The early estimates of the amount of money missing from MF Global customer accounts was $600 million, but the trustee overseeing the bankruptcy proceedings has revealed that the number is actually double that, totaling over $1.2 billion.
Farm Futures Senior Editor Bryce Knorr says that the actual dollars involved is probably not as important as the fact that there is so much uncertainty regarding the issue and the fact that it happened in the first place.
"Most people assumed that their brokerage accounts were relatively safe because the Board of Trade has long advertised that no one has ever lost a penny on one of its contracts," Knorr said. "That's still true; there has never been a default on a Board of Trade contract. The trouble is that the funds in the account that are over and above the value of the actual contracts; that's the money that's missing."
The comingling of funds is illegal and in the long run there is no insurance against that, so the confidence in the entire commodities field. Many people have closed their accounts, taken their money and gotten out.
"Because there are several tens of thousands of accounts are involved there are elevators that have hedges on whose accounts have either been frozen or if the positions were transferred in some cases the positions were transferred improperly," Knorr said. "So the elevators can't really do anything with those positions and are having trouble doing their normal risk management activities, and in turn the banks that finance them are getting pretty queasy because they don't know what their exposure is and then of course there are farmers who are in the same situation."
Knorr says that the bankruptcy may have had some impact on the volume of trading it is very difficult to determine what that really is. Regardless, he says that volume hasn't dropped off a cliff and that while $1.2 billion is a lot of money, it's a "drop in the bucket" compared to what is traded on a daily basis. He says that most farmers are not seeing much impact from this.
"Most farmers don't really trade futures directly," Knorr says. "But they do take positions through their elevator when their elevator buys their grain either on a forward contract or a hedge to arrive and covers that risk in the futures market."
Knorr says that this is a black eye for the industry not a black swan and is nothing on the order of the European debt crisis, the problems of the Super Committee or any of the things that have been shaking the market, although it won't help and will be a story that will pop up every once in a while for years because that's how long it will take for the lawsuits to be resolved.
"It is against the law for a company to use segregated funds, plain and simple that is the first thing you learn when you are a futures broker," Knorr said. "The fact that this happened and that is has taken such a mess to try to figure out is going to only increase the potential of increased regulation of commodity markets."
Already the House Subcommittee for Oversight and Investigations is planning a hearing on how regulators and the major credit-rating firms monitored MF Global in the months leading up to the bankruptcy.