MF Global Holding’s Liquidations and the November 17th Commodity Prices Rout

Aside from China’s proposed increase on credit margins for Silver, I think that the unwinding of mostly commodity assets of bankrupt MF Global Holdings has had much to do with the rout in the commodity markets last Thursday (November 17).

The above chart from stockcharts.com, is the weekly charts for gold, silver and CRB indices which exhibits the steep decline last Thursday.

From Businessweek-Bloomberg dated November 16th, (bold emphasis mine)

The trustee liquidating commodities broker MF Global Inc. filed papers yesterday setting up an emergency hearing tomorrow for approval to require the accelerated filing of claims.

Six customers filed a motion asking the bankruptcy judge to overrule the trustee and allow customers to take out 90 percent or more of their collateral.

In papers filed yesterday referring to his “vigorous efforts,” the trustee said the “precise size of and the reasons for the shortfall in segregated accounts are not yet known by the trustee, law enforcement, and other officials and regulators conducting investigations.”

If the trustee has his way, there will be a two-track process where commodities and securities customers must file claims by Jan. 27 to receive the maximum distribution of so- called customer property. General creditors must submit claims by May 28.

James W. Giddens, the trustee for the MF Global broker, said he has already distributed about 3 million commodities contracts in 17,000 customer accounts, together with $1.55 billion in collateral, to 12 or more other brokers. Accounts that weren't transferred by Nov. 11 are undergoing an “orderly liquidation,” Giddens said.

Giddens also said he's looking for other brokers to accept bulk transfers of 450 customer accounts for securities. He also asked a judge to let him transfer about $520 million in collateral to commodity customers whose accounts consisted solely of cash on Oct. 31.

The trustee said he will review customer claims on a “rolling basis” as they are filed. Given what he called the “relatively poor state” of the books, the trustee said he hopes to make additional requests to the court for further distributions of so-called customer property.

Giddens was unable to transfer accounts immediately because about $600 million of customers' collateral is missing. Consequently, open contracts transferred to other brokers weren't accompanied by all the collateral customers had on account with MF Global.

Six customers in their motion filed yesterday contend the trustee should be giving them at least 90 percent of the collateral. They arrive at the figure saying that the $600 million in missing cash is about 10 percent of the $5.5 billion supposedly held for customers.

Missing cash, accelerated filing (November 15th) of claims and orderly liquidations for accounts that have not been transferred seem to coincide with November 17’s rout in commodity prices.

I expected this liquidation induced volatility from MF Global Holdings to happen a week ago. Apparently legal obstacles may have delayed the process from taking place until late this week.

While it is unclear if the procedural liquidations has culminated, the likely effect from this should be temporary which means current weakness in commodity prices may prove to be a great buying opportunity.