Doing business in the post MFG era

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PNW_Trader
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Doing business in the post MFG era

Post by PNW_Trader » Fri Nov 11, 2011 6:18 pm

Even if you were lucky enough to escape the MF Global fiasco, you should, in my opinion, pay attention to what it means for your futures business. Net, net, the message is that segregated funds are a fairy tale. Any money you have on deposit at an FCM are at their disposal to use as they wish. And, if the FCM goes bankrupt, then you need to wait in line like any other creditor and hope you get a good size portion of your account back. Of course the FCM will deliver beautifully illustrated brochures assuring you to the contrary. Well, just take a look at the MF Global brochures to assess the value of those documents.

So, what do we do going forward? If your system runs with "standard" money management, then for most periods you need keep only a fraction of your account cash on hand with the FCM. So, moving money in and out of the FCM will be a necessity. Second, it seems to make sense to spread the risk across multiple FCMs.

I'm thinking of a structure such as:

Primary cash account (PCA) - at firm with FDIC or SPIC guarantee (note for larger accounts that may require multiple cash accounts to get the full amount covered).

FCM1 - be able to easily wire funds from PCA to FCM1. Ideally, you are constantly getting margin calls - and wiring the minimum amount into the account (or wiring excess funds out).

FCM2 - also be able to wire funds easily from PCA to FCM2. Wiring of funds between FCM1 and FCM2 may also be handy.

System position equalizing software - a simple program which seeks to take the TB suggested positions and spread the risk across FCM1 and FCM2. This system needs to consider where existing positions are.

I don't see anything terribly difficult with all of this. Yes, it will make our lives that much more difficult. But, are we willing to take the risk and not do something like this? Fool me once, shame on you; fool me twice, shame on me.

Thoughts?

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Re: Doing business in the post MFG era

Post by rhc » Sat Nov 12, 2011 2:08 am

From;
viewtopic.php?t=9060&postdays=0&postorder=asc&start=300
rhc (on Sunday Nov. 6th 2011) wrote: . . . . For my part, I'll be withdrawing surplus IB funds and depositing them straight into my bank account.
My IB account will now only contain the required funds necessary to maintain my positions (plus a small buffer amount to allow for forseeable new positions)

There is no advantage whatsoever for me to have excess cash in my IB account.
If I’m short of funds I will simply wire some back in. If I’m excess of funds I will simply withdraw.
Yes, It’s a hassle & a time waste but it seems to be the new cost of doing business in today’s ‘Corzined up’ world.
True to my word, the net worth of my trading account with IB has decreased by 60% and the net worth of my bank account has increased by 60%.
The minute I see something that I deem to be strange with IB's share price [NASDAQ:IBKR] is the exact same minute that my trading account gets decreased again.
As mentioned above, it's annoying but what can one do in a world where the the term "segragated account" means five-eighths of 'sweet fanny adams' ?

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Post by sluggo » Sat Nov 12, 2011 9:00 am

When deciding where to store futures account "excess cash" above the margin requirements, I perceive there to be an unpleasant trade-off. You can have either (A) Convenience, or (B) Safety. But you can't have both. Some examples:
  • Store all cash at the broker (FCM). This is the REFCO / MF Global scenario. There is significant counterparty risk, which the counterparty strenuously denies.
  • Store minimum-allowed cash at the broker and all the rest at a Cash Management firm. This is the Sentinel scenario. There is significant counterparty risk, which the counterparty acknowledges but poo-poos and issues worthless assertions and empty platitudes against. Sentinel's was, "We've been in business for more than 20 years offering cash management services, and we have never failed to meet a customer wire-out request, the very same day." Wire transfers, in large size, can be done the same day with one phonecall. You pay a fee each time you send or receive wire transfers.
  • Store min-cash at the broker and all the rest at a commercial bank. I've tried this and at least in my experience, in the US, there are several inconveniences. First, wire transfers must be initiated by physical signatures on hardcopy documents, and they take 24 hours or sometimes 48 hours to execute. There is no point-and-click-from-your-home-in-your-pyjamas wire transfer option. Second, US retail banks have a wire transfer limit of $1M to $3M (depending on the bank and the branch manager). Wanna transfer more than that? You must jump through numerous additional hoops and spend more time. Third, wire transfer fees are ridiculously high, so you don't want to be wiring in/out several times per month. And, oh by the way, there is counterparty risk. At least the counterparty admits this freely, and displays the SIPC sticker proudly on his front window.
  • Store min-cash at the broker and all the rest at an online bank. I have not explored this option very much. PERHAPS online banks offer more convenient and quicker wire transfers; I would hope so. PERHAPS their max-permitted wire transfer amount is bigger than $3M. PERHAPS their wire transfer fees are low; I have no idea. And oh by the way, there is counterparty risk. With little history to study, I have no idea how to assess this risk.
  • Store min-cash at the broker and most or all of the rest at the Treasury Department of the United States of America. They make this incredibly easy to do; Google for "Treasury Direct" and read the site. The good news is, counterparty risk here is the lowest imaginable. The bad news is, inconvenience is maximized. Treasury Direct is not a bank account, it is an electronic repository for US Treasury instruments. (I use it to buy and hold T-Bills). You can't wire-in and you can't wire-out. If you want to sell a T-Bill before maturity, this requires a paper signature, certified by your bank manager with his "Medallion" stamp, mailed in hardcopy form via the US Postal Service, to the Treasury Dept. I did one just as a test case; it took 7 calendar days to liquidate a Tbill.
  • Store min-cash at the broker and most or all of the rest in another, unrelated, account at a different money management firm. So if your futures broker is RJ Obrien, set up to do wire transfers back and forth between RJO and your account at (for example) Charles Schwab, or JP Morgan, or Merrill Lynch, or Interactive Brokers, or whoever. I haven't explored this very thoroughly, but I have "heard" this option can offer point-and-click wire transfers from home, in large size. However, there is counterparty risk. Merrill Lynch is owned by Bank of America, which some perceive to be higher than average risk. Schwab has lost its way after the retirement of Chuck and the firing of his successor, David Pottruck. JP Morgan could be burned to the ground by angry OWS protestors, etc.
  • Combine several of the above, and spend lots of your time (which you value at, what, $300 per hour?) overseeing them all. Watch for margin calls, constantly evaluate counterparty risk, constantly rebalance money among the accounts, etc.

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Post by Moto moto » Sat Nov 12, 2011 10:55 am

great summary Sluggo thanks.
I think there will be a lot of pressure on FCM,brokers and other intermediaries to implement more Real Time Gross settlements (RTGS)
between accounts. It is possible to have reasonably instantaneous transfers, the biggest limits are on costs and transfer limits - I think these things need to change and brokers and banks will need to allow greater access to clients.
However then who will wear the extra levels of security that often occurs with extra limits, and ease of access.
In an ideal world you can link various accounts to an exchange, a broker and the banks of your choice - and what can occur is a system that allows the "instantaneous release" of funds between accounts that have been pre registered. These can have checks and balances via security and clearly some time lag is required.....but in this day and age that ideally should be minimal.
One of the biggest issues is in banking security - it is scary how much the banks loose due to fraud and internal issues they have with tracking money flows. They never admit them of course, but last Christmas i talked to an internal IT specialist at one of the banks in Australia - even he admitted the projects he was working on was scary to say the least. One of the biggest issues they had was with integrating old and new systems.
I wondered if there was a real IT opportunity for a clearing house system, and as he pointed out the biggest issue would be none of the banks wish to open their systems to others, admit that there are lots of internal security/IT issues and also the fact they make a lot of money from the "slippage in transfers via interest" means they are not really incentivised to make things more convenient for their customers to the banks expense. :(
and so Sluggo i think you are 100% correct in that its going to be another trade off - or at least an extra cost for that convenience ......maybe, just maybe - if anything good comes out of this MFG debacle it is a move to making such things more possible and accessible in a cost effective manner - as it will be forced on banks/brokers/people as opposed to them choosing not to have it happen.

and again.....this only covers excess cash - it still does not change the fact that the margins you might have at an FCM or broker might not be used inappropriately if things are clearly not truly segregated.

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Post by AFJ Garner » Sat Nov 12, 2011 12:39 pm

sluggo wrote:When deciding where to store futures account "excess cash" above the margin requirements, I perceive there to be an unpleasant trade-off. You can have either (A) Convenience, or (B) Safety. But you can't have both.
Sigh, yes an excellent summary. I did not think there was anything I had overlooked but I am sad to hear that Treasuries Direct is such a hassle for you guys; it sounded such a good solution. So, in our case it will remain highly rated money market funds, highly rated banks, and a necessity to leave a little more excess margin than we would like at a few different brokers.

Tiresome and miserable as this all is, in historic terms I do not consider it to be any worse than it has ever been. Banks and financial institutions having been going belly up since the beginning of (commercial) time. Even now, we have greater stability than at most times in the past. I won't bore you with "great bankruptcies of history" but if you want to take a look, Barings went bust well before the a-hole Leeson did them in - they overstretched themselves in South America in the 19th Century.

Overend, Gurney & Company was another spectacular 19th Century banking catastrophe and the list goes ever on.

A-holes like Corzine, Leeson et al will continue to f*** things up. Sometimes they will be criminal, sometimes they turn out to be mere fools and greed obsessed braggarts. Wonder which Jon Boy turns out to be.........

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Post by gunter » Sat Nov 12, 2011 12:47 pm

Have a look at Dukascopy's website. They have a service they call "Swiss Custodian Banking Services". In essence, you can open an account with any of their pre-approved banks and on a daily basis, Dukascopy will debit or credit your account with the Custodian bank.

This is a step in the right direction. Ideally, one would want accounts opened with all of their approved banks and then the debits and credits are done pro-rata on each account.

Perhaps some FCM's would be willing to enter into such agreements after the current MFG fiasco. I am pretty sure that if clients put pressure on them, such agreements could be reached.

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Post by svquant » Sat Nov 12, 2011 1:23 pm

Some FCMs have ACH based transfer capabilities so this is a little easier than wires and can be done in your PJs with T+1 settlement or so. I know IB has this now and next year RJO will have this capabilities. So now you need to just find a safe bank with reasonable ACH fee structure. I know some places for business accounts have a flat $25/mo for ACH capabilities. If you have a pool not a big expense for some peace of mind.

For those looking at what to do this is one area to explore, easier and less expensive than wires. Be aware there are sometimes max limits on transfers depending on the situation.

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Post by AFJ Garner » Sat Nov 12, 2011 1:25 pm

gunter wrote:Have a look at Dukascopy's website.
Hmm, never heard of them.

Any Swiss Bank can place fiduciaries with any bank of your choice. I assume they can even place money overnight rather than locking you in for any given period. In my experience Swiss Banks are horrendously expensive and smaller clients have difficulty negotiating fees down. Nonetheless, if you have a securities and a cash account with a conservative, non/low lending, fee generating bank they can place your money anywhere you choose: Rabobank, RBC, JPM, whichever look the least dangerous. Equally they can place it in a money market fund but it takes a couple of days to liquidate. I'll probably go over and see RBC (our custodian bank) and try to fine tune exactly what they can do and for what charges.

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Post by gunter » Sat Nov 12, 2011 1:58 pm

Dukascopy is a forex broker.

They will most probably be not what you are looking for, but their custodian offering is what interests me.

If it is not contrary to the laws and regulations governing your broker, then I am pretty sure something similar can be set up with them (if they are willing). Another option to explore would be to have your bank(s) issue bank guarantee(s) to the broker for x amount to cover margin calls which then gives you some time to deliver the money.

Not sure if brokers will want to use this approach, but I suspect after MFG they might be more lenient.

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Post by stopsareforwimps » Mon Nov 14, 2011 5:02 am

Moto moto wrote:I wondered if there was a real IT opportunity for a clearing house system, and as he pointed out the biggest issue would be none of the banks wish to open their systems to others, admit that there are lots of internal security/IT issues and also the fact they make a lot of money from the "slippage in transfers via interest" means they are not really incentivised to make things more convenient for their customers to the banks expense. :(
In Australia there is an RTGS system (I worked on it at one time). You can have money transferred to other Australian banks in real time. Fees may apply. This was done as I recall at the behest of the central bank to reduce counterparty risk. You can transfer money progressively during the day and there is no risk of "they couldn't make the overnight run".

Transferring abroad is still via the pony express. Funds may arrive 2-3 days later. Intermediate banks may deduct fees, but you cannot know what they are in advance. Even OzForex's rates are mediocre at best these days.

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Post by Moto moto » Mon Nov 14, 2011 9:23 am

stopsareforwimps wrote:
In Australia there is an RTGS system (I worked on it at one time). You can have money transferred to other Australian banks in real time. Fees may apply. This was done as I recall at the behest of the central bank to reduce counterparty risk. You can transfer money progressively during the day and there is no risk of "they couldn't make the overnight run".

Transferring abroad is still via the pony express. Funds may arrive 2-3 days later. Intermediate banks may deduct fees, but you cannot know what they are in advance. Even OzForex's rates are mediocre at best these days.
yes.....thats how I knew about it, but there are limits - costs, transfer limits, and not everybody has or wants it....plus overseas transfers still take the time.
Getting money into a FCM is generally easy - getting it out is the problem. If anything positive comes from the MFG fiasco is that this might be improved and become standard - the technology seems to be there, but the will does not.

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Post by Chuck B » Mon Nov 14, 2011 10:08 am

Moto moto wrote:Getting money into a FCM is generally easy - getting it out is the problem. If anything positive comes from the MFG fiasco is that this might be improved and become standard - the technology seems to be there, but the will does not.
I guess I'm just too pessimistic coupled with how this would look if you put yourself into the shoes of an FCM CEO. I would expect the initial reaction would be to circle the wagons, and hence, if anything, it will be more difficult (or unchanged) in the ability to get your funds out of an FCM quickly. They will point you to a litany of reasons why allowing rapid and continuous movement of funds in and out of their FCM company will result in series disruptions to their ability to manage the company in addition to adding costs that they will not bear and will therefore have to impose on every customer. Etc, etc...

The exception to this depends on two things: (1) your level of business with the broker (round turns/month), and (2) the amount of funds you have with them. Work some formula based on those two things with a heavy factor on #1, and you will then arrive at how you will be treated with respect to ease of movement of your funds and the fees (if any) they will charge you.

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Post by Robwynge » Sat Feb 04, 2012 7:52 am

I would love to revive this thread and ask, 3 months after the MF Global mess started, what are people doing? Have people found methods of account management that provide an acceptable trade-off between safety and convenience?

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Post by stopsareforwimps » Mon Feb 06, 2012 4:12 am

Robwynge wrote:I would love to revive this thread and ask, 3 months after the MF Global mess started, what are people doing? Have people found methods of account management that provide an acceptable trade-off between safety and convenience?
My plan is to have two accounts at >=2 different brokerages and to own put options on the 'other' broker at each broker, as an insurance policy.

I'm also planning to contact some investment banks to see if they will sell me CDSs on my brokers (currently I have 4). This mights be cheaper.

Not yet implemented but it's on my task list / flow chart.

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