The recent MFGlobal bankruptcy saga was all in the news and it was such a hot topic that The Sunday Times put up a report and interviews on local Singaporeans investing/trading in stocks and CFDs. I guessed their agenda was to evaluate the investing climate of Singaporeans, and if there is a large percentage of people using CFDs. In fact, most of the interviewees were young adults in their early 20s. I guessed the journalists assumed this is a high risk group of people who are internet savvy and can easily be enticed into CFD trading, given the promise of making fast money. Without sufficient experience and knowledge, the youngsters may run into debts by leveraging on their trades. Most of the interviews showed that the youngsters mainly invested in stocks and stayed away from CFDs. I am unsure if this is deliberate to advise youngsters to avoid CFDs unless they are very savvy in investing/trading.
I trade CFDs and invest in stocks. But I shall not delve into so much details to explain the pros and cons of both type of securities. I am going to focus on my experience with MFGlobal Singapore. I used to trade with them until I received a letter from them dated 29 Jun 2010 (I added the bolding for the text):
As we have previously notified to you, for contracts for differences – “CFD positions”, MF Global Singapore Pte. Limited (“MFGS”) acts as agent to you even as it acts as sole principal to MF Global Australia Limited (“MFGA”) for each transaction. The transactions are effected in and subject to the governing laws of Australia. The money and collateral that you place with MFGS for CFD positions will, insofar as it is still held with or by MFGS be placed in a segregated account in accordance with the requirements under the Securities and Futures (Licensing and Conduct of Business Regulations).
[Free Ebook] How should you invest your first $20,000?
We asked 14 Singapore finance bloggers to share what they would do if they could go back in time and invest their first $20,000. They can no longer rewind time, but you can learn from their experience and hopefully start with a better footing.
However the amounts intended and applied to support the initial and variation margin on the CFD positions will necessarily be passed from the segregated account with or by MFGS to MFGA as initial and variation margin for the CFD positions (together with amounts from other customers of MFGS passed on to MFGA for the same purposes). You should be aware that under Australian laws MFGA is permitted to use the amounts in the segregated account to hedge the positions that MFGA has with its own hedge counter-parties. These amounts used to hedge such positions will be considered and treated as the collateral provided by MFGA for its hedged positions and will not be treated as segregated amounts. In the event of a bankruptcy or liquidation of MFGA or its hedge counter-party, such amounts will not be afforded segregation protections and you may not receive all of the money to which you may otherwise have been entitled. Please note that the above applies to any existing as well as any new CFD positions.”
I see a red flag in this letter. They are trying to say that your segregated account is no longer safe and they can touch your money! This is very different from the idea of segregated account – whereby the law protects the clients’ money from the brokers. I immediately closed my account upon receipt of this letter. I received a call from my broker who was trying to find out if the reason of closing the account was due to the letter and he offered a clarification if required. I told him I just would not be trading so frequently in the following months and want to close the account.
On hindsight, I should have warned more people about it, and maybe more people may have avoided this saga.
By right, clients should be able to retrieve their money if they are still in segregated account. It was reported that US$633 million customers’ money have gone missing and the US regulators are searching for it. The Sunday Times reported, “KPMG representatives in Hong Kong, who are overseeing the winding up of MF Global’s unit there, have said there are no indications there is anything amiss with client funds in Asia.”
I have also heard that those who still have positions with MFGlobal, they are not able to get back their monies. Maybe the following statement from The Sunday Times would be comforting, “[i]n its latest statement on Thursday night, MFGS said almost all the existing positions, or trades listed on the Singapore Exchange have already been closed out or transferred to other brokerages.” Nothing was mentioned about positions on other stock exchanges or derivatives trades.
Hopefully clients can get back their money soon.