J. O'Brien and Rosenthal were obvious candidates: behind MF Global, they were the two largest fully independent FCMs measured by segregated funds. Their client bases were similar.
But even so, the customer funds they received in November dwarfed most of the other brokers who were selected by the CME Group, including bigger and better-known global names like French-owned Newedge and Australian bank Macquarie.
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