Here's something to think about folks.
MF Global has reportedly fired the rest of their staff; it's all over. This should not surprise.
But what you need to think about here is how you, as an investor or trader, deal with this.
First, read my earlier Ticker from today. If you haven't understood these risks, you now should. If you need confirmation of this, go call a securities lawyer and spend the money to ask the question and get an actual opinion. I've done it years ago and you should too.
Now let's talk risk management.
It is my considered opinion that due to clawback risk and SIPC avoidance in some cases (e.g. Madoff) means you cannot count on any of these things. For an investor you might feel ok being under SIPC limits for actual equity positions, but clawback risk means you could be wrong there too.
But what if you're an active trader? If you discern risk and leave, you run the risk of being clawed back. If you stay and get hosed, you could lose the entire contents of your account. So what do you do?
CNBC had a discussion just now where they talked about paying custodial fees and sweeping funds. That's all fine and well but it presumes the custodian doesn't steal the money -- which is exactly what is alleged to have happened in the MF Global case!
Therefore, this doesn't work either.
This is the best I've been able to come up with. It's not perfect, and if you have better ideas let's have 'em in the comments section.
First, you move all of your liquid cash to Treasury Direct. Buy short-term T-bills with it on the way in (e.g. 4-week) which will pay zero and sweep to CofI (Certificate of Indebtedness); this gives you a "cash stash" of essentially infinite size that pays no interest, but should be safe. If the Treasury screws you then the problems are beyond risk management. We'll leave it at that.
From there you fund a futures account somewhere. You fund it with only enough to cover your margin. This requires you have ~7-10% of your position size you intend to trade (aggregated all-in) on deposit, and if you suffer losses you will have to make more deposits. As you make gains you withdraw the excess funds and sweep them manually through your bank account to Treasury Direct.
This leaves you trading only futures. That sort of sucks, but the reason for it is that your maximum loss in the event of fraud is now your margin money, or about 10% of what you have in the game.
Is it perfect? No, but it works for anyone with enough size to be in trouble with SIPC limits (e.g. $100k cash limit) and above. It severely restricts what you can trade, but you can still trade broad basket equities (e.g. S&P 500, Nasdaq 100, etc), Treasury rates (e.g. 10y T-Bill futures) and some currencies (e.g. Euro/Dollar), commodities (e.g. gold, copper, wheat, etc) and you get statutory tax treatment. The latter means you have a very simple tax return and that's of benefit for active traders (it's a net lose, however, for long-term investors.)
This strategy should limit your exposure to fraud to no more than your margin deposit. The only "corner case" would be an overnight position that is severely underwater and you can't liquidate out of and thus take a "beyond margin" hit during an active fraud. I can't figure out how to get around that one, unfortunately.
In theory anyway.
Again, this is a musing, not a recommendation -- if I'm missing something, comment on it. But if not, this is a potential strategy to talk about with an actual licensed advisor for those who don't want to just walk off entirely from the market but find unacceptable the potential to lose everything due to clawback risk along with SIPC limit problems and the potential for fraud. Since it appears that the CFTC, CME and others are simply incapable of detecting fraud in time to stop you from getting screwed and the risk of a screwing means zeroing you out your only option other than a "head in the sand" is active management and personal segregation of funds. You'll still lose, but a 10% loss should be survivable even under the most-adverse circumstance.
In any event it sure as hell beats a 100% loss.
Where We Are, Where We're Heading (2013) - The annual 2013 Ticker
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