CHICAGO (Dow Jones)--A day after it was revealed, market watchers were still tying to figure out Friday how MF Global lost $141.5 million in a matter of hours. The unauthorized trades of Chicago Board of Trade wheat futures occurred during Wednesday's overnight electronic trading session, MF Global said.
They were unwound on the screen during the day after the firm discovered the improper activity, according to traders. MF Global and CME Group Inc. (CME), which runs the CBOT, declined Friday to release a specific timeline of events or more details about the trader's positions.
The Commodity Futures Trading Commission, the government agency that regulates U.S. futures markets, also wouldn't reveal whether it had opened an investigation into the incident.
CFTC spokesman David Gary did say MF Global remained in compliance with the commission's regulatory capital requirements. However, market participants have begun piecing together what could have happened based on their observations and knowledge of market operations.
MF Global has identified the trader who made the unauthorized bets as Evan Dooley, a registered representative in the firm's Memphis office - until he was fired for having "substantially exceeded his authorized trading limit."
He held a maximum of 15,000 wheat contracts, MF Global spokeswoman Diana DeSocio said. That would have given him almost 3.6% of the market's open interest, or the total number of contracts that haven't been offset by an opposite transaction. Open interest at the close of business Wednesday was 419,681 contracts, according to the CME.
Dooley was able to amass the sizable holdings despite CME limits on speculative positions. Speculative traders on Wednesday were able to have a total of 6,500 contracts in CBOT wheat futures, CME spokeswoman Mary Haffenberg said. As long as total holdings were less than 6,500 contracts, traders on Wednesday could have up to 5,000 contracts in spot-month March, 5,000 contracts in most-active May and 5,000 in new-crop July, Haffenberg said.
The speculative limits for the spot-month March future had been lowered by Friday because the contract is approaching expiration, she said. Traders can generally exceed the speculative position limits during the course of a session as long as they are in compliance by the settlement, CBOT floor traders said.
Traders said, in their experience, the exchange is more focused on making sure participants have enough money to cover their positions than on regulating the number of contracts they hold. Dooley didn't have the funds to back up his position, MF Global said.
Speculative position limits are used to prevent a trader or firm from manipulating prices by acquiring a large market position. Dooley had holdings in several contract months, according to MF Global. CBOT floor traders assume Dooley made big bets that the price of wheat would fall, bets that had to be offset by buying wheat at a loss.
Traders pointed to a big, mysterious swing in wheat futures Wednesday morning. Prices started the day lower, and then surged higher midmorning, rising at one point by the daily maximum set by the exchange.
Traders, perplexed at the time, later said the move was consistent with a big unwinding of short bets. Because the activity was done on the screen, rather than in the trading pits, little was known about the activity. MF Global wouldn't describe the positions that caused the losses. The CFTC is now considering raising the speculative position limits for wheat and other agricultural futures due to greater interest in commodities.
Single-month limits for U.S. wheat would increase to 11,100 contracts from 5,000 contracts, while limits for all months would jump to 14,500 contracts from 6,500 contracts. Along with having speculative limits, the CME performs mark-to-market checks up to twice a day to ensure that traders' positions are secure and creditworthy.
In the checks, the exchange marks where market prices are compared to where traders put on their positions. If the market has moved significantly away from traders' positions, they will get margin calls.
If the market has moved in favor of traders' positions, they will have money added to their account. Margin accounts allow traders to participate in futures without having the full amount of funds available. MF Global said its "internal risk staff" first detected the loss and then the firm notified the CME. The firm would not provide more details about what specifically caused the unauthorized positions to be detected.
The CME said it didn't have any rules that would have required MF Global to make the unauthorized trades public. MF Global and the CME also declined to discuss whether the exchange would have detected the unauthorized activity if it hadn't been notified of it. "This was our decision" to release the information, DeSocio said.
"This was our initiative." MF Global's situation has been widely compared to a scandal at Societe Generale (SCGLY). The French firm recently revealed a EUR4.91 billion ($7.3 billion) loss on bad bets on stock futures by an alleged rogue trader. Societe General took three days to unwind the bad trades and announce its loss. MF Global liquidated the unauthorized positions the same day and made its loss public the day after.
CBOT floor traders said they were glad to see that MF Global came clean quickly. However, the firm was likely able to get out of its positions faster than Societe Generale simply because the size of the bets was smaller, a trader said.
-By Tom Polansek, Dow Jones Newswires; 312-341-5780; tom.polansek@dowjones.com
(END) Dow Jones Newswires