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MF Global's demise felt by commodities exchanges


Jack Farchy writes for beyondbrics, the FT's emerging markets hub

The most dramatic effect of MF Global's bankruptcy is being felt on the other side of the world from the company's New York offices. Sheep farmers in Australia woke up on Tuesday morning to discover their wool futures market had closed down. MF Global accounted for 80 per cent of trading.

The story for larger markets such as oil, corn or copper markets is less extreme. But at futures exchanges around the world, one of the largest commodity brokers will not turn up for business today. When the London Metal Exchange opens its ring for the first trading session this morning, one fewer broker will take his seat on the red leather.

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MF Global was, of course, more than just a commodities broker, but its size and scale in the relatively small world of commodities broking means its bankruptcy could reshape the industry.

Particularly in U.S. futures markets, MF Global was a force to be reckoned with. By volumes traded, it was the leading broker on Nymex and Comex, where energy and metals futures are traded. MF Global was also the second-largest trader on CME and the third-largest on the CBOT, the marketplace for the most important global grains contracts, according to data published on the company's own website.

Even outside the U.S., it was the number three dealer on ICE Futures Europe, where Brent crude and Gasoil are traded, number 4 on Euronext Liffe, and number one on the Sydney Futures Exchange, the commodities arm of ASX which shut down on Tuesday.

The LME doesn't publish data on trading volumes by individual brokers, but MF Global was one of only 12 companies authorised to trade on the ring, and, according to competitors, consistently one of the leaders in terms of volume.

The immediate concern now that MF Global has succumbed to bankruptcy will be to disentangle the company's proprietary positions from those of its customers and to return their money. Trading volumes across commodities, which were thin on Monday, should pick up as investors succeed in moving their accounts to other brokers and start trading again.

In that way, the bankruptcy of MF Global appears, so far, to be following the pattern of Lehman Brothers in 2008. The collapse had a significant, but short-term impact on commodities trading, slowing business for days as customers moved accounts elsewhere.

Perhaps more significant once the dust has settled will be the impact on the brokerage industry.

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The loss of MF Global will leave an even greater share of futures trading in the hands of bank-owned brokers, such as JPMorgan, UBS, Goldman Sachs, and BNP Paribas.

The shift of power could be even more dramatic as it comes at the same time as another leading commodity broker, Newedge, is facing a period of uncertainty while its owners, Société Générale and Crédit Agricole, contemplate a sale.

The loss of one of their most aggressive competitors will also benefit the few large commodities brokers who are independent of banks, such as INTL FCStone, RJ O'Brien, OTC Global, Marex Spectron, GFI and PVM. One of these groups could certainly be in the running to kick start their expansion plans by buying part of MF Global out of bankruptcy; but even if they do not, they are likely to gain from its demise.

MF Global's approach to brokerage was to win market share by competing aggressively on brokerage fees, competitors say. As such, its bankruptcy should mean higher fees - as well as higher market share - for other brokers.

Moreover, its relatively orderly collapse appears to have highlighted the benefits of central clearing, and so could accelerate a move towards exchange-traded contracts that began with the Lehman Brothers bankruptcy and is being pushed by regulators.

Ultimately, the end of MF Global may be a boon for both commodities brokers and exchanges.

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Additional reporting by Gregory Meyer and Javier Blas

2011-11-01 05:00:47

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