Canadian rules differ | Avoid problems by dealing with brokers you trust
Is your money safe with your futures broker?
The MF Global bankruptcy has made it a pressing question for thousands of farmers who use futures to hedge their crop prices.
Fortunately for Canadian farmers, brokers here say Canadian rules on how brokers handle margin accounts and other client money tend to be tougher than in the United States.
It would be hard for a Canadian brokerage to take money out of margin accounts and shift it to other parts of their business, which is what happened with MF Global, whose bankruptcy saw $7 billion in margin accounts temporarily disappear and some of the money potentially lost.
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But no system will entirely protect farmers from fraud, so farmers need to be careful with whom they deal, especially with many new players entering the market now that the Canadian Wheat Board’s monopoly is ending.
“It’s the wild west out here,” said Brenda Tjaden Lepp of FarmLink Marketing Solutions about both cash grain buying and futures brokering.
“All these companies that are coming in to buy your wheat, how do you know they’re going to be good to deal with?”
MF Global was the single most important player in many futures marketplaces. Its strategy was to be everywhere and be involved in every market.
MF Global not only had Canadian clients and was active in Canadian derivatives markets. It was also one of the members of the ICE Futures Canada clearing facility, which transfers money between futures positions every day as they gain or lose value.
Canadian authorities seized control of the assets and operations of MF Global’s Canadian wing when the company slid into bankruptcy in the United States in November. After a couple of weeks of anxious unwinding, client positions had been shifted to other dealers and the markets were back to normal.
Tight rules in Canada limiting how brokerages handle money in clients’ accounts prevented Canadian clients from losing much or any money.
Looser rules in the U.S. allowed MF Global to move money between parts of the company and invest it in riskier assets. When the company collapsed, huge amounts of money appeared to have disappeared from client accounts.
Most of that money has since been recovered and 80 percent has been returned to clients. However, some farmers in the U.S. not only had their futures positions sitting in limbo for weeks but also had hundreds of thousands of dollars possibly gone.
Ken Ball of Union Securities in Winnipeg said MF Global’s bankruptcy was not only dangerous because of the enormous size of the company but also because it specialized in offering direct futures trading accounts to small clients such as individual farmers. Most companies don’t do that.
He wasn’t surprised MF Global had financial trouble as a brokerage because former MF Global clients told him they had extremely low fees.
“They were charging a quarter of the lowest commission I’d even consider,” said Ball.
Canadian brokerages are overseen by the Investment Industry Regulatory Organization of Canada (IIROC), which also operates the Canadian Investor Protection Fund (CIPF). It was the protection fund that petitioned MF Global’s Canadian operations into bankruptcy Nov. 4, with KPMG immediately becoming the trustee.
CIPF insures investors against some or all losses from the bankruptcy of a licensed dealer.
David Thomas, director of public affairs for IIROC, said Canadian rules are structured to prevent money going missing in the case of a bankruptcy.
“We have strong rules in place in Canada that require firms to keep client and firm assets separate,” said Thomas in an e-mail.
“IIROC requires firms to keep fully paid or excess margin securities that they are holding on behalf of their clients separate or segregated from the assets of the firm. The segregated securities must be held in trust for the firm’s clients.”’
Ball said the best way to avoid problems is for farmers to deal with people they trust. He said he has had only one call from a client in the wake of the MF Global collapse, and that’s because his clients trust him.
“Most I have been dealing with for 10 to 30 years,” said Ball.
