WSJ: MF Global Case Has Rattled The World of Futures

   By Jacob Bunge 
 

The closely knit futures industry has confronted scandals before, but the collapse of MF Global Holdings Ltd. still has seasoned brokers and exchange officials on edge.

Confusion over what went wrong at MF Global and how it could have been prevented have prompted some of the world's biggest agricultural trading firms to consider dumping brokerage middlemen and bringing their business in-house, to avoid being caught up in another such debacle.

MF Global's rapid demise appears to have broken deep-seated confidence in the market that allowed the industry to move beyond the trading of corn and soybean futures and become a multitrillion dollar business, with contracts used by high-speed trading firms that provide liquidity in stock markets, as well as banks aiming to shield themselves against shifting interest rates.

"It's going to be a long time before that trust is rebuilt," said Chris Hehmeyer, chief executive of trading firm HTG Capital Partners and chairman of the National Futures Association, the industry-backed regulatory body. "First we have to find out what happened."

Futures brokerages and exchanges this week gather for the industry's annual retreat in a pink-stuccoed Florida resort, keen to find their own fixes before changes are made for them.

The estimated $1.6 billion that is still missing from the pocketbooks of farmers, fund managers and floor traders has led to a raft of ideas for safeguards, as well as a bout of soul-searching for the derivatives industry, which prides itself on having sounder and simpler regulation than the securities business.

Industry-backed committees formed in recent months have weighed a range of fixes, such as streamlining the process for customers to switch clearing firms and a requirement for brokerage executives to sign off on major transfers of customer funds. Others have backed a new, independent repository to hold the capital customers used to trade futures.

There is concern, though, that none of the measures would go far enough.

Executives of CME Group Inc., the exchange operator that presided over MF Global's operations in life and after its collapse, have said it was unlikely that any regulation could have prevented the debacle since MF Global allegedly broke customer-protection rules already on the books.

Customers of Chicago-based Lakefront Futures & Options LLC in the past often left a million dollars or more in excess collateral in their trading accounts even if it wasn't needed to back up trades, according to Jon Marcus, principal of the firm.

Now, Mr. Marcus said, those clients "wire their money out every chance they get."

"Customers will ask literally every day, 'Have you heard anything new about the [missing] money?" said Mr. Marcus, whose farmer and trader clients were among those caught up in the MF Global collapse.

The growing pile of rules and practices proposed as shields against another MF Global-style debacle has added to ongoing uncertainty about when Washington will produce much-delayed regulation for swaps and other complex derivatives-- seen for years as a potential source of new growth.

The collapse of one of the industry's main players, alongside a recent slowdown in trading activity, has sapped some of the buoyancy enjoyed by exchanges and brokers as recently as last fall.

Ambitious deal-making promised to remap the sector, and trading activity had resumed its upward trajectory after being dragged down by the 2008 financial crisis.

This week's gathering, organized by the Futures Industry Association, arrives as the trade body anoints a new leader. Walter Lukken, who was the futures industry's top regulator at the Commodity Futures Trading Commission until 2009, will take over presidency of the FIA from its longtime head John Damgard.

At the event, Mr. Lukken will host his own successor at the CFTC, current CFTC Chairman Gary Gensler, who has favored a more stringent approach to regulation than the flexible regime Mr. Lukken championed