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MF Global Holdings signage at its offices in midtown Manhattan, Nov. 1, 2011. MF Global's Canadian unit has about 50 employees, operating out of trading offices in Toronto and Montreal.


MF Global Holdings Ltd.'s bankruptcy has all but shut down the company's Canadian division, leaving its employees in limbo and its clients' accounts entangled in a legal quagmire.

Late Tuesday, the Investment Industry Regulatory Organization of Canada (IIROC) formally suspended the commodities and derivatives broker's membership and trading privileges, after the company confirmed that its capital position had fallen below regulatory requirements. As a result, MF Global Canada can no longer execute any new orders, although the IIROC decision does allow the firm to liquidate existing client positions "in order to facilitate the orderly transfer of client accounts."

However, sources at MF Global Canada said that, in practice, it has been virtually impossible for them to unwind clients' accounts because of the tight rein imposed by regulators on both sides of the border on transactions by MF Global. All trades must be executed by calling a single phone number at MF Global's U.S. offices – and the line was so overloaded that by midday Wednesday, it had to be shut down, making it impossible for any client liquidation orders to go through.

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"So we're frozen here," one source said. "I don't know what to tell clients any more."

While MF Global Canada officials did not respond for calls for comment, sources said the Canadian operation's troubles are unrelated to the in-house "proprietary" trading that sank its U.S. parent, since MF Global Canada only trades an behalf of clients. Rather, its problems lie in how its clients' trading accounts are managed by the U.S. parent.

The money clients have deposited with MF Global Canada is held in a Canadian segregated account with Royal Bank of Canada, but funds are transferred to an "omnibus" account at Bank of New York to process actual trades and to secure margin requirements. That account is now tied up in MF Global Holdings' bankruptcy process, with MF Global Canada unable to access it until the bankruptcy trustee determines to whom the money belongs and authorizes the release of the funds.

Without access to that money, sources said, MF Global Canada's capital position fell below requirements, prompting IIROC's suspension order.

The trustee, law firm Hughes Hubbard & Reed, said Wednesday that it is trying to figure out how to free up client money so it can be transferred to accounts at other brokerage firms, but gave no timetable for when it might be able to do that. Any plan from the trustee would need court approval.

Clients' existing holdings are safe, since the derivatives contracts they hold are in their own names. However, with MF Global Canada unable to execute even liquidation or "offsetting" trades to cancel out clients' existing positions, the clients can't do anything about price swings in the market that could be unfavourable to their holdings.

MF Global Canada has about 50 employees, operating out of trading offices in Toronto and Montreal. IIROC officials have moved into those offices and are largely overseeing its operations. Some employees have already left the company, while others await word about whether their jobs will survive.

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"People have boxes at their desks, [preparing]to leave," one employee said.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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