Another commodity brokerage blowup, another reason to be glad you live in Canada.
South of the border, Peregrine Financial Group Inc.'s commodity and forex futures accounts have been frozen, the company has gone into bankruptcy, and more than $200-million (U.S.) is missing. Allegations of fraud are flying. And there's a good chance that investors will never see most of that money again.
The Securities Investor Protection Corp., the U.S. organization that insures investors in the event of a failure of a securities brokerage business, reminded everyone this week that it's not their job to cover any losses from a failed futures brokerage. It only covers accounts in traditional stocks and bonds.
But Canadian investors, we're assured, have all their money intact, will get it all back, and are well protected by the Canadian Investor Protection Fund if they don't.
This looks like a movie we've all seen before – and far too recently. It was only eight months ago that MF Global Holdings went belly-up, with funds missing from client accounts and leaving U.S. investors with little recourse other than to cross their fingers and take their lumps.
But investors in the Canadian division of MF Global were able to lean on the CIPF; it made temporary funds available while the bankruptcy trustee hunted down all the Canadian clients' money, and assured investors that they would be eligible to receive up to $1-million per account to cover any losses.
It's been a long and at times frustrating process for MF Canada's clients, but eight months later, all but a handful have gotten every penny back. Roughly a half-dozen large accounts that exceeded the CIPF's $1-million limit are still out of pocket, but the estates of the dearly departed MF Global and MF Canada are negotiating a settlement that should deliver their missing funds by the end of summer.
Meanwhile, in the U.S., the MF Global mess has cost investors a collective $1.6-billion – and yet little has changed to better protect the innocent victims when futures-brokerages self-destruct.
Despite plenty of talk about how to address the inadequate investor safeguards, the only new protection that has emerged is a $100-million fund that futures-market operator CME Group Inc. set up for family farmers, ranchers and agricultural co-ops, who use commodity futures to manage risk in their businesses. (The CIPF, operating in a much smaller marketplace than the CME, has four times that amount on hand.)
Individual farmers and ranchers are eligible to receive up to $25,000 to cover losses in the event of an insolvency of a CME member brokerage. Co-ops can get up to $100,000.
It's a pittance, bordering on a joke. And it doesn't cover anyone who has a futures account for purely investment purposes.
In the case of Peregrine, it doesn't look like the CIPF will be needed at all – the funds managed by Peregrine's Canadian unit were well segregated from the failed U.S. parent, and another brokerage house, R.J. O'Brien & Associates Canada Inc., has already agreed to take all the Canadian accounts. It looks like regulators have smoothed out some of the kinks that slowed down the MF Canada process (many of which, in fairness, were way out of their control, as the Keystone Kops routine in MF Global's muddled U.S. process made their job complicated).
Several former MF Canada brokers ended up moving to Peregrine; for clients who followed them, this is now the second time in less than a year that they've been forced to switch brokerage firms. Some of them are, understandably, throwing in the towel in frustration, vowing to give up commodity futures investing altogether.
But for clients in the U.S. who followed their MF Global brokers to Peregrine, they now face a second financial bath in a matter of months. (Some of those are Canadian residents and businesses, who for some unfathomable reason insist on having accounts with the U.S. head office rather than the much-better-protected Canadian operation. Buyer beware.)
That's not just a black eye on these two companies, but for the entire futures-trading business. Retail investors have increasingly been looking to commodities as a viable asset class to diversify their portfolios and find much-needed returns. Unless the U.S. industry can give them some better protections against the failures of its own members, the risk is going to look too severe.