The thing about useful stuff is: MF Global clients asked to take a hike

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.

For the desk heads of the products affected e.g. CFDs, this will be a nightmare for their business, which they have developed and nutured over many years. Inevitably, these hikes will harm their P&L on which they are judged and bonuses paid [always a sensitive matter]. Even a reversal of the policy in a few weeks time, will not restore all of the business lost and whilst its' "quality" may be debated in some quarters, it will have wider implications. For example

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

For these reasons it will have undoubtedly been a hotly contested matter internally but evidently the senior executives decided the solvency of the firm and perceptions about it necessitated such action.

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.

Labels: credit crunch, Hedge Funds, MF Global