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