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The Globe and Mail

MF Global sows winter of discontent for Chicago exchange

Traders at CME Group in Chicago. The grain futures clearinghouse is in the spotlight after the collapse of giant brokerage MF Global and the loss to farmers and other agri-businesses of up to $1.2-billion (U.S.).

Kiichiro Sato/Associated Press/Kiichiro Sato/Associated Press

Agricultural bankers and other players in the world's grain markets say fallout from the collapse of giant broker MF Global is changing cash grain trading and fuelling calls for alternatives and reforms.

Trading changes include more "back-to-back" transactions (where purchases and sales are done simultaneously) and more direct contracting by farmers to end-users, eliminating middlemen like MF Global, merchandisers say.

Bankers and traders also say anger with lack of oversight by the Chicago Mercantile Exchange clearinghouse regarding MF Global's supposedly secure customer accounts is rampant, spurring calls for more regulation of a traditionally close-knit, clubby and "self-regulating" industry.

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Proposals have included the idea of setting up a separate "insurance fund" to hold the so-called "segregated" accounts that futures commission merchants (FCMs) now hold and account for with the exchange clearinghouse, which is supposed to "mark to market" every trade every day to assure adequate capital.

Up to $1.2-billion (U.S.) in such segregated customer funds are still missing eight weeks after MF Global collapsed into bankruptcy after a revelation it had made a $6-billion bet on European sovereign debt that went sour.

"I don't think people are satisfied with CME's response. What the banks thought was rock-solid isn't as rock-solid any more," said Lance Holden, senior vice-president with Wells Fargo Bank, the largest private lender to agribusiness that had customers who lost funds with MF Global.

CME Group chief operating officer Bryan Durkin told a packed meeting of the National Grain and Feed Association (NGFA) this month that MF Global was the culprit, not CME's clearinghouse, echoing earlier testimony by CME executives to Congress.

"This was the failure of a firm. A firm that broke the rules, not the failure of any clearinghouse. At CME, we met our obligations," Mr. Durkin told the gathering of 700 farm bankers, grain traders, brokers and farmers in Chicago.

"We believe all customers affected should have their full balances and property returned by MF Global. Until then, we will not consider the process complete," Mr. Durkin said.

CME, looking to line up with its futures-trading customers and the banks like Wells Fargo who finance them, has pledged at least $550-million to the court trustee now sorting out the MF Global mess to help make good customers who were victimized.

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But CME will need to do more, grain traders said.

"We want to get the confidence back and restore confidence with the lenders too," said Diana Klemme, vice-president of Grain Services Corp. in Atlanta, which advises grain buyers and sellers on marketing and risk strategies.

As the CME's regulator, the Commodity Futures Trading Commission, as well as Congress and the bankruptcy court try to sort out accountability for the missing funds, many farmers and grain traders have backed off using CME's grain futures, the world pricing and risk-management benchmark for decades.

"There are some real concerns about figuring out just what happened and how we make sure the situation never repeats," said NGFA treasurer and director of marketing Todd Kemp. "Of course, the No. 1 issue among customers right now is return of supposedly segregated funds to customers."

Mr. Kemp said NGFA members, which include more than 1,000 firms that buy and sell grain, will find it hard to market grain without the CME. But confidence has been deeply shaken in the exchange and the FCMs who hold customer funds, he said.

"Our task in that respect is to re-establish confidence and examine changes that might help ensure safety of customer funds in the future," he said. "Some have suggested that we might look at changes in which entity holds customer funds."

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Oversight and accountability must be addressed, he added.

"NGFA historically has not been an organization that believes in more government regulation. However, it's clear that in some way customer protections need to be improved," Mr. Kemp said.

Bankers said CME will also remain squarely in the grain industry's sights as an institution that must re-earn trust.

"CME – all of the exchanges have been focused on contracts, more growth, all these hedge funds, private equity funds that are getting into these markets. They are focused on that instead of their base business," Mr. Holden said. "That something like missing segregated funds could happen – that's a big miss."


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