Thursday, November 03, 2011

MF Global Collapse - Need for Caution....and wisdom...

UPDATE: A few people wrote that MAS has rules to require brokers such as MF Global to seperate client money from its own. Having a law is one thing but ensuring that it is followed by effective policing is another. Also, are Singapore investors using MF Global in the situation as investors of defunct s-chips - the MAS unable to go after the wrong doers because they are not in Singapore even though the crime was committed here. It is useless to have laws when it is hard to go after people who break it.

MF Global a financial dervatives broker has collapsed and filed for chapter 11 bankruptcy. MF Global was allowed to operate in Singapore offering exchange traded derivatives, futures, options, forex and OTC (over the counter products) such as contracts for difference.

MF Global collapsed due to wrong bets on European sovereign debts but that is not the main problem. The CEO, a former Goldman Sachs executive, dipped into client money to pay for losses. Now it is not clear how much money can be recovered[MF Global accounts shock leaves clients scrambling]

MF Global has been operating in Singapore[Link] and signing up clients here. The number of clients is about 1000 . However, MF Global is not the only one operating here. Over the years our financial sector has been deregulated to the point, many such brokers of various sizes have set up shop here. It is very hard to educate investors on the risk of setting up an account with these firms as they weave into our financial system and many Singaporeans simply believe they are safe because they are allowed to operate here - many are not aware that the Singapore govt, out of its aspiration to be a financial hub, has been deregulating to attract investment banks and brokers to set up here. These firms are allowed put out glossy advertisements in local financial magazines, on our cable channels and set up booths in Raffles Place and at exhibitions  to sign up clients and some offer free 'educational' talks on investing. It is quite easy for them to sign on clients as they make themselves appear legitimate and safe but they are not well regulated or monitored by the authorities. The PAP govt jumped onto the bandwagon of deregulation but how wise is it when you allow your citizens to be exploited with so little or no benefit  in return.

Several months ago, I decided to visit the office of one of these 'major' international brokers who has been advertising in our papers. magazines and at various Singapore websites. This broker has signed up thousands of clients offering an OTC product known as 'contract for difference'. I met the customer service officer (a Filipino) and the nice lady told me that the firm has hired 5 or 6 people - so they don't create much employment here.

Economists who view the financialization of the US economy negatively believe that much of the derivative trading has turned into nothing more than gambling. In the past, derivatives were used to hedge and pass on risks for businesses to speculators - it has turned into large casino. Most of the trading activity produce no net benefit for the economy. Singapore wants a piece of Wall Street but we take the best and leave out the less regulated modern day 'bucket shops' that will certainly bring grief and harm to our people. It is not clear if the MAS and the PAP govt will learn anything from this episode (MF Global collapse) but it is certainly time for us to rethink 'deregulation' even though nobody has Occupied Raffles Place because the police warned people not to be 'misguided'....but who really are the ones 'misguided'?...The ones who deregulated our financial industry to the point that left thousands stung by losses in toxic products or rogue brokers....or the few brave ones who wanted to Occupy Raffles Place?

27 comments:

SNA said...

Singapore to protect local investors who dealt with MF Global - Reuters

http://www.reuters.com/article/2011/11/02/mfg-singapore-idUSL4E7M24NL20111102

Lucky Tan said...

It is a bit late to 'protect'.

However, even if we get lucky this time and MF Global did not transfer funds out of Singapore. The next time we may bot be so lucky.

BryanT said...

"....or the few brave ones who wanted to Occupy Raffles Place?"

You meant the cowardly few who said that they would occupy but did not have the guts to turn up.

BTW, what has MF Global's wrong bets on European sovereign debts got to do with its offer of brokerage services here?

Lucky Tan said...

Bryan,

There were a handful who turned up buy discouraged by lack of attendance and police presence.

"BTW, what has MF Global's wrong bets on European sovereign debts got to do with its offer of brokerage services here?"

The problem is not that MF Global lost money but that it was not properly regulated to ensure that client money is protected and seperated from its own prop trading account.

Ghost said...

As someone who used to work in the derivatives market here in Singapore, I would say your complains about deregulation are mostly correct. The main problem started when the floor was taken away and everyone is allowed to trade online. This was forced through because the SGX came under massive pressure from the big boys and this was the move that killed the “locals” here in Singapore. There’s always a sense of gambling in the derivatives market but I believe the crazy bets MF Global made are a result of the online trading as you can do big trades quieter and faster online. From what I read, this was part of the problem at MF Global. The trades were done quietly in big numbers and people were surprised by the positions they took. At least when Nick Leeson did his trades, the rest of the guys in the market knew he was taking a big bet on something.

Anonymous said...

I was also into derivatives trading a dozen yrs ago in SGX.

when locals were moved to electronics trading, I had accounts with MF Global too.

But i remember client accounts are supposed to be segregated from other company trade accounts. Did they deregulate that one too???

slo said...

I fully agree with Ghost as I share the same background and have been in derivatives business since the 70s. The deregulation, seems to have taken a wrong turn, with even the SGX encouraging dark pools, high frequency and algorithm trades, all of which serves to serve the covert traders. All the SGX wants is volume and the need to be number one.

Can I add that there is nothing wrong with the derivatives model. If the user choose to gamble with it, they can use any instrument and there plenty around.

Lucky Tan said...

anon 10:20,

Companies like brokerages are always suppose to keep their own money separate from client money. That is the company policy. However, that is not the problem I'm discussing. The question is what regulation mechanism and checks is in place to keep the client money separate by the authorities.

In the MF Global case, they probably thought that they replace the clients' fund after they make big money from their bets - and go undetected because there is nothing in place to check if they had moved money out of clients' account. If there is a mechanism that prevented that or detected that, they wouldn't even try.

Our local brokerages members of the SGX are strictly regulated and audited, but these other players are not by our local authorities and because we are deregulated they like to come here to advertise and set up shop. The risk of something happening far outweigh the little benefit for Singapore.

Anonymous said...

Lucky, the clever money has all gone to agriculture. Only the dead beats are still trying to make money out of a broken machine like wall street and the sgx.

Lucky Tan said...

anon 12:42,

Agriculture is the big bet of Jim Rogers and value investor michael Burry. Yesterday it was reported that the global population reached 7 billion it is understandable we need more food and energy is needed. The other factor for wanting agriculture land is rapid urbanisation.

Kaffein said...

"Singapore to protect local investors who dealt with MF Global - Reuters"

I'm pretty dubious about the statement. I know they are different products in the financial world but the recent snub of the investors in Lehman Brothers collapse leaves much to be desired. In general Singapore does not have strong consumer protection laws.

On a separate note, have we wondered how the CEO could have ever dipped his hands into the bucket of client's money? Quite sure it's poor checks and balances.

All speculation: could it be that the very people signing the approval is his buddy CFO, or his drink buddies? I see a very similar vein of checks and balances in a tiny country I know. Husband, wife and all members of the same household hold various approving positions for each other.

Scary.

Kaffein

Anonymous said...

THOSE 60% WHO VOTED FOR PAP --- YOU DESERVE IT. GOOD LUCK.

Anonymous said...

From the past examples of how the government ignore the plights of citizens who suffer huge financial losses from the toxic products sold by banks and fraudulent S-chips listed in the SGX, the PAP deemed the welfare of its citizen to be insignificant compared to its aspiration for the country to be the number one financial hub. This is the tradeoff the PAP always talk of as an excuse for their poor decision- making. In the future, one can expect more citizens to be conned in the financial sector in the quest of PAP to be number one financial hub, thanks to the 60.1%.

Anonymous said...

It has been very clear for many years that the LHL regime and perhaps LHL himself and his scholar minister batch is schooled in right-wing economics best exemplified by e.g. 'trickle-down economics' and deregulation. Lucky is one of the few Singaporeans to be aware of this. :)

Anonymous said...

The CEO and management of MF Global should be held accountable for touching the monies of clients. They are supposed to be held in trust as collateral! How can MF Global use the money for their own business functions?

Goldman Sachs' name has really gone through the mud recently. This exposes just how shallow and irresponsible the global financial industry has become.

Anonymous said...

I don't think the MF Global collapse issue is as big a matter as the Lehman Brothers, Minibonds and other structured products cases in 2008 which affected a very large number of local retail investors due to banks being involved.

And despite the 2008 case where many investors who bought such products from the banks lost their money, PAP could still win 93% seats in GE 2011.

So this MF Global case should also not be an issue too because only a very much smaller group is affected.

Anonymous said...

occupy wall street - and now Greek PM is holding a referendum to ask if the Greeks want the bailout plan. Should the Greek PM be lauded for asking the people instead of USA politicians doing all the wrong things that infuriate the public? Any views on this - is Greek PM deserving of the flak indicated by the press?

Anonymous said...

speaking abt agriculture. The Brotherhood has gone into it in a big way. They have sent their ppl out as far as Honduras and Uruguay to buy vast tracts of land. In Burma they have even drained swamps near nywipai to grow palm oil. The life there is very hard. But they seem to be doing very well in weathering this economic storm, as the price of oil palm seems to be going up and up.


GIC should have followed their lead. Instead them dumped all their monies into deadwood banks like UBS.

Anonymous said...

What I cannot figure out is why our government cannot think like these people who have decided to trade their ties for tractors.

If they claim to be the very best that money can buy, why cant they seem to predict way markets will turn against them and make the move out to greener pastures.

SE said...

You think this is BIG? Sit tight, there'll be more coming in, with their boatload of high trading frequency pitches by the crocodiles.

Now that they have exploded Euro & USA, they have only Asia left to wreck. I'm just waiting for our SWF to blow up and our CPF kaput into the air. Don't believe me? Where's their transparency today, and who are they accountable to?

http://www.businessweek.com/news/2011-10-28/norway-s-sovereign-wealth-fund-sold-all-u-s-mortgage-bonds.html

http://www.economist.com.hk/node/21534753

Good luck all.

Anonymous said...

http://www.bloomberg.com/news/2011-10-28/norway-wealth-fund-lost-52-billion-in-quarter-as-crisis-roils.html

Norway lost 52 biliions in their pension fund

Anonymous said...

quote : It is very hard to educate investors on the risk of setting up an account with these firms as they weave into our financial system and many Singaporeans simply believe they are safe because they are allowed to operate here - many are not aware that the Singapore govt, out of its aspiration to be a financial hub, has been deregulating to attract investment banks and brokers to set up here. : unquote

since when have we really come across programme (television or otherwise) or talk shows to dwell on the risk (or the "dangerous" mechanics) of such instruments before the crisis. even today, has anyone come across such educational programme.

Anonymous said...

"I don't think the MF Global collapse issue is as big a matter as the Lehman Brothers, Minibonds and other structured products cases in 2008 which affected a very large number of local retail investors due to banks being involved."

alone it may not be big relatively to the big boys but super big for the casualties (investors who got burned real bad. the million dollar question - are there any more further to MF Global.

Anonymous said...

Lucky,
Just to keep things in perspective, the Securities & Futures Act and its subsidiary legislation make it compulsory for brokers to segregate clients' money.
Unfortunately, any sanction for breach is meted out against the company itself and not to the individuals who make the decision to pilfer clients' money. It seems they would be dealt with under the criminal law i.e. Penal Code etc.
But would you agree that irregardless of what regulations were in place, anyone who wants to commit fraud would find a way to do it?

Anonymous said...

the bankers, property developers and government are the greatest con men of this era.

Anonymous said...

"the bankers, property developers and government are the greatest con men of this era."

like any other groups, they are no better or worser (as far as moral goes) than any other "lesser" groups of people in terms of human (survival) instinct of wanting to horde as much resources as possible.

just that they possess more resources (& more internal guts) to market or orgainise themselves better so that the unknowing lesser groups will help them to perpetuate this myth at the latter's own expense.

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