12 December 2011

MF Global and HSBC case

As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:

ZH: "is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances."
TF: "A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system"

Here is a suggestion, read the actual Interpleader Complaint for the facts:

1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.
2. By e-mail dated October 25, 2011, MFGI notified HSBC that "MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”
3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.
4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.
5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.
6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.
7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.

Not being a lawyer, I read this as "before you went bankrupt, you said I could have my metal", "yeah, well, you didn't take it before I went bankrupt, so it is now part of the bankruptcy proceedings".

So no rehypothecation or loaning, no "suing" by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.


  1. Whoever bought you,lost money!

  2. So do bankruptcy proceedings automatically mean what's yours is somebody else's?

    I'm assuming that the gold was the property of Mr Fane.

  3. They don't automatically, no. I believe this case will hinge on whether Mr Fane actually had clear title to the bars (like allocated) or just gold in his MFG account (like unallocated).

    There have been cases where comingling of specific bars has resulted in them being deemed on balance sheet and thus part of bankruptcy.

  4. Hi Bron, should one infer from your comment distinguishing allocated (clear title to the bars) from unallocated that the only prudent move for people who don't take physical possession, even in Perth Mint holdings, would be allocated? What might be a scenario when a holder of unallocated with the Mint might have problems?

  5. MFG lost people's cash, and the clients had clear title to that. Sure, there was an obscure clause allowing them to use it to buy Govt debt. If they can do that, it would not surprise me if they could also say they "leased Mr Fane's allocated gold", and although the physical asset was not exchanged, Mr Fane "lost" the ownership of the gold (even though it had not left the premises), because the cash they got in exchange for his gold was lost, hence the gold is no longer his.

  6. anon @ 19:38:

    what you're suggesting, if I understand correctly, is that it could be possible Fane's gold and silver was hypothecated/rehypothecated.

    So if this is possible, then those with allocated gold and silver contracts and presumably, corresponding bar metal numbers and weights, could have their allocated gold and silver hypo/rehypothecated?

    In the interpleader, it states HSBC has the metal ready to be delivered and are waiting for instructions.

    So Bron/Anon @ 19:38: any further insight? Is the gold and silver held by HSBC non-hypo/rehypo gold and silver bars?

    Or is it possible Fane's gold and silver were hypo/rehyo'd and HSBC is currently holding other bars of gold and silver?

  7. Michael, as I said in the post, it is all about counterparty exposure. Allocated is not a magic bullet if you have it stored with a crook.

    Certainly unallocated with other business is at risk. In the Perth Mint's case as we aren't a bank and don't engage in lending, just using the unallocated in our business, it is not subject to the same risks as other versions of unallocated.

    Anons - I've been discussing this with Tom from www.metalaugmentor.com and he is better on futures technicalities than me. Below is he comment to me in an email, the bit in bold being the key answer to your questions:

    "It seems to me that the gold and silver bars ("Property") were certificated warrants ("registered" in the COMEX warehouse) based on futures contracts that the customer took delivery on (or was short, it is not clear). In any case, it appears that the Trustee has taken the position that a warrant for COMEX metal held in a customer account is subject to the bankruptcy order on all customer funds including cash and other collateral (which so far have seen only a 60% release).

    This is not a good precedent since warrants for COMEX-warehoused bullion should really be treated as separate customer property and not part of the customer segregated account, but the situation would still only apply in a case like MFG where the customer funds have been illegally raided and therefore the 2.15 and/or 30.7 segregated accounts have a shortfall with regard to required customer balances. It has nothing to do with rehypothecation, pledging physical bullion or any other ridiculous contention."

  8. Bron, thank you.

    I've read the interpleader and note:

    A) Fane requested his metals on Oct 25, 2011. The commencement date for liquidation of MFG was Oct 31, 2011.

    B) Paragraphs 11 says MFG asked by email to take possession and move the metal to brinks. Also: "customer to advise of date and time" of transfer.

    C) Paragraph 12 says Fane didn't contact HSBC to request the metal to be transferred to Brinks prior to the commencement date.

    D) Exhibit B, page 12, HSBC's lawyer, in his letter to MFG's trustee, points out Fane didn't state if or when he'd like to take possession of the metals. Fane only did so in writing around November 18, 2011.

    So, if correct here, Fane would've received metal without HSBC resorting to litigation if MFG in their email on October 25, 2011 (prior to commencement date) stated a) wanted to take possession to Brinks and b) date and time of the transfer

    Tom says:

    "...it appears that the Trustee has taken the position that a warrant for COMEX metal held in a customer account is subject to the bankruptcy order on all customer funds including cash and other collateral (which so far have seen only a 60% release)."

    I surmise what may have happened is the trustee is, like in any bankruptcy, asserting claim over any assets of the bankrupt. Otherwise, not sure what the purpose of paragraph's 11 and 12 are.

    Thus, if the warrants are legally treated as separate customer property, Fane should be able to recover his property at the hearing in early 2012. This should be procedural in nature.

    Also, assuming Fane did not request the transfer of his property until post commencement date, surely he should still be able to recover his property but only after the trustee first asserts the claim before a determination is made.

    But Tom's point is valid. The warrants should be treated as separate customer property. Thus, it should not matter whether a request is made pre/post commencement date - property belongs to Fane.

  9. Bron, other question I had is whether the 5 gold contracts and 3 silver contracts listed in Exhibit C had corresponding bar metal #'s (ie. 5 100 oz gold bars, 15 1000 oz silver bars).

    In other words, will Fane receive the bar metal #'s assigned to him or will he receive the weight he's paid for?

  10. Anon, I agree with your and Tom's assessment, the warrants are the client's and it shouldn't matter when actual delivery took place. It will be interestng to see how it plays out.

    As to Exhibt C, they list warrant numbers but not bar numbers. However, as each warrant is for an odd amount of ounces (whereas futures contracts are exact, eg 100oz for gold) this indicates to me that specific bar weights & numbers have been allocated/segregated to the warrant (or client if you will). This specificity may become quite important in the determination.

  11. Thanks Bron.

    Yes, we wait for the decision before reaching further conclusions. I suspect this is really just a procedural/technical formal proceeding and Fane will get his property in due course. I suspect the trustee wants a court order to avoid any liability from MFG creditors. Standard stuff.

    But I wonder where the other Fane's are? We haven't heard about them nor their property...

    Also, while it seems the Fane case is not one dealing with hypo/rehypo (assuming Fane gets the specific bar #'s - otherwise MFG could in theory provide the property in weight, not the specific bar #'s), we do not know for sure whether other customers of MFG with certified warrants have not had their warrants hypo/rehypo'd...

    Looking at this another way, is it not possible Fane's warrants were hypo/rehypo'd but since he requested transfer pre-commencement date, in theory, MFG could have 'switched' the collateral to the Lender from Fane's warrants to any other collateral worth $1.5M...heck, perhaps using another customer's cash

  12. Casey weighs in http://www.caseyresearch.com/articles/abcs-re-hypothecation-gold-and-securities-markets-what-you-need-know?ppref=SLG012ED1211A

    "No gold has been hypothecated, re-hypothecated, or hyper-hypothecated. The dispute is between the trustee of the gold and the claimed owner of the gold. As is not uncommon in this sort of situation, as custodian of the bullion HSBC is stuck in the middle and is asking the court to decide to whom to release the gold so that it – HSBC – is not held liable by either party."

    I suppose to Anon #1, Casey has also been bought out?

  13. Thank you Bron. I hope you do not mind the questions.

    Brekke from CR states:

    "That seems to be the case here, and in time the gold will make its way into the legally sanctioned hands."

    The key here is time.

    Thank you for the link to Tom's metal augmentor's site whereupon he also discusses allocated/unallocated LBMA accounts. It seems highly likely investors holding allocated gold, with identifiable contract #'s/bar #'s/weights, will receive their gold upon request.

    You wrote in the comments section of your most recent post:

    "It will only end when investors holding London unallocated move to physical."

    From the perspective of an investor holding allocated gold, will said investor in any scenario (ie. monetary system collapse, broker bankruptcy and/or custodian bankruptcy) be able to take possession of their allocated property (worst case via court order assuming rule of law remains intact)?

    Will time matter to these allocated holders in the situation where London investors move from unallocated to physical?

  14. You shouldn't have any problem getting hold of your allocated, just make sure the storage contract you've signed is very clear about it being allocated/segregated and not on the balance sheet of the custodian.

    It is possible that an over cautious liquidator may freeze all transactions to make sure assets of the company are not being unlawfully taken, but true custodial metal should be much easier to prove is yours.

  15. http://online.barrons.com/article/SB50001424052748703856804577098740322633760.html?mod=googlenews_wsj?mod=googlenews_barrons

    Bron, looks like the MFG Trustee has PROPOSED essentially selling allocated gold/silver for cash and lumping these funds into the 'single pool' to be split b/w all customers.

    Fane - only reason I believe he wasn't lumped in was b/c MFG on his behalf requested HSBC to transfer said metal BEFORE the commencement date. Fane didn't advise of date/time of transfer but HSBC has the metal ready.

    Do not think the Trustee will be successful but we wait for a court determination.

    Nonetheless, should have allocated holders of gold/silver nervous everywhere.

    Some points:
    a) Not sure how long it will take to have this determination made b) if receive cash, what will prices be at that point
    c) in a monetary collapse/hyperinflation, might get hyperinflated cash dollars to bid for gold that's nowhere to be found and if available, good luck buying said gold with hyperinflated dollars.

    Ultimately, Fane should be receiving his allocate property.
    The rest of the allocated holders who did not request transfer prior to bankruptcy should also be receiving their allocated property.

    But if not...

  16. Thanks for the heads up on that article. I see that a strong case is being made that warranted metal is not the same as cash or other paper assets.

  17. This is a good factual explanation of the MF Global misuse of customer's cash http://www.metalaugmentor.com/reviews/mf-global-and-the-great-wall-st-re-hypothecation-scandal/

  18. http://www.metalaugmentor.com/reviews/the-gold-rehypothecation-unwind-begins-hsbc-sues-mf-global-over-disputed-ownership-of-physical-gold/#reviews

    "In other words, the claim that the MF Global bankruptcy trustee makes is that the bullion, even though specifically belonging to a particular customer, should be treated exactly the same as cash, which is fungible and belongs to all customers via allocation on the client ledger. The judge will have to decide as it isn’t clear that specific customer property should be treated as such."

  19. http://seekingalpha.com/author/avery-goodman/comments/symbol/phys

    "No. Most COMEX inventory is allocated. Most COMEX standard bars are slightly different in weight and size, and all bear a unique serial number. A COMEX bar that is exactly 100 ounces of gold is a very rare bird. They are mostly poured, rather than pressed bars, and that is why they are so variable.

    The warehouse receipts are specifically tied to idenifiable bars of gold. BUT, with the advent of electronic warehouse receipts, the new exchange rules say customers cannot "own" a warehouse receipt. Unlike before, a clearing member must now hold warehouse receipt tied gold.

    There is counter-party risk in that type of arrangement, because if the broker goes belly-up, the customer is an unsecured creditor. Gold that merely shows up each month "in your statement" is not actually titled in the customer's name. The warehouse receipt, and, therefore, the gold within it, is now always titled in the name of the clearing member."

    Bron, distinction may be relevant for the final determination - I think Goodman is too quick to state the customer is an unsecured creditor just b/c the receipt is in the name of the clearing member.

    if the backward title chain is linked: HSBC to MFG Trustee to Customer, suggests customers will receive cash.

    If the chain is linked: HSBC to Customer, suggests customers will receive metal.

    Then there's the issue of custodian risk, which you cover in your comment at 15 December, 2011 12:06...

    Would be interesting to take a look at one of the standard storage contracts...

  20. Thanks for that Goodman link. Ultimately, as you say, I comes down to the specifics of the agreements - as always!

  21. Bron, from the perspective of a rational holder of allocated metal, I believe one would take possession immediately in light of all the uncertainties involving allocated metal as a result of MFG.

    Question is likely not if but when the next brokerage will fall...

  22. Whether this case has any bearing on other allocated storage arrangements depends entirely on the similarity of the agreement wording in this case compared to the wording of other allocated agreements.

    I’m not sure there is any general applicability of this case to allocated storage in general, particularly since this is about COMEX warrants held through brokers.

    Why anyone would continue to trade on COMEX I do not understand.

  23. Good factual summary of the situation from Attorney at Commodity Customer Coalition which represents more than 7,000 MF Global customers


  24. Go to You tube and search,

    Gerald Celente Alex jones MF Global.

    Apparently Gerald Celente was a client of MF Global and was affected by not being delivered a 6 figure sum, and gives his thoughts on what he thinks about them.