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Opalesque Futures Intelligence

How Rule 1.25 Impacts Professional Investors: Where did MF Global Money Go?

Friday, December 02, 2011

How Rule 1.25 Impacts Professional Investors

Where did MF Global Money Go?

Rule 1.25 is designed to restrict how a Futures Commission Merchant (FCM) can invest segregated client funds.

Often an unknown, when an investment in futures and options is made nothing is bought or sold, the money is placed as a “margin deposit” in the name of the investor on the books of an FCM.  The FCM can then invest this money in various interest bearing products such as treasuries, municipal and foreign bonds, among other “low risk” and liquid instruments.

Most significantly rule 1.25 restricts the financial investments in which FCMs can invest segregated account deposits.  The rule requires GSE securities to be fully guaranteed by the U.S., makes sure that CDs are non-negotiable, insists that commercial paper, corporate notes is fully guaranteed, The proposed rule change does not impact: treasuries, municipals and money market mutual funds.  The rule eliminates investments in foreign sovereign debt entirely, a potential warning sign to which professional investors should note relative to the potential seriousness of the debt crisis.  The rule also eliminates in-house transactions, a potential insight into the very specific problems that might be found in the CFTC’s examination of MF Global’s issues.

“Every single day an FCM must file a segregated report.  On Friday, prior to the (MF Global bankruptcy) everything was fine, on Monday the bells went off,” according to Russ Wasendorf, Sr., founder of FCM PFGBest.

Speaking on PBS Nightly Business report, Wasendorf, a former NFA board member, offered one potential opinion on the case of the disappearing $600 million: “Something happened in the middle of that time.  Futures regulations work just fine.  Once the money was transferred it went into a new regulatory environment, probably covered by banking rules, which supersede the regulations of the futures industry.” 

Click here to view the CFTC’s proposed changes to rule 1.25.

Risk Disclosure:

MANAGED FUTURES IS NOT APPROPRIATE FOR ALL INVESTORS.  IT CAN INVOLVE VOLATILITY AND RISK OF LOSS.

While this article is written with balance and accuracy in mind, the content is designed for sophisticated qualified eligible persons.  It is not appropriate for all individuals. 
Qualified eligible person as defined under the (CFTC) Regulation 4.7., because they are: Registered investment company; Bank; Insurance company; Employee benefit plan with >$5,000,000; Private business development company Organization described in Sec. 501(c)(3) of the Internal Revenue Code with >$5,000,000 in assets; Corporation, trust, partnership with >$5,000,000 not formed to invest in exempt pool; Person with net worth >$1,000,000; Person with net income >$200,000 each of last 2 yrs. or >$300,000 when combined with spouse; Pool, trust separate account, collective trust with >$5,000,000 in assets;  User also confirms they meet the following Portfolio Requirement: Own securities with a market value >$2,000,000; Have had on deposit at FCM, in last 6 months, >$200,000 in margin and option premiums; Have combination of securities and FCM deposits. The percentages of required amounts must = 100%.

Opinions:

User represents themself to be a sophisticated investor who understands volatility, risk and reward potential.  User recognizes information presented is not a recommendation to invest, but rather a generic opinion, which may not have considered all risk factors.

User recognizes this web site and related communication substantially represent the opinions of the author and are not reflective of the opinions of any exchange, regulatory body, trading firm or brokerage firm. The opinions of the author may not be appropriate for all investors and there is no warrantee relative to the accuracy or completeness of same.  The author may have conflicts of interest, a disclosure of which is available upon request. 

RISK DISCLOSURE

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. YOU COULD LOOSE ALL OF YOUR INVESTMENT OR MORE THAN YOU INITIALLY INVEST. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS.

THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (“CTA”). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (“CFTC”) REQUIRE THAT PROSPECTIVE CUSTOMERS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT’S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.

YOU ARE ENCOURAGED TO ACCESS THE DISCLOSURE DOCUMENT. YOU WILL NOT INCUR ANY ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, WHICH WILL ALSO BE PROVIDED TO YOU AT NO ADDITIONAL COST.

MUCH OF THE DATA CONTAINED IN THIS REPORT IS TAKEN FROM SOURCES WHICH COULD DEPEND ON THE CTA TO SELF REPORT THEIR INFORMATION AND OR PERFORMANCE. AS SUCH, WHILE THE INFORMATION IN THIS REPORT AND REGARDING ALL CTA COMMUNICATION IS BELIEVED TO BE RELIABLE AND ACCURATE, PUBLISHER CAN MAKE NO GUARANTEE RELATIVE TO SAME. THE AUTHOR IS A REGISTERED ASSOCIATED PERSON WITH THE NATIONAL FUTURES ASSOCIATION.

No part of this publication or website may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher.



 
This article was published in Opalesque Futures Intelligence.
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