MF Global clients asked to take a hike Wednesday, March 19, 2008
FT Alphaville has a report that MF Global [where I once worked] has hiked its margin rates considerably. Under the heading "MF Global Reiterates Strong Liquidity Position (and tells clients to get lost)" it notes that
And when we say “hike” we mean a move, typically, from 25 per cent to 75 per cent or more. In fact, for UK small caps the requirement is now 90 per cent.
Those most notably affected are thousands of traders and speculators using CFDs, who have either had to deposit extra funds immediately, move their business elsewhere or liquidate their positions. And then there is MF’s own army of brokers - many of whom are on substantial commission arrangements and who have now lost much of their client base overnight.
According to well placed market sources, this has added “meaningfully” to some of the unexpected price swings seen across the London market in particular over the past 24 hours.
This is an interesting development for the following reasons:-
- it certainly provides the firm with added protection against market swings and potential impact from client defaults.
- in the case of CFDs, where the trades are backed off against the underlying equity and the related stock borrowed/lent to settle trades, it may partly reflect market conditions in the stock lending market, where collateral rates will have also increased to reflect price volatility.
- it places the firm at a competitive disadvantage to many of its rivals in space where margin, commission and interest rates are keenly negotiated by clients.
- it may bring in extra cash into the pot sourced from clients willing to pay the higher rates, but equally if clients do liquidate positions and move their business this will result in cash outflows.
- Multi-product clients may decide to move all their business away, even though only part of their activity is affected
- Client relationships will have been harmed given the disruptive nature of closing/moving positions. Likewise trust will be hit e.g. such a policy might be widened to other products and confidence in the firm if the move is perceived as a desperate measure
- The reduced activity in CFDs, where MF Global is a major player by volume if not value, will also reduce its stock lending business, cutting it out of some of the important flow as well as hurting any guaranteed income deals it has with lenders that provide stock it no longer needs.
- MF Global provides white label CFD services to other firms, and they will have to pass these hikes onto their clients too, with a knock-on business/reputation impact for them
UPDATE: For whatever reason, FTAlphaville have removed the blogpost, which is almost unheard of. Of course, the post is already floating across the internet via rss, and so it's still showing in my Google Reader. Either they got the story completely wrong or someone didn't like its' tone. Meanwhile, CityIndex has also raised its' margin requirements to 10% on FTSE100 and 20% on FTSE250, but which suggest that collateral requirements in the stock lending market aren't high enough to warrant the increases by MF Global that FT Alphaville reported.