How close are you to the bankruptcy filing of MF Global and the subsequent liquidation of its client accounts by the federal government? Based on its popularity with elevator managers for clearing grain hedging accounts through the Chicago Mercantile Exchange (CME), many Cornbelt farmers may be closer than they think to the 7th largest bankruptcy filing in US history. What has happened, what is happening, and what will be happening? There are some lessons being learned that will impact the relationships involving farmers, grain elevators, and the banks that lend to both of them.
The MF Global financial failure occurred, even after the implementation of the Dodds-Franks federal legislation designed to prevent such occurrences. Nevertheless the Wall Street investment house with subsidiaries worldwide filed for bankruptcy October 31 after attempts at selling assets of the company failed over the prior weekend. Its investments in numerous European banks soured when European governments refused to bail out the banks. The company was losing money and $660 million investor funds could not be immediately tracked because they were not in segregated accounts. Those include many margin and hedging accounts belonging to clients such as farmers and elevators.
Because of the impact on grain elevators the National Grain and Feed Association conducted a webinar with members on November 10. It was designed to provide early guidance for holders of MF Global trading accounts and suggesting potential impacts of the various legal actions that are pending. Those actions include two bankruptcy filings by two of the three MF Global companies, and federal action against a third involving the Securities Investor Protection Act (SIPA), in which a trustee is handling the open hedging accounts.
The scope of the action most closely impacting farmers and elevators is the $660 million in undifferentiated trading accounts, which the SIPA trustee is attempting to find among the MF Global deposits in other investment houses. That represents 11.6% of the accounts, which seems to be the amount that could be lost by investors. However, all funds could eventually be found and returned to investor accounts. But in the meantime, there are about 17,000 hedging accounts at the CME which have been transferred to 11 other brokerages, with only 85% of their margin intact. According to Dale Michael, Managing Director of Credit and Risk Management of the CME, MF Global had $1.5 billion in CME accounts, and was over collateralized, or had more money standing in trading accounts than was needed. But Michael says the CME can only do what the SIPA trustee says can be done, and part of that is to prohibit account holders from withdrawing money until all funds have been accounted for. Bankruptcy attorney George Angelich of Arent Fox LLP, says that could take months or years.