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MF Global's Bad Check

Clients of MF Global that had the foresight to ask for their money back before the bankruptcy came this close to being made whole.

But, the recipient of the check above was unable get at the cash it represented.

MF Global Bad Check
Credit: CNBC Source
MF Global Bad Check

In his words:

"...this check had a two business day hold at my Credit Union, then the funds cleared on the third day, but the money was clawed back on the fourth day with the innocuous sounding reason 'Refer to Maker.'"

Security accounts are insured by SIPC, cash accounts at banks by FDIC, but cash accounts at Futures Commission Merchants (FCMs) are only protected by the good faith of the system. MF Global clients had good reason to ask for their money back. But, what about the rest of the industry?

While there have been fears that money would flee the future business altogether, that appears not to be the case. Instead, smaller futures firms seem to be moving customer cash to larger custodians.
In an 8-K filed November 21st, 2011 with the SEC, Jefferies Group refers to the alleged "Mass Exodus" of Prime Brokerage Clients.

"The only recent development in our prime brokerage business has been our moving the custody of certain client assets to J.P. Morgan Clearing Corporation pursuant to a longstanding agreement we have with them whereby we continue to provide all other services to our clients and custody is at JP Morgan on a fully disclosed basis. This is a far cry from false rumors of an exodus of clients moving to other firms or anything else of this nature."

Paul Frye, Straits Financial COO agrees that clients are becoming more cautious and asking more questions but says "there hasn't been a mass exodus of money."

Farmers and others involved in the markets that need to be in the futures markets seem to be willing to take on the associated financial risks - at least for now. Frye says he doesn't know how other companies do it but, he knows his clients personally, travelling to western Nebraska from Chicago every two to three months.

"They are not going to trust the system, it's going to be a question of whether or not they are going to trust you," he says.

According to its website, Straits Financial Group is the brokerage arm the largest publicly-listed logistics company in South East Asia and relies on commissions to pay its bills.

Frye and his company continue to believe in the futures market and has hired a group of eight former employees of MF Global to join its retail brokerage unit.

"We exist because big banks don't want farmers" he says.

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