Nov 14. MF Global implications

Some fairly large moves Friday, with pronounced weakness in US rate futures.  As of noon CST settle I estimate that tens were up about 7 bps to 2.12%.  EDZ12 fell 4.5 bps to 99.245, pegging a strike for midcurve Nov expiration.  While 3-month libor settings have been trending higher, it’s still interesting that EDH12 through EDM13 are all within 10 bps of each other at rates of 68-78 bps, (these contracts cover the period for which the Fed has pledged low/zero rates).  Most at-the-money straddles shifted to lower strikes; vol was MUCH firmer.  Stocks levitated Friday with SPX up about 2% and the DJIA up 2.19%…just about the same amount that one gets in interest over a YEAR in tens.
–Just a few notes about MF bankruptcy.  The CME announced a $300m guaranteed fund to facilitate release of cust seg funds!  The bankruptcy trustee fired 1066 employees and is disposing of almost all office space.  The missing money isn’t going to be magically found, and it’s likely a lot more than $600m. People have talked about MF as a “canary in the coalmine.”  Using the same analogy I would go a few steps further and say this part of the mine shaft has collapsed, and the entire mine is vulnerable.  The CME had an audit of MF on Oct 26 that supposedly went ok. Must have been pretty rigorous. My info is that MF customers aren’t certain of their positions or margin requirements and don’t know about their cash. As of Friday stock capitalization of CME was $17.27B.  The fallout of lower trading volumes and distrust of clearing firms probably can’t be repaired with $300m.
–Had MF’s position been small it wouldn’t have wiped out the firm.  But a large leveraged position is a big issue, the one that european banks are facing.  Perceptions of one area after another in the “risk management” universe are eroding…sovereign CDS because the Greek default wasn’t considered a credit event, “segregated funds” at brokers, bank safety, and even the integrity of exchanges themselves.

Posted on November 21, 2011 at 12:38 pm by alexmanzara · Permalink
In: Eurodollar Options

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