Transparency in the new market environment
The financial crisis and the Madoff scandal have subjected the fund industry to unprecedented scrutiny. Following record outflows, fund closures and collapses, investor confidence is very low. Optimal relationships between brokers and administrators can help managers provide the transparency to meet regulatory obligations and to restore investor confidence.
MF Global, the world’s largest futures and options broker, enjoys a major market share on the world’s leading derivatives exchanges, including CBOT, CME, Comex, Nymex, Liffe and ICE. With 3,200 staff and offices in 14 countries, we trade with more than 150,000 clients every day, we transact more volume than anyone else, and two-thirds of our business is on-exchange.
Our leading market position gives us transaction volume and very substantial client balances, we seek to offer best in class risk management, and our predominantly agency-only model means we are unconflicted. All this makes us a very attractive venue to transact business.
Through our business worldwide, we have the opportunity to work with many fund providers in various jurisdictions, and have observed a range of governance structures. Ideally a fund’s governance structure should be spelled out in its prospectus or articles of association, clearly defining the roles and duties of the broker, the independent administrator and the fund manager. This model ensures that the administrator can monitor all the fund’s actions.
We’ve all seen the problems that can occur when funds are losing money. We have more comfort where rules are already in place on the maximum amount of leverage a fund will accept, and that require trading to be stopped or curtailed automatically when a fixed proportion of the capital is lost. The independent administrator should manage this process and have the power to stop trading if necessary.
Before opening an account, we ensure that a fund’s beneficial ownership is transparent. We will only deal with legal entities incorporated in OECD countries or recognised offshore jurisdictions, and we will only deal with entities from jurisdictions where we are less comfortable doing business if certain conditions are met.
What red flags do we look for? A change of administrator may be a signal for us to investigate. We monitor trading – if the fund buys thinly-traded instruments toward the end of a month, could this mean manipulation of the valuation? We will also scrutinise sudden changes of ownership, of authorised signatories or management, as well as unusual fee structure.
We are unlikely to accept accounts where the manager and administrator are the same legal entity, and unknown providers cause us concern. We prefer to deal with administrators with which we have established relationships and confidence in their professionalism.
We in turn can provide administrators and funds with a range of services, including daily account summaries configured to individual requirements and online access to account statements and open positions. We use Risk Informer to provide administrators with real-time risk monitoring of all trading activities and margin requirements for the funds they service, aggregating trades on a real-time basis with data from exchanges and in-house, and we can also give an administrator a view-only trading platform.
Transparency is as much part of the new environment as performance. The long-term winners will be managers that employ sound governance and can demonstrate the safety of their clients’ assets.
James Rowsell is managing director for Europe at MF Global
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