The demise of MF Global

Tuesday, 15th November 2011 09:00 - by Robbie Burns

The collapse of MF Global raises one or two interesting issues. First, I should declare that MF Global owes me £45,000. I had £65,000 in spreadbets with them; managing to get 20k off them just before they went bust. I had a letter today from the Administrators... The upshot is that they are trying to sort out the mess and I'd expect to hear "in due course". I expect to get the money back, but it would be no surprise if I had to wait for a while. The money was supposed to be held in a segregated account but, of course, we now know that over in the USA (at any rate) some of it wasn't. No-one appears to know whether the UK accounts were segregated, but I did speak to someone at MF before the administrators moved in and he said they definitely were. However, despite the doubts, I should get it all back as it's under the £85,000 which is guaranteed to be returned under the current financial rules. However, what if I had had £300,000 with MF Global? I think I would be rather worried. There are two major issues raised by the collapse: 1. Beware of having too much lodged with one provider. 2. Beware of over-leveraging. So, No.1, it’s best not to have more than £85,000 with any one Spreadbet, CFD, Broker, or institution. Because even though most of them are unlikely to go bust in this climate, well…who knows? For example, if you are Spreadbetting with £300,000, spread your money across four separate accounts or more. At least then you know you should get your money returned if the worst happens. The other is perhaps even more important, and that is over-use of leverage or credit provided by Spreadbet and CFD accounts. It is a reminder that, at any time, your provider can simply e-mail to say ‘Sorry. We are offering no more leverage/credit. Please send us cash right now or we will close out your positions.’ Leverage, by the way, simply means credit. Say you have 10 grand deposited with a Spreadbet firm; in a lot of cases they might give you access to 50-100 grand’s worth of shares. What happens is that people get greedy and start using the credit. They suddenly have 90 grand’s worth of shares and (say) only 15k in the bank to cover it. What happens if the market melts down or the firm tells you ‘No more credit?’ You only have 15k to cover 90 grand! I have heard of, and met, people over the years who lost everything they had by doing this. Do not be a casualty of leverage because you got greedy. So, repeat after me, do not get carried away, especially with Spreadbet firms or anything that gives you leverage. Only play with money you can afford to lose and do not ever use more leverage than you can handle. I personally could right now go in and buy 3 million quids worth of shares on leverage. Am I tempted? Not in the slightest. It is greed that tends to be the downfall of many a Trader, spurred on by the over-use of leverage. Think hard: Can you really afford all those positions you have open on credit? Could you pay up right away if all your bets were closed out and you owed them? If you want to read what can happen to real people when this happens to them, read the ‘Traders Tales’ chapter in my new book Naked Trader 3, available on this link - http://nakedtrader.co.uk/ The worst I can remember is someone who nearly lost everything when he went crazy and leveraged up continually on just one share that kept going down. He nearly lost his house and his marriage. Read through the stories and then take a good honest look at your positions. Should you really have them? Can you afford them? Well, okay, write me off as a boring old fart if you will, but you know that I am right! P.S. If you had any money with MF Global, ensure that you make the Administrators aware. Their e-mail address is mfglobalenquiries@kpmg.co.uk Robbie’s views are his own, not a reflection of LSE.co.uk’s. London South East Limited does not provide financial or share advice, and is not FSA regulated.