MF Global Fallout Haunts the Metal Markets

The MF Global mess continues to haunt the commodity markets. Reports suggest that MF Global could have engaged in rehypothecation or illicitly pledged collateral by their clients as collateral for its own borrowing (Wikipedia.org). And ownership issue over collateral has given way to numerous lawsuits and liquidations.

Writes Zero Hedge (bold emphasis mine)

That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk. Which in our day and age of infinite monetary interconnections, means virtually every financial entity. After all, just ask Gerald Celente what happened to his so-called gold held at MF Global, or as it is better known now: "General Unsecured Claim", which may or may not receive a pennies on the dollar equitable treatment post liquidation. What, however, was less known is that physical gold in the hands of the very same insolvent financial syndicate of daisy-chained underfunded organizations, where the premature (or overdue) end of one now means the end of all, is also just as unsafe, if not more. Which is why we read with great distress a just broken story by Bloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances. Essentially, this is at the heart of the whole commingling situation: was MF Global using rehypothecated client gold to satisfy liabilities? The thought alone should send shivers up the spine of all those gold "bugs" who have been warning about precisely this for years. Because the implications could be staggering.

Probably the core primary consequence of this discovery, which obviously has a factual basis, or else it would not lead to an actual lawsuit between two "reputable" firms (aka ponzi participants), is whether gold in the GLD warehouse, supervised by HSBC, is truly theirs, or has it all been hypothecated from some other broker who never really had the asset or the liquidity, and so on in what effectively can be an infinite chain of repledging one asset to countless counterparties. Because if there is on cockroach...

Suffice to say, expect either a prompt settlement in this lawsuit, or a fervent denial by all parties involved that any gold was misplaced. Because here is the punchline: each physical gold or silver bar has a unique deisgnator that should never be replicated, yet this is precisely what happened to lead to the lawsuit! In a non-banana world, there should never be any debate over who owns a given physical asset, as replicated ownership (note - not liens) effectively means someone stole the gold (or there was counterfeiting involved) and was never caught... until MF Global finally expired of course.

Read the rest here

Escalating European Crisis Weighs on Global Financial Markets

I don’t think last night’s selloff at Wall Street was mainly about the stalemate or the failure by the special debt-reduction committee to come into an agreement over budget cuts as portrayed by media.

Although I’d say that the extant gloomy sentiment may have been partly aggravated by the above events.

I would further add that the developments at the MF Global Holdings, where shortfall in U.S. segregated customer accounts may exceed $1.2 billion, more than double what was previously expected appears to be more of an influence considering the sharp declines in prices of the commodities.

Although I would reckon that last night’s semi-crash mostly reflected on European debt crisis, which according to reports, have been spreading to the core

From Reuters,

ECB policymaker Juergen Stark warned on Monday the sovereign debt crisis had spread from the euro zone's periphery to its core economies and was affecting economies outside of Europe.

"These are very challenging times... The sovereign debt crisis has re-intensified and is now spreading over to other countries including so-called core countries. This is a new phenomenon," Stark said in a speech to Ireland's Institute of International and European Affairs in Dublin.

"The sovereign debt crisis is not only concentrated in Europe, most advanced economies are facing serious problems with their public debt."

And growing evidence of the banking stress in Europe has been the fund flows (capital flight) to the US Federal Reserve

From Bloomberg

Foreign bank deposits at the Federal Reserve have more than doubled to $715 billion from $350 billion since the end of 2010 amid Europe’s debt turmoil, buttressing the dollar’s status as the world’s reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of Sept. 30, up from 22 at the end of 2010, according to a survey of 80 financial institutions by ICAP Plc, the world’s largest inter-dealer broker. The dollar has appreciated 7.2 percent since Standard & Poor’s cut the nation’s AAA credit rating Aug. 5, the second-best performance after the yen among developed-nation peers, according to Bloomberg Correlation-Weighted Currency Indexes.

In what appears to be a choice between two seemingly ‘toxic’ assets, investors have been exiting the EU and has flocked to the US, which alternatively means that US dollar has been winning this round so far.

Politically captive financial markets will remain highly volatile.

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.

Client Accounts Transfer from MF Global Holdings may trigger Market Volatility Next Week

Transfers of client accounts from bankrupt futures brokerage MF Global Holdings to new brokers may cause some market volatility next week due to possible liquidations on margin calls.

From FoxBusiness.com (bold emphasis mine)

--Ex-customers of MF Global are gaining access to frozen accounts moved to new clearing house

--Some traders fear new margin calls after the move

--Not all money backing current market positions moved with accounts

Some former customers of MF Global Inc. (MFGLQ) rushed Friday to sort through newly unfrozen funds--and awaited word on whether they will have to put up additional capital to back their market bets.

Friday, CME Group Inc. (CME) transferred about $1.45 billion in 15,000 customer accounts from MF Global's U.S. brokerage--roughly 30% of the 50,000 accounts to be moved--to new clearing firms. A group of 10 clearing firms received the bulk transfers throughout the day Friday and began contacting clients about the accounts.

For many of those new clients, the process was a nerve-wracking experience. Some said they were still unsure of when they would gain access to an active account, which is required to resume trading. Others who gained access rushed to sell some positions in order to meet what they expect will be margin calls due to bets that have turned against them over the past week.

For all open bets in the commodities markets, traders need to put up cash to back the position, known as posting margin. In order to keep holding those bets if the contract falls in value, traders are required to post additional cash with their clearing firm.

But confusion still reigns over much of the market and traders are unsure whether their new clearing firms will require them to post additional margins on their trades.

Reuters estimates that some $1 billion will need to be raised next week (bold emphasis added)

There was little sign yet of mass liquidations analysts feared may ensue as traders rush to raise up to $1 billion in additional margin with new brokers.

But with margins due Friday evening or later, forcible liquidation looming on Monday morning, and thousands of accounts still unsettled, dealers were jittery.

"It seems that without MF (Global) in there...no one wants to be held with big positions, if and when these accounts are allowed to trade. It's better to have a lighter position on, in the event that you get a move in the markets," Bill Raffety, senior analyst for futures brokerage Penson Futures in New York, said of the day's light trade in soft commodity markets.

MF Global holdings chief Jon Corzine, a former chief of Goldman Sachs and former governor of New Jersey, who resigned yesterday without his $12.1 million severance pay, made bet a huge bet in Euro debts in the belief that “Europe wouldn’t let these countries go down”, which obviously boomeranged.

Mr Corzine was apparently undone by his extreme faith in governments to deliver miracles and possibly on expectations of a MF Global bailout—both of which did not occur.The Bank of England (BoE) says that MF Global "posed too small a risk to financial stability to merit a bailout" (Bloomberg)

To add, many of major market participants, like Mr. Corzine, have been positioning based on expectations of the directions of political actions from policymakers and their possible ramifications. This validates my view of how politicized financial markets have been.

Yet our fundamental difference; Mr Corzine trusted governments too much (and was betrayed) while I am too deeply skeptical of each and every actions made by politicians and their wards.