What is counter-party risk?

[wemakebread]

What is counter-party risk?
If I bought a spa package and the shop closes down, I can neither enjoy its services nor get back my money.

If I buy a bread toaster and the company goes bankrupt, what good is the lifetime warranty?

If I bought gold from a company who promises to buy back at certain time at certain price, but is later suspended by MAS, how are they going to honour that promise, even if there is black & white contract?

I don't fancy CFD of SGX stocks because they are not traded on a central exchange. Therefore, counterparty risk is relatively much higher.

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http://www.todayonline.com/Business/EDC ... t-in-limbo

MF Global clients left in limbo
by Ryan Huang Wenwu 04:47 AM Nov 02, 2011

SINGAPORE - Scores of investors turned up at MF Global's Singapore office yesterday to try to withdraw their funds from the bankrupt derivatives brokerage, a day after the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX) ordered the company's local unit to stop taking new business and to close out existing positions.

The scene at the company's office at One George Street turned ugly, as some disgruntled investors and MF Global staff exchanged heated words. Investors who were keen on cashing out and who had positive balances were given a withdrawal form. Others told Channel NewsAsia that their accounts had been frozen and their online trading platforms suspended such that they could not close their positions.

Investors were also frustrated by the lack of guidance over how to proceed with their accounts and positions.

Last Friday, the SGX said MF Global Singapore was meeting all its financial obligations. Some investors Channel NewsAsia spoke to said they were reassured by the statement and left their money where it was. However, some who had accounts with Kim Eng, AmFraser and CIMB found their trading platforms for contract for differences (CFDs) frozen. Those brokerages had MF Global as a counterparty.

A Kim Eng customer who identified himself as Mr L B Ho said: "It is very unfair to us. It would have been an opportunity for me to close the position, and I should have been able to make some gains. Because of what happened, I cannot do anything and the opportunity might be lost already."

Others just wanted to get their money back immediately.

A retiree and MF Global client, who wanted to be known only as Mr Wan said: "I just want to get my money back. I have lost so much already. I can't afford to lose this much because this is the balance that I have."

In a statement last night, the MAS confirmed that it had been informed that MF Global Singapore had appointed provisional liquidators from KPMG to oversee the winding up of the company.

"The provisional liquidation is intended to safeguard the interest of customers and achieve equitable treatment for all creditors. This follows the announcement by MF Global Holdings Limited, the ultimate parent company of MF Global Singapore, of its filing under Chapter 11 of the US Bankruptcy Code," MAS added.

The New York-based parent listed total debt of almost US$40 billion in its filing in the US Bankruptcy Court in Manhattan on Monday.

MAS said it would work closely with MF Global Singapore and the provisional liquidators "to achieve an orderly winding down and equitable treatment of all stakeholders".

MF Global Singapore said it would contact all stakeholders in due course with information specific to their trading accounts. In statement last night, MF Global said: "The provisional liquidation of the company does not detract from the proprietary rights of its customers, particularly in respect of monies already placed in segregated funds, in Singapore and elsewhere. In this regard, the provisional liquidators will endeavour to call in assets of the customers wherever situated."

It has set up a hotline (6866 6796) to answer customer queries.

Brokerage Kim Eng said it was confident of providing alternative market access for its clients tomorrow to unwind their open positions. Other affected brokerages said they would monitor the situation further.

The SGX also said yesterday the appointment of liquidators would not affect the transfer of customers' derivatives positions on SGX from MF Global to other clearing members. In a statement yesterday, SGX said it would continue to "facilitate the orderly transfer of positions". The exchange also reiterated that MF Global was meeting its financial obligations to the SGX's derivatives clearing house.

[archonmage]

What is counter-party risk?
I don't fancy CFD of SGX stocks because they are not traded on a central exchange. Therefore, counterparty risk is relatively much higher.

Agreed. Perhaps for those interested in trading CFD, they can look for local brokerage firm that offers CFD, just to name a few, Lim and Tan, Kim Eng and Phillips. Counterparty risk definitely will be lesser as compared to those international firms.

The disadvantage for using a local CFD brokerage firm is the higher financing cost for both long and short.

[Stradlinz]

What is counter-party risk?
I don't fancy CFD of SGX stocks because they are not traded on a central exchange. Therefore, counterparty risk is relatively much higher.

Agreed. Perhaps for those interested in trading CFD, they can look for local brokerage firm that offers CFD, just to name a few, Lim and Tan, Kim Eng and Phillips. Counterparty risk definitely will be lesser as compared to those international firms.

The disadvantage for using a local CFD brokerage firm is the higher financing cost for both long and short.

KE and CIMB CFD use MFGlobal platform.. and maybe some others.. So MF Global is the counter party.. The brokerage only act as agent to facilitate the transactions..

[archonmage]

What is counter-party risk?
I don't fancy CFD of SGX stocks because they are not traded on a central exchange. Therefore, counterparty risk is relatively much higher.

Agreed. Perhaps for those interested in trading CFD, they can look for local brokerage firm that offers CFD, just to name a few, Lim and Tan, Kim Eng and Phillips. Counterparty risk definitely will be lesser as compared to those international firms.

The disadvantage for using a local CFD brokerage firm is the higher financing cost for both long and short.

KE and CIMB CFD use MFGlobal platform.. and maybe some others.. So MF Global is the counter party.. The brokerage only act as agent to facilitate the transactions..

Stradlinz,

Thanks for the inputs. Learn something new today. So go for firm which has a more reliable platform

[Stradlinz]

Agreed. Perhaps for those interested in trading CFD, they can look for local brokerage firm that offers CFD, just to name a few, Lim and Tan, Kim Eng and Phillips. Counterparty risk definitely will be lesser as compared to those international firms.

The disadvantage for using a local CFD brokerage firm is the higher financing cost for both long and short.

KE and CIMB CFD use MFGlobal platform.. and maybe some others.. So MF Global is the counter party.. The brokerage only act as agent to facilitate the transactions..

Stradlinz,

Thanks for the inputs. Learn something new today. So go for firm which has a more reliable platform

Hi archonmage

not sure which is most reliable. Got lots of companies, for me personally used CMC and CIMB CFD before and quite happy with it. CMC is market maker so counter party is CMC itself. For CFD acc I try not to put too much fund inside. And must choose company which withdrawal is easy and fast so once detected got financial problem can withdraw funds instantly.

MFG episode has taught me to be more prudent in using CFD. Last week has been noticing MFG share price drop drastically like 20-30% per day for few days.. So luckily last friday still in time to liquidate and withdraw all funds from CIMB CFD which uses MFG platform.. Heard many people got caught with open position which cannot be liquidated..

But I think Spore quite strict with client segregated acc.. However in MFG USA got case they use customer's segregated acc for prop trading and FBI now investigating the case.. So fraud still can happen if company is in financial stress..

[zipink]

Hi archonmage

not sure which is most reliable. Got lots of companies, for me personally used CMC and CIMB CFD before and quite happy with it. CMC is market maker so counter party is CMC itself. For CFD acc I try not to put too much fund inside. And must choose company which withdrawal is easy and fast so once detected got financial problem can withdraw funds instantly.

MFG episode has taught me to be more prudent in using CFD. Last week has been noticing MFG share price drop drastically like 20-30% per day for few days.. So luckily last friday still in time to liquidate and withdraw all funds from CIMB CFD which uses MFG platform.. Heard many people got caught with open position which cannot be liquidated..

But I think Spore quite strict with client segregated acc.. However in MFG USA got case they use customer's segregated acc for prop trading and FBI now investigating the case.. So fraud still can happen if company is in financial stress..

I agree with Stradlinz. Don't put large amount of fund with a CFD broker. Of course, "large amount" is relative.

I was reading Straits Times yesterday, there was this lady who put in her life savings of more than $100,000 with MF Global. Most likely she can get back her money should it be in a segregated account. BUT she got caught with an open position. She could not liquidate and chalked up $40,000 in losses.

Why would she put her life savings with a broker is beyond my understanding. A broker is NOT a bank. A bank could also fail, let alone a broker!?!?

Even if her trades are against her and she got a margin call, she could just have topped up her money into her cfd account. She doesn't have to put all her money into the account in one shot.

Like what Stradlinz said, just be prudent. Also trade within your limits and use our common sense too. It doesn't mean you have to stay clear from CFD totally due to this saga. Just like there are always accidents on roads, it doesn't mean you stop walking on pavements or stop driving just because you saw one accident. Just my 2 cents.

[Yew Meng]

Agreed. Perhaps for those interested in trading CFD, they can look for local brokerage firm that offers CFD, just to name a few, Lim and Tan, Kim Eng and Phillips. Counterparty risk definitely will be lesser as compared to those international firms.
The disadvantage for using a local CFD brokerage firm is the higher financing cost for both long and short.

FYI - Lim & Tan Securities just issued an internal memo clarifying that :
"Lim & Tan Securities does not use MF Global nor external counterparty to provide CFD to their clients.
It's CFD trading is based on Direct Market Access (DMA) with SGX and the Company hedges counter party risk by buying shares directly in the ready market or by borrowing the shares from CDP under their Securities Borrowing and Lending programme. The underlying shares are then 100% held in custody with CDP, a wholly owned subsidiary of SGX.
Furthermore, for clients who deposit cash with them as collateral, their money will be held in trust in a regulated bank in Singapore while shares deposited as collateral are held in a sub account with CDP."

[walkinepark]

For any investment, risks cannot be avoided.
It's thus prudent to know where the Exit door is and how fast you are able to exit when things go bad.

Just to share my experience CMC markets time latency on "payments in" and "withdrawals".

Payments in takes: 1 day
Withdrawal takes: 2-3 days (why?)


Then again, it's inconsequential because should things go awry, we retail investors will most likely be the last to know the news, let alone withdrawing.

I'm not saying CMC Markets is unstable but pls.. caveat emptor in whatever investments.

cheers

[ahvyee]

Another thing is, for any withdrawal of fund, there will be charges.. please take note.. for any transfer of fund in, there is no charges.. lol

[walkinepark]

Another thing is, for any withdrawal of fund, there will be charges.. please take note.. for any transfer of fund in, there is no charges.. lol

From what i understood was there will be charges ($20?) imposed for the "Express" withdrawal, i.e. 1 day time lag.

For the normal withdrawal that takes 2-3 days, no charges.

[wemakebread]

Thanks for all the sharing.

This has become a mini-guide to "Hidden risks to CFD trading" ... hahaha.

The story about the lady who put her life savings into her CFD account merely underscores the value of financial literacy, which is simply priceless. Education gives the highest leverage.

Her account is $100,000.
Would things be different if she took out 5% (which is $5000) to invest in her education? It is both an insurance (possibly protect her from bad decisions) and an investment (when profitable trades from good decisions cover her initial tuition fees) The wisdom gained could be reused many times for the rest of her life, and even shared with her friends, family and relative. Isn't education the best leverage?

What is the upside vs downside for this $5000?

My encouragement is for new traders/investors to spend more time/effort/money on learning first, and not be too eager to make money from the market. Don't under-estimate the risks, because sometimes we don't know what we don't know, until something like Lehman or MFG happens.

I think it's a great blessing in disguise that MFG incident came about now, just as many people are getting interested in CFDs. There is now more awareness about the risks associated with CFD trading.

[alvin]

Below is a post I did for my blog and I find it relevant to replicate here:

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):

“Dear Client,

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).

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, “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.