Stephen Foley: MF Global mess shows need for drastic reform

 

US Outlook: Oh, 2011. Another year, and Wall Street invents another way for us to lose money we thought was safe.

Two months ago today MF Global, one of the world's biggest commodities futures brokers, filed for bankruptcy, and still we don't know what happened to $1.2bn that disappeared from supposedly segregated customer accounts. Hundreds of small firms and sole traders go into the new year without access to their cash, and the chances are they won't ever be repaid in full.

It's as if you go to the ATM and are told that half your money is gone. In the banking world, we have government-mandated deposit insurance to prevent these things happening, and to prevent bank runs that can bring the economy to its knees. No such thing, it turns out, in the world of commodities trading, which is why this part of the finance industry has been shaken to its core by MF Global.

Farmers and commodities buyers are looking at ways to cut out the middlemen, bypassing brokers and exchanges entirely by doing their own end-to-end deals. But only the big players can do that, which is why there is an urgent need for reform.

Brokers like MF Global are meant to keep client accounts separate from their own trading operations and the CME, which runs the exchanges where most commodities trading occurs, is meant to ensure that brokers are playing by the rules.

The whole mess has got commodities traders debating the question of whether a for-profit exchange can really be relied upon to regulate its own market. Imposing all that pesky paperwork kind of puts off its potential customers. Everything else being equal, brokers will gravitate to the exchanges with the laxest rules, the least oversight, the freest of free-for-alls, which is why these things are best imposed by government regulators.

Terry Duffy, CME's chairman, enraged traders with his "shit happens" testimony to Congress this month, in which he said: "Regulatory failures happen, unfortunately. Banks fail and ... the taxpayers get tapped. The laws prohibit Ponzi schemes, yet hundreds are detected every year after the public has been robbed and the money evaporated. Insider trading happens every day. Enron explodes, Lehman fails."

This is not a man who should be allowed to regulate anything.

For now, the CME is holding vigorously to the line that self-regulation and the system of segregated funds is working well, that the MF Global case can be explained by illegal actions at a singular company, and that all we need to prevent a repeat is an increase in the possible fines to deter transfers from customer accounts.

Many of the people affected by the MF Global debacle are individual traders and people actually working in the important agricultural sectors of the economy. They shouldn't have to simply adapt to the fact that their money could disappear at any moment. We should adapt the system to protect them, and that means broker-funded account insurance and an end to self-regulation by the CME.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Ashdown Group: Marketing Product Manager - (Financial Services) - SW London

£35000 - £38000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Day In a Page

Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project
Diana Krall: The jazz singer on being friends with Elton John, outer space and skiing in Dubai

Diana Krall interview

The jazz singer on being friends with Elton John, outer space and skiing in Dubai
Pinstriped for action: A glimpse of what the very rich man will be wearing this winter

Pinstriped for action

A glimpse of what the very rich man will be wearing this winter
Russell T Davies & Ben Cook: 'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'

Russell T Davies & Ben Cook: How we met

'Our friendship flourished online. You can share some very revelatory moments at four in the morning…'
Bill Granger recipes: Our chef serves up his favourite Japanese dishes

Bill Granger's Japanese recipes

Stock up on mirin, soy and miso and you have the makings of everyday Japanese cuisine
Michael Calvin: How we need more Eric Cantonas to knock some sense into us

Michael Calvin's Last Word

How we need more Eric Cantonas to knock some sense into us