Until last October, farmers and fund managers rarely lost sleep over the extra money that they habitually maintained in their brokerage accounts, confident that it would be there the next morning.
Now, stung by the loss of customer money from the failure of MF Global Inc, many cannot sleep soundly without transferring every spare cent into their own banks overnight.
It is a sea change in the way that traders manage their excess collateral -- cash on account that is over and above the margin required to guarantee their trades. It means that floor traders and corn growers are spending more time, and in some cases money, moving cash in a process known as sweeping.
It is also one the clearest examples of the damaged trust between futures commission merchants and their customers in the wake of MF Global, which had been the country's most active commodity broker. Former clients are still missing over $1.5 billion of their MF Global funds, much of that excess.
For now, the impact of this change is limited. An extra hassle for some traders, more paperwork for brokers, and a boon for boutique firms that specialize in managing cash. But if interest rates begin to rise, the independent brokers hit hardest by the MF Global collapse will rue the loss of income.
For the clients who haven't taken advantage of this, they are doing it more now, says Pauline Modjeski, president of Chicago-based Horizon Cash Management, which helps manage about $2.5 billion of cash on behalf of dozens of funds and traders.
As opposed to sweeping large cash balances once in awhile, we're sweeping large cash balances every day.
This week, for the first time, regulators put a precise number on the excess cash: $10.6 billion at the end of December, some 6.8 percent of total segregated funds, according to figures from the U.S. Commodity Futures Trading Commission.
Previously the CFTC had only published a figure for required segregated funds to cover margins. The new figure for the first time included the total assets in customer accounts, explicitly noting the surplus cash that traders often keep on hand either because they intend to open new trades or for the ease of covering any increase in margins.
One large trader said the excess figures appeared to be about half as much as would typically be left on account, and a half-dozen industry figures all agreed that sweeping accounts was far more prevalent now than before the October 31 bankruptcy.
The reason is clear: The unprecedented misappropriation of segregated funds has shaken faith in one of the most fundamental cogs in the futures market.
More than three months since the collapse, former MF Global customers have only recovered about 72 percent of their total collateral. The trustee said last week that he is still $1.6 billion short of the funds needed to make customers whole.
Collateral is in many ways the lifeblood of the futures market. It is needed to maintain margin, the money a trader or crop producer puts up to buy any number of commodity futures contracts to buy protection from, or speculate on, falling and rising prices from a bushel of wheat or corn to gold and silver.
Because brokers must keep those funds in a separate -- or segregated -- account, they were seen as unquestionably safe.
MF Global changed that. While the Securities Investor Protection Corp insures stock market investors against a failing broker, commodity investors have no similar protection, although the CME Group now sponsors a $100 million fund.
Executives at the very firms who used to hold this money are none too surprised by the recent customer wariness.
I think that not only did (customers) get less money coming out of MF Global, they also got more sensitive to (holding) excess funds, said Leslie Rosenthal, managing partner with Rosenthal Collins Group in Chicago.
The exact sums of excess collateral are not possible to quantify. The CFTC was not able to provide any historical data on excess collateral, and brokers declined to provide any specific estimates to Reuters.
Pete Loewen, Loewen and Associates a broker in the agriculture markets in Manhattan, Kansas, estimates that excess money kept at FCMs has been cut at least in half.
People manage their money much more closely, says Loewen, who now spends less time analyzing the market because he is busier arranging money transfers to meet margin calls because clients do not keep as much of a cushion of funds in their accounts.
To be sure, any change is likely to be more pronounced among the smaller farmers, ranchers and commodity funds that were MF Global's mainstay clients rather than the larger, corporate clients that tend to trade through the Wall Street banks that hold over 90 percent of all segregated funds.
Overall, the shift in segregated funds since MF Global was relatively slight. Funds declined by $7.5 billion, or 4.9 percent, from end-October to end-December, a drop that was also likely affected by the frozen MF Global money, a decline in volatility and a reduction in futures trading volume.
BRIGHT SPOT FOR FCMs
There is no definitive trend among FCMs as to which customers tend to leave more or less excess collateral.
Four of the brokers that received bulk transfers of MF Global accounts after the brokerage failed -- Rosenthal Collins Group, PFGBEST, INTL FCStone and Penson Futures -- are currently holding 2.5 percent or less each in excess segregated funds. But so is Goldman Sachs.
And customers of ADM Investor Services have $48 million or 15.1 percent excess, according to the data.
For the moment, the extra sweeping of accounts is more a blessing than a curse. The shrinking pool of money that they hold also means they do not have to put up more of their own money -- some 8 percent -- to meet higher capital requirements.
The CFTC in 2009 revised its capital requirements, noting that in 1995 there were 255 FCMs, which in total were required to hold approximately $30 billion of segregated and secured amount funds for their customers.
By June 30, 2009, the total amount of those funds rose to around $175 billion, with half the number of FCMs holding the money, according to the CFTC.
FCMs have been also been forced to look elsewhere for yield as chronically low interest rates have reduced profits reaped from holding customer funds overnight.
But down the road, the trend could rob them of revenue.
There's no particular revenue downside but it frees up capital on our side, said Sean O'Connor, CEO of INTL FCStone. It would be different at higher interest rates of course as then we would be losing income earning assets.
(Additional reporting by Cezary Podkul in New York and Tom Polansek in Chicago; editing by Jim Marshall)