The Australian division of American futures and derivatives firm MF Global is now in administration, with the parent company filing for bankruptcy in the United States after it announced a loss of nearly $US200 million due to its exposure to the European soverign debt market.
It is understood customers from large banks including Commonwealth Bank, Westpac and ANZ are all affected and have been hit with margin calls. It is understood CommSec has told its clients they can no longer open new contracts for difference.
The Commonwealth Bank was contacted this morning, but no reply was available prior to publication. The Australian Securities and Investments Commission released a statement this morning confirming the firm was in admiinistration, and that trading activity has been halted, with Deloitte being appointed as administrators.
“Clients of other firms who receive MF Global CFDs should contact their provider directly. The administrator will advise how this impacts clearing for recent trading,” it said in a statement.
The regulator has been concerned about the CFD market for some time, even publishing documents for investors on how to trade responsibly.
MF Global, which is run by former Goldman Sachs head and New Jersey governor John Corzine, filed for bankruptcy in the United States after suffering a number of losses due to exposure to the European sovereign debt crisis. The company’s share trading was halted on the New York Stock Exchange, after falling 60% in just one week.
However, while shares in the US fell after the news was announced, most investors are remaining calm – most of MF’s revenue comes from its brokerage business, limiting its capacity to affect other parts of the fragile American economy.
The company has about $US1.6 billion in debt, and last week it reported a loss of nearly $US200 million. According to the US Commodity Futures Trading Commission, MF Global was within the 10 largest futures commissions merchants.
The local branch of MF Global was contacted, but no reply was available. It is understood MF holds only a minority stake in the local CFD market.
But the controversy highlights the current uncertainty surrounding CFDs, which are largely not understood by the majority of investors. The Australian Securities and Investments Commission has been attempting to educate the market on CFDs, especially since last year’s collapse of local trading firm Sonray Capital Markets.
Last year, the regulator even said it would start cracking down on the contracts for difference market, releasing a report in which it stated that groups are targeting CFDs towards investors who are not suited to trade them.
“The majority of investors do not seek or receive personal financial advice prior to investing in OTC CFDs. Investors are attracted to CFDs because of the leveraged opportunities they offer, the low initial capital required to commence trading and the perceived ease of trading,” it said last year.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
