CME Downgraded Because of MF Global

The CME was downgraded by S&P because of the collapse of MF Global. MF Global was a commodities broker that cleared its futures trades on the CME. The CME is the world's largest futures exchange operators by trading volume.

When MF Global collapsed, the CME said it would do all it could to restore the "lost" $1.3 billion of client money that had been stolen. I say "stolen" because that money was held in what were supposed to be individually "segregated" accounts that held property (cash) belonging to the individual client that owned the account. No one had a right to that money except the client. It is now clear that MF Global took that money.

The exchange had a pot of money reserved to make clients whole in situations like that. They did not use any of that reserve to restore the clients' stolen money. At first, it wasn't clear that the money was stolen (at least that's what was claimed). Now it is. The CME has still not offered to use their reserve to pay back the clients.

You can read the Wall Street Journal article that details the downgrade here.I don't know about you, but what I found most striking was this comment by a "spokesman" for CME:

"As we have said before, the protection of our customers and integrity of our markets are our primary concerns," CME's spokesman said. "Throughout the unprecedented MF Global failure, we have acted aggressively to speed the return of customer monies -- not because we had to, but because it was the right thing to do for our customers."

First, they didn't return the customers money. Second, what were those "aggressive" actions that they took? I don't know why they needed to do anything especially "aggressive" if they had a reserve in place to satisfy such situations.

Just think about this and you'll see that this spokesman is blowing smoke. He's trying trying to minimize the impact of an exchange being downgraded. The functioning of our futures markets depends on the integrity of the exchange on which transactions take place. The S & P specifically sites the CME's handling of the MF Global situation as the reason for the downgrade. Therefore the integrity of the Exchange is being questioned.

If the integrity of the world's largest futures exchange operator is being questioned, can people trade futures on an exchange whose integrity is questionable? If you knew someone had questionable integrity, would you loan them money? Would you leave something valuable of yours with them for safekeeping?

Imagine if another incident like MF Global occurs. What will happen to the futures market? In fact, how do we know that - right now - futures traders aren't wondering whether they should trust the CME? Is the futures market beginning to unravel - slowly. I don't know.

The futures markets have an impact on the real world. They're not just a place for speculators. If you don't understand that, we can talk more about this in the future.

For now, understand how the CME is trying to distract us from the serious nature of this downgrade. And understand that their performance under fire - the collapse of MF Global - is a disgrace.

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