MF Global Spreads has ceased to be

[Traduk]

KPMG state that they have so far recovered 82% of Client Monies ( £594 million ) the remainder being largely held by affiliates and in particular MF Global Inc. That suggests approx £130 million unlikely to be recovered.

Assume we will get dividend from KPMG with the shortfall being paid by FSCS ? - which I guess worst ways is encouraging for an eventual 100% recovery .

I got a letter from KPMG today but it only stated the outcome of the meeting earlier in January and some reference to the courts for approval of actions.

The FSCS sent me a form some time ago and in filling in the form and empowering them to act on my behalf they have effectively assumed the responsibility for full re-reimbursement which will eventually be forthcoming from them. The FSCS will then deal with KPMG to recover as much of the funds as possible commensurate with their payout.

If you had\have funds less than £50K with MFGlobal you should have received correspondence from the FSCS (providing you are a UK client) and IMO they are now my sole point of interest. What and how much KPMG recover is between them, the FSCS, larger clients and creditors.

Although appreciation should be reserved until after mission accomplished, I am more than pleased that we have a government sponsored compensation scheme in place that will take the strain.

The Canadian clients had the best deal of anybody because in Canadian law hypothecation (temporary use of client money) is against the law and according to various news articles Canadians saw their money back in 10 days.

 

[capitalspreads]

traduk

it is not a government scheme. the money for the FSCS is supplied by companies such as LCG (capital spreads) and IG, Charles Stanley etc etc. Effectively the well run companies pay when the badly run ones cost money. This must be the only industry in the world where this happens. Can you imagine creditors of Barratts Shoes claiming off Tesco and Next for unpaid bills?

So MF Global will eventually cost LCG shareholders.

Simon

 

[Traduk]

traduk

it is not a government scheme. the money for the FSCS is supplied by companies such as LCG (capital spreads) and IG, Charles Stanley etc etc. Effectively the well run companies pay when the badly run ones cost money. This must be the only industry in the world where this happens. Can you imagine creditors of Barratts Shoes claiming off Tesco and Next for unpaid bills?

So MF Global will eventually cost LCG shareholders.

Simon

If as you say it is a collective scheme whereby the members of the financial industry that fall under certain rules are obligated to pay up for losses for others in the industry, it must be very expensive. It is not something that is publicised, or at least not from what I have read, that other companies pay that compensation.

I am not sure of the exact numbers but since it came into being I recall that the FSCS has arranged the re-reimbursement for a few million people to the tune of several billion.

There is some logic in calling upon what was competitors to pay towards compensation but that does require the supposition that those paying will benefit by attracting the business from the failed company. It doesn't feel right in principle that a UK company should pay to meet the failings of a major international company but we live in strange times where UK tax payers are bailing out international banks.

I hope that companies such as yours that if called upon to pay towards ex MF clients compensation do get a share of those clients who wish to continue trading

 

[cookie]

In addition to lodging claim for cleared personal funds lodged with MF Global have also lodged claim with FSCS - dont really care who compensates as long as I get 100%.

I agree why should a well run honest SB company have to pay for the failings of a Rogue competitor ? Bottom line clients deposits should be protected at all times - without this guarantee we are taking a massive risk even before we even open any position.

FSCS have acknowledged receipt of my claim but advise that they have yet to have the account balance confirmed by KPMG to enable them to process. When received they will aim to complete claims within 6 months ??

Have subsequently been contacted by Spreadex claiming that they have purchased the Client List and have set up an Account for me advising A/C No and Log In - unfortunately with a Nil cash balance - how mean !!

 

[pboyles]

If as you say it is a collective scheme whereby the members of the financial industry that fall under certain rules are obligated to pay up for losses for others in the industry, it must be very expensive. It is not something that is publicised, or at least not from what I have read, that other companies pay that compensation.

I am not sure of the exact numbers but since it came into being I recall that the FSCS has arranged the re-reimbursement for a few million people to the tune of several billion.

There is some logic in calling upon what was competitors to pay towards compensation but that does require the supposition that those paying will benefit by attracting the business from the failed company. It doesn't feel right in principle that a UK company should pay to meet the failings of a major international company but we live in strange times where UK tax payers are bailing out international banks.

I hope that companies such as yours that if called upon to pay towards ex MF clients compensation do get a share of those clients who wish to continue trading

What you may not realise is that they are all rogues. Sure this time it was MF Global that got caught but it wasn't so long ago FXCM and Capital Spreads were fined. For these companies to now suggest that they are paying for the mistakes of others is a bit much. It's like a burglar blaming criminals for his high insurance premiums.

 

[Traduk]

What you may not realise is that they are all rogues. Sure this time it was MF Global that got caught but it wasn't so long ago FXCM and Capital Spreads were fined. For these companies to now suggest that they are paying for the mistakes of others is a bit much. It's like a burglar blaming criminals for his high insurance premiums.

In the past 20+ years I have had about 18 different brokers (4 currently) and of the half dozen that have gone under or amalgamated most were as a result of reckless clients reneging on massive debts when positions went badly wrong.

So far I have not lost a penny and hope not to this time.

You may choose to believe whatever suits you regarding brokers but I do not share your views as my experiences do not in any way correlate with your assertions.

MFglobal is unique and apparently used a work around of rules by a method which is relatively new. It may well be that the loophole they allegedly used may be plugged.

 

[Traduk]

In addition to lodging claim for cleared personal funds lodged with MF Global have also lodged claim with FSCS - dont really care who compensates as long as I get 100%.

I agree why should a well run honest SB company have to pay for the failings of a Rogue competitor ? Bottom line clients deposits should be protected at all times - without this guarantee we are taking a massive risk even before we even open any position.

FSCS have acknowledged receipt of my claim but advise that they have yet to have the account balance confirmed by KPMG to enable them to process. When received they will aim to complete claims within 6 months ??

Have subsequently been contacted by Spreadex claiming that they have purchased the Client List and have set up an Account for me advising A/C No and Log In - unfortunately with a Nil cash balance - how mean !!

I got some further clarification yesterday and it looks as though the process explained to me some time ago was misleading (possibly my interpretation).

KPMG are supposedly with an interim distribution going to make the first payment. Once that distribution is made the information will be passed on to the FSCS with them making up the shortfall.

The information is confusing as it is from two different sources but I have been reasonably assured that uncomplicated cases will be resolved quite quickly.

I also got that Spreadex e-mail but haven't bothered to look at them yet. They quoted my MF account number which was only known to MF staff and me so I guess that they must have purchased the list. On their part it is a sales pitch and I will give them a look but doubt if I will go any further.

 

[lplate]

If as you say it is a collective scheme whereby the members of the financial industry that fall under certain rules are obligated to pay up for losses for others in the industry, it must be very expensive. It is not something that is publicised, or at least not from what I have read, that other companies pay that compensation. . . . There is some logic in calling upon what was competitors to pay towards compensation but that does require the supposition that those paying will benefit by attracting the business from the failed company. . . .

You are right that the FSCS "levy" (i.e. tax) is not publicised, but it is not paid with a view to shrewdly gain benefit; quite the opposite. Journalists find the FSCS a reader turn-off, and the industry does not like to tell its customers of this tax.
http://www.fscs.org.uk/industry/funding/levy-information/
The tax is on any institution upon which one of its customers might potentially have a valid claim.
Like the pensions "levy", the fscs levy, unlike a normal insurance premium, is based on turnover, so is not on how risky the contributor is, and thus more likely to claim.
Thus the classic unfairness of this was in 2009, when the cautious mutual Nationwide BS (members, i.e. customers) paid a quarter billion, over half of its profits, towards supporting the reckless banks. (The Abbey demutualisation in 1989 dragged the old ("pre-internet") building society compensation scheme into the wider morass of financial risk. (Note there is provision to "pool" the whole scheme if a big call upon funds occurs.)
The FSA sets a different level each year. In theory as a ratio of turnover this should tell you how much risk lies in the system. I doubt they are that clever, though, and when a big call occurs they have to bump up the levy in arrears.

Personally I'd like the non-High St FSCS scheme abolished and require customers to buy their own insurance, proper Credit Default Swaps unlike the past Mickey Mouse ones, so then a saver or investor with a racier institution then finds they have to pay more to deal with a risky institution. That would have been a warning with MF, because then the price of the CDS would have been higher.

On the issue of segregation, I don't understand the significance of this versus non-segreation, as surely the broker in both situations needs to make the money work, if only to place a hedge on the customer's bet. I'd be grateful for your thoughts on this, Simon, and indeed of course on the FSCS.

 

[Traduk]

Lplate,

There are many pros and cons in any discussion regarding protection for client funds within broking companies and just as with the banking sector insurances may not be the answer especially as liabilities are dynamic. As unfair as it may be on well run companies, the FSCS protection is the last resort protection.

I imagine that the principle applied is that the companies that support the potential losers via a FSCS levy will benefit from some of the business from the clients of the failed company. The were plenty of companies that were quick to point out, to me, that they would welcome my business after the failure of MFglobal.

Some of those companies (UK based) were more than happy to point out that they were SFA regulated which also means they are subject to FSCS protection for clients which is a plus for them but means that they may have to pay out when a comparable company goes under.

Within the principle of segregated funds held by a brokerage, they were not available to the broker for any other purpose than to service an individual's account. In theory they were held as a source of funds on deposit to be used only as margin to cover client deals. Credits or debits depending on trader activity should have been added or subtracted as appropriate.

The funds which were ring-fenced should never have been co-mingled with broker money and used as collateral in any trading undertaken by the broker. Rehypothecation which is deemed illegal in Canada was not so in the UK which led to the unknown to UK clients, use of their funds contrary to the spirit of segregation. Clients have good cause to feel outraged by the fact that protection of segregated funds actually afforded no protection at all as re-hypothecation over-ruled segregated status.

Regarding the use of client funds. In the past interest was paid on accounts whether segregated or not and was a percentage just below LIBOR or T.Bills. Nothing wrong with funds being lodged overnight in interest bearing government bills (banks have done that forever). IMO it is an outrage when a broker bets the farm and all client funds (as collateral) on a high risk trade in which the client never knew of the trade or risk and was never going to share in the reward if the trade was successful.

The entire broking industry needs to look to the outcome of the MFglobal debacle because the days when clients left millions in trading accounts may revert back to the days when I started (20+ years ago) when just enough to run an account was left with the broker and margin calls were wired in as needed.

Back then the brokers had to extend a line of credit and swallow bad debts. A lot of brokers would not want those days back again but that is where it will go if confidence is lost.

 

[Hirose Financial UK]

On the issue of segregation, I don't understand the significance of this versus non-segreation, as surely the broker in both situations needs to make the money work, if only to place a hedge on the customer's bet. I'd be grateful for your thoughts on this, Simon, and indeed of course on the FSCS.[/QUOTE]

lplate
segregated accounts afford the client more protection. When you deposit funds into your trading account the actual money is sitting in a 'client' account at a Bank eg XYZ Client account Barclays Bank. This money (if a tust account) will be segregated from the Bank normal accounts which mean the Bank and the Trading company that you are trading with can not touch those funds to utilise in its normal course of business...hence segregated / ringfenced.
FSA rules do not now allow the company to use funds for margin purposes so companies have to be better capitalised than they were.

The FSCS are moving to new office space. I am sure the fish tank will look good.

 

[cookie]

As predicted KPMG are hoping to make an interim payment of verified Client Monies to the tune of 26cents in the Dollar ???

Why Dollars - I lodged £'s into a Sterling A/C ? I understand the interim will be paid directly into my UK A/C ( I can choose which one ) but I will be charged for any commission on currency exchange !!!

 

[capitalspreads]

as others have commented the difference between segregated and non segregated is

Segregated sits in a seperate account and the funds cannot be used for anything (particularly not for hedging client positions) The provider must use its own funds as margin to do this.

Non Segged we can use the funds as we see fit (not quite but almost)

The important point about all of this is contamination. MF were permitted to operate both as broker/market maker and as a "proprietary market risk taker". Nearly all SB/cfd companies do not have this risk potential. All we do is run as a market maker to client risk.

We do not suddenly decide that Italian Debt looks cheap lets buy a bundle of it.

In Gibraltar the regulator has a much better way of putting up FSCS type insurance. They insist on the regulated company actually "buying" insurance from a real insurance company. In this way they put the risk onto an insurance company for whom badly run companies would become a risk and they would charge more to insure. The problem with the FSCS is that they have control/oversight without any responsibility at all. If the regulators do a bad job it is not the regulators who pay it is the other regulated companies.

Frankly i would get rid of the whole lot and replace it with a Government Insurance Monitor to ensure that all companies with FSA regulatory oversight had suitable insurance against retail client risk. (it would be far, far cheaper) and fairer to all.

Well run/low risk companies would have low premiums. Companies offering ridiculous 15% per annum returns would be 'insured' out of the market.

Simon

 

[hacks]

As predicted KPMG are hoping to make an interim payment of verified Client Monies to the tune of 26cents in the Dollar ???

Why Dollars - I lodged £'s into a Sterling A/C ? I understand the interim will be paid directly into my UK A/C ( I can choose which one ) but I will be charged for any commission on currency exchange !!!

Yes i agree, it should be in pounds. Even though the £:$ exchange rate now is about 1.5792, the rate they used was 1.6141. If you add the 2.75% conversion fee that banks normally charge then you'd still lose and that's without additional bank charges for receiving money in another currency.

Another thing, I read their documentation that was sent on 2nd Februrary about the client money claims and they said they will not be making interim distribution payments of less than £100 or $160 "as the cost of making such payment may exceed the distribution in such circumstances" as they put it.

That means that anyone with a cash balance of less than about £380 at the time MF Global went into special administration will get nothing from this interim distribution.

 

[Traduk]

Yes i agree, it should be in pounds. Even though the £:$ exchange rate now is about 1.5792, the rate they used was 1.6141. If you add the 2.75% conversion fee that banks normally charge then you'd still lose and that's without additional bank charges for receiving money in another currency.

Another thing, I read their documentation that was sent on 2nd Februrary about the client money claims and they said they will not be making interim distribution payments of less than £100 or $160 "as the cost of making such payment may exceed the distribution in such circumstances" as they put it.

That means that anyone with a cash balance of less than about £380 at the time MF Global went into special administration will get nothing from this interim distribution.

If there was documentation sent out on the 2nd of February, I have yet to receive it but I would be surprised if there was any due for distribution as the court hearing was on the 3rd February which was to legally ratify the way forward.

The update on the site for the 3rd February does mention a contact to be made to each client by letter which when returned with a signed indemnity will enable the interim distribution (barring problems). I do not know how that will tie in with the FSCS but some progress towards a resolution will be welcomed.

I did not see any limitation on small sums held or payments restrictions but I probably wouldn't have noticed as I do not fall in that category. I did look at the pdf of the monies outstanding and the known claims against the pool and it looks like a mess that is going to take an awfully long time to sort out and I sincerely hope that my interest in the ongoing saga is ended by the FSCS.

 

[scose-no-doubt]

Isn't 26c in the dollar just 26%?

 

[tar]

Isn't 26c in the dollar just 26%?

it depends if your account is in dollars or pounds :cheesy:

 

[lplate]

...Segregated sits in a separate account and the funds cannot be used for anything (particularly not for hedging client positions) The provider must use its own funds as margin to do this.... MF were permitted to operate both as broker/market maker and as a "proprietary market risk taker". Nearly all SB/cfd companies do not have this risk potential. ...We do not suddenly decide that Italian Debt looks cheap lets buy a bundle of it...

Thanks Simon and Hirose Financial UK for your clear and full explanation of the meaning of segregation and for your thoughts on fairer insurance and on the competence of the FSA. Just to be clear, am I right to deduce the following:
1. As deposits in many mass financial products are not segregated, this means retail deposits in a segregated account in a spreadbetter are actually intrinsically safer than say, UK bank deposits, which are not segregated and now often have credibility only because of the “external” £85k deposit protection scheme. (I leave aside the issue of the safety of the bank in which the segregated funds are held, “Barclays” in the example.)
2. Spreadbetters with segregated funds such as Capital Spreads actually offer no real risk to deposits to the retail customer (the Barclays issue notwithstanding), yet the FSCS unfairly claims that such spreadbetters nevertheless have customers who could potentially draw upon the scheme, and thus must pay the FSCS levy.
3. From the retail customer’s point of view, MFglobalspreads offered an identical service to that of spreadbetting brokers using segregated accounts, i.e. a spreadbetting service, but the structure of the firm was completely different.
4. The FSA has not actually clarified its view on point 3 and so we don't yet know if it will adopt the customer’s viewpoint above and thus regard MFglobalspreads as a retail spreadbet service no different from any other spreadbetter.

 

[Hirose Financial UK]

lplate,

good points. Properly segregated funds held with a retail trading firm will sit in a Trust account at the Bank. The Bank gives a commitment not to use those funds, so yes it could be viewed as safer.....except.....Banks are for the most part safe (govt backing and lender of last resort) so the actual risk lies with the trading firm still...they are the ones who ultimately have to put (or not..MFG) the funds in the segregated trust account. This is where the breakdown happens.

 

[Traduk]

Thanks Simon and Hirose Financial UK for your clear and full explanation of the meaning of segregation and for your thoughts on fairer insurance and on the competence of the FSA. Just to be clear, am I right to deduce the following:
1. As deposits in many mass financial products are not segregated, this means retail deposits in a segregated account in a spreadbetter are actually intrinsically safer than say, UK bank deposits, which are not segregated and now often have credibility only because of the “external” £85k deposit protection scheme. (I leave aside the issue of the safety of the bank in which the segregated funds are held, “Barclays” in the example.)
2. Spreadbetters with segregated funds such as Capital Spreads actually offer no real risk to deposits to the retail customer (the Barclays issue notwithstanding), yet the FSCS unfairly claims that such spreadbetters nevertheless have customers who could potentially draw upon the scheme, and thus must pay the FSCS levy.
3. From the retail customer’s point of view, MFglobalspreads offered an identical service to that of spreadbetting brokers using segregated accounts, i.e. a spreadbetting service, but the structure of the firm was completely different.
4. The FSA has not actually clarified its view on point 3 and so we don't yet know if it will adopt the customer’s viewpoint above and thus regard MFglobalspreads as a retail spreadbet service no different from any other spreadbetter.

There is a lot of information available on the demise of MFglobal Spreads on the web. The Spreads division was a well run and highly profitable division, according to insiders of my acquaintance and if it was an entity on its own was a highly viable business. As a division of MFGlobal it is considered to be part of the whole company with no regard to its activity.

The problem was that it was just a small division of a major brokerage which as one of the largest should have inspired a sense of safety. The actions of the main holding group involved all subsidiary branches and the good, the bad and the ugly were all taken down together.

The problem appears to lie with Re-hypothecation which appears to me to be a ridiculous idea where funds held on deposit irrespective of ownership can be hypothetically used as collateral for a brokerages trades and not only to on excess of the funds but often to many multiple thereof.

According to what I have read the UK has\had the least stringent rules on re-hypothecation which I hope is rectified ASAP. There are accepted risks with managed accounts and inherent risks with non segregated accounts but the risk against the pool of segregated accounts should never have been allowed.

It is supremely ironic that a couple of seriously big traders who I know (one a hedge fund trader) would only use MF for the safety of size.

 

[howard0181]

I had about £62k in MF Global. My account was opened in 1999 with GNI as segregated but I cant find my original paper. KPMG tell me that I am non segregated. I cant prove that they are wrong.

My question is do we feel that segregated clients will get 100% before non segregated get a penny. I would have thought thats the case. I have claimed with FSPC and I think I will get £50k back withing three months so in reality I just need £12k from the administrator.