Wednesday, November 23, 2011

"Farm belt rage over MF Global could chill markets"

Combining nitwitted and possibly nefarious activities with the Ag economy, this is my kind of story
From Reuters:
When the CME Group pledged $300 million of its own money to help former MF Global customers get their cash back faster, the exchange was likely thinking of customers like Kansas cattle rancher Tim Rietzke.
Fed up and frustrated with his broker's collapse and what he sees as the CME's slow efforts to help him retrieve $30,000 in stranded capital, Rietzke says his faith in the futures industry has been shaken to its core.
"I would be hedging some feeder cattle right now, but I'm not going to do it. I'm leaving them exposed to the cash market and I don't like that," Rietzke said.

Rietzke may reside far from the trading pit in Chicago, but he and thousands of other ranchers and farmers across the country are at the heart of futures trading.

With billions of their dollars locked up by MF Global's October 31 bankruptcy filing, they are a key voice in determining if and when the futures business regains its poise and reputation.
"I have no confidence in the market, because it could happen at any other brokerage," Rietzke told Reuters from his 8,000 acre ranch near the southwest Kansas town of Coldwater.

Dozens of other market participants, most of them smaller introducing brokers or independent traders, say the painful lesson of MF Global is forcing them to reconsider a livelihood in the market and how they hedge future crops and livestock.

Some, like Rietzke, could reduce their hedging, or cut back on day-trading; others may take up trading exchange-traded funds (ETF) that track commodity prices, but are backed by a brokerage insurance fund by securities regulators.

While trading activity in New York and Chicago has recovered following a slump immediately after MF Global's collapse, exchange officials and experts fear the crisis -- as well as its messy, protracted aftermath -- may have a chilling effect on the markets for months or years.

As the symbolic figurehead of the futures universe thanks to its ownership of both the Chicago Board of Trade and the New York Mercantile Exchange, the world's biggest agricultural and energy markets, it is the CME Group that -- to many traders -- bears an enormous burden for making things right....MORE
Mr. Reitzke is not the only person to think there may be deep structural problems in the futures markets.
In a widely circulated letter, CME Introducing Broker Ann Barnhardt said last week:

BCM Has Ceased Operations (Part 1)
Posted by Ann Barnhardt - November 17, AD 2011 10:27 AM MST
Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate.

This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.
Continued . . . .