November 4, 2011
Australia's grain futures weakened by MF Global's collapse
The collapse of US futures broker MF Global Holdings Ltd has undermined the Australian grain futures market.
Bourse operator ASX was attempting to entice fresh international players into the market, traders said. Risk management firms are sitting on the sidelines after encouraging their clients to use the contracts to manage risk.
MF Global's Australian unit had been the market maker, providing the trading volumes needed to give farmers, exporters, domestic end-users, and traders' confidence that they could move in and out of the market when they wanted.
"MF Global provided much needed liquidity to the market, which is very important for its development, so that's the big issue," said Jonathan Barratt, head of Sydney based Commodity Broking Services.
The ASX re-opened its agricultural futures trading platform on Wednesday after suspending trading following MF Global's collapse on Monday (Oct 31).
Trading has been thin as traders fear a crisis of confidence due to MF Global's Australian unit being placed under administration and positions it held for clients frozen.
"Most of the Australian grain trade will have some exposure there and they can't move their positions," said Adam Davis, a senior trader at Merricks Capital in Melbourne.
"When you have so much uncertainty around these things there it just destroys people's confidence in exchanges," said Davis.
He added a lack of a local futures hedge also destroyed liquidity in the cash market.
Only 130 ASX grain contracts traded on Wednesday (Nov 2) compared with an average daily volume of around 1,800.
New York listed MF Global, which traces its origins back 230 years to a London sugar trading business, applied for bankruptcy protection on Monday after misplaced bets on European sovereign debts.
Its Australian operations, which included highly leveraged contracts-for-difference (CFD) products as well as trading in agricultural futures, are now being administered by accountancy firm Deloitte.
A Deloitte spokeswoman said the firm was working on the issues impacting on the market but was not yet in a position to comment further.
Barratt stressed there was nothing wrong with the Australian operations and said the Sydney based futures team had a solid reputation as competent traders keen to see the ASX agricultural futures platform develop.
"MF Global did a good job here but the problem is now someone needs to step in to fill the hole that has been created," he said.
"Taking MF Global out of the equation means it is going to take a long time to get comfortable using ASX futures again unless there is market liquidity," Barratt added.
Still, MF Global wasn't the only game in town.
Firms such as U.S. risk manager INTL FCStone were already stepping up their Australian futures trading and are set to win additional business from the MF Global client base as confidence returns.
"I don't see MF Global's demise as a big issue as its clients will be picked up by other firms, it is a hiccup rather than a disaster," said Ole Houe, a partner in Advance Trading Australasia.
Advance Trading has just hung out its sign in the Australian grains market, having snared a handful of experienced grain brokers.
Houe said the ASX moving its grain futures to a more efficient trading platform and introducing 24 hour trading on October 23 was more significant than MF Global's demise because it would allow overseas players to trade ASX grain futures.
"New liquidity is likely to come from firms like JP Morgan, Newedge and Deutsche Bank. These were guys who were ready to step in and improve liquidity as soon as they could trade around the clock on the screen," said Houe, adding the old, manual ASX platform made trading cumbersome.
Apart from ASX futures, there are plenty of alternatives to manage risk available to grain growers and traders, according to Mike Chaseling, deputy chairman of Australian grain exporter Emerald Group.
"Obviously MF Global had a reasonable presence in the market place, so while its collapse doesn't do overall market confidence any good, there are other tools available other than the ASX," said Chaseling.
"We suspect that the liquidity will increase with the move to ASX 24 and become more balanced in terms of participation, but there's other markets that can be used, including US. futures exchanges, also European markets," he said.