Although the Trust was established in 1969 to provide financial assistance to customers if a brokerage became insolvent, because federal laws required customer funds to be segregated made the prospect that customers actually would need the money remote. As a result, the CME board voted to turn the Trust into a charitable foundation in 2005.

Some of the largest beneficiaries of the CME have been the Renaissance Schools Fund, which supports charter schools and has received $3.1 million since 2006; the University of Chicago, which has received $2.5 million since 2006, and the Erikson Institute, which specializes in early childhood education and has received $1.625 million.

As a result of the MF Global bankruptcy, CME has put all future grant applications on hold, but has said it will honor current grant obligations.

Worse yet, we keep on hearing frustrating tales about poor communication whether it be from the Commodity Futures Trading Commission (CFTC), CME Group or the Securities Investor Protection Corporation (SIPC) trustee from MFGI customers who for years were told by the leaders of the industry that what has been happening could not happen. Namely that their segregated funds where safe and would not be put in jeopardy even — or especially — in case of an FCM collapsing.

While there has been progress of late there still has not been a viable explanation why it has been so difficult to get customers their money back. We understand there is a shortfall in customer segregated funds and we understand an investigation takes time but there has been no logical explanation from the trustee why they can’t pinpoint the size of the shortfall or why what customer money is accounted for hasn’t been returned to them already.

And perhaps most disturbing is that what progress has been accomplished so far has been attributable to a grassroots movement of a handful of angry customers and ad hoc organizations formed on the fly as opposed to the so called leaders of the futures industry who have appeared to be asleep at the wheel and willing to let futures customers twist in the wind.

CME Group blamed MF Global shortly after the bankruptcy claiming that on the week they were in trouble (later determined to be Wednesday Oct. 26) they completed an audit that showed MF Global was in compliance with its segregation requirements. They then learned on Oct. 31 that MF Global had a shortfall in customer segregated funds (and by the way put out a pretty specific estimate of the shortfall of $633,027,696). According to numerous back office sources an FCM is required to report its customer segregated funds to its designated self regulatory organization (DSRO), in this case CME Group, on a daily basis. At the point their audit was completed, it was common knowledge that MF was in much distress so we find it difficult to understand how CME was not more on top of it. As former CME regulator Peter Moy wrote on a comment board, “in previous situations like MF Global, the Audit Department would be present at the firm everyday to insure that all segregated customer funds were properly accounted for. The excuse that they transferred the funds after the audit is lame.”

The CFTC has been MIA for most of this as Chairman Gary Gensler recused himself due to his relationship with former MF Global Chairman and CEO Jon Corzine from their days at Goldman Sachs. The SIPC liquidation trustee has come under a lot of criticism but most of it has to do with his lack of knowledge of the industry, which is why many in the industry were perplexed the CFTC and CME Group didn’t fight for more control of the process. One former MFGI customer who still has nearly $185,000 frozen wondered whether the trustee assumed customers with positions got 60% of their money back instead of just 60% of the margin held at CME Clearing.

It is an important question because the trustee pledged last week—after much external pressure from groups like the Commodity Customers Coalition (CCC)—to have an interim distribution to “cash only” customers. The Intercontinental Exchange (ICE) sent a letter to the trustee pointing out that customers who exited their positions before the bankruptcy did not receive any allocation as the trustee just completed a transfer of positions and a portion of the margin used to hold those positions. While the cash only transfer addresses certain customers, many other had only minimal positions and still have 80%, 90% or 95% of their accounts frozen. Today the trustee noted that there will be another interim distribution that would attempt to get all customers 60% of their assets returned.

Former MF Introducing broker Sean McGillivray just wrote, “The impact on investors have been well documented. Inconsistent and unequal treatment of differing accounts by regulators as well as the exchanges has eroded confidence in the system. It has also forced unnecessary client liquidation losses. Our firm now holds unsecured debits on the books at our new FCM, because of the CME’s (half hearted and really half thought out) transfer plan.” McGillivray went on, “The majority of our client accounts remain frozen with little hope of a speedy resolution. The industry must step up to restore confidence. The CME is one of the few entities capable of guaranteeing any shortfall, effectively allowing for the immediate release of client funds.” 

This is one of many notes we have received detailing the frustration with a broken process and a disconnect between customers and businesses under stress  and those responsible for resolving a problem that was not supposed to happen and has not been well managed.

So lets recap. Tomorrow will be three weeks since MFGI went under. The trustee completed it initial transfer that returned positions and $1.5 billion in customer margin money last week to 14,500 accounts. It has pledged a second distribution of 60%, about $520 million, of the capital in cash only accounts. The second distribution is said to have begun but is not complete. When that is complete it would mean that just over $2 billion of $5.4 billion would have been returned to customers in just under a month. That is a little more than 35% of customer money that was never supposed to be at risk, even in a bankruptcy.

That is not a give job. Not by the trustee and not by the folks who should be looking out for their customers or the folks who are charged with keeping an orderly marketplace.

Throughout the process the language of the trustee appears to confuse the distinction between customer segregated money and general claims in a bankruptcy. Nothing has angered former MFGI customers more than the term “claims process.” They reply that they have segregated accounts. It is their money that by law is kept apart from the funds of the broker. They don’t want to make a claim, they want their money back. And they should have gotten it back by now, or at least what is left of it and they should be first in line for anything that is left.

Recently there has been numerous media reports regarding a potential tie-up between CME’s Dow Jones index business and Standard & Poor’s. To date there has been nothing official but what initially caught my eye was a Reuters’ story that attributed a sharp drop in Chicago Board Options Exchange (CBOE) stock to the potential merger. CBOE has exclusive licenses to list equity options products with both Dow Jones and S&P. In fact, CME and CBOE have sparred in court in the past over the nature of their separate licenses with S&P. The idea put forward in the story was that CBOE’s exclusive license agreements with the two companies could be threatened if there were some type of agreement.

Since, CBOE leadership has said that a Dow/S&P tie-up would not be a threat because they have agreements going out to 2018.

What I don’t understand is that in none of the speculation regarding the whole matter has the idea of the Department of Justice coming in to look over such a merger between CME’s index business and McGraw Hill’s S&P index business to see if it were kosher. The whole premise behind the Reuters story appears to be prima facie evidence that such a deal would raise antitrust concerns.

The regulatory regime in the equity options world puts a premium on multiple listings and CBOE has had to fight in court to maintain their ability to list certain indexes exclusively. If the two best known index providers merge, the grip of these exclusive licenses would tighten further.

When Russell Indexes chose to enter into an exclusive license with the Intercontinental Exchange (ICE) to offer futures on it popular Russell 2000 index back when the two exchanges were battling over the Chicago Board of Trade, CME turned to S&P to license its similar 400 and 600 indexes as a proxy for the small- and mid-cap space. A merger of two of three major index providers would seem to further limit that type of competitive response.

The story did say the CME was moving beyond pork bellies but I noted that was akin to saying Ford is moving beyond the Edsel. Duh.

While I was putting together my little rant, I had to go back and do some research as I thought the CME’s pork belly contract had already been delisted. A quick google search showed several year-old editorials talking about the need for it to be pulled as volume and open interest had dwindled down to a handful but I discovered that it was still listed.

This no doubt was due to it historic importance to the institution. But on Friday the CME Group made it official: “Effective close of business today, Friday, July 15, 2011, Frozen Pork Bellies futures and options (tag 1151-SecurityGroup=GPB, Open Outcry symbols PB, KP/JP) will be delisted.”

Some may call it an end of an era but to be honest, that era ended a long time ago.

In the last 10 years, however, things have changed as futures’ volume exploded, exchanges became public companies and big players in mergers and acquisitions, and assets allocated to futures based investment strategies have grown by a factor of 7X.

 Futures had moved into mainstream or so we thought. Yesterday the Wall Street Journal had a story about the CME Group revamping its Chinese renminbi futures contract. Below the main headline was a subhead that could have been 39 years old. It stated: “Exchange Group Plans Futures on Chinese Yuan, Denominated in Dollars; Moving Beyond the Pork Belly Pit.”

Moving beyond the pork belly pit? They moved beyond the pork belly pit before I started in the industry more than 20 years ago.

It was 1972 When the Chicago Mercantile Exchange launched currency futures through the International Monetary Market. In following decades the CME and Chicago Board of Trade launched interest rate futures, stock index futures, electronic trading and merged.

I understand that there is a certain romance with the pork belly contract and have even noted in print how the CME, now CME Group, is synonymous with it even though it has been decades since it has been a significant part of its business. But this is 2011. It was the 1980s when financial futures greatly surpassed agriculture futures in volume for Chicago’s futures markets. By that time bellies were more lightly traded than the other livestock contracts at CME, let alone their financial contracts.

We even wrote an obit on it when CME decided to move pork bellies exclusively online when they moved CME Group products to the CBOT trading floor. There was no room for the aforementioned belly contract.

And it is not jus the headline writer. The story includes the following: “…as it tries to keep pace with rapidly consolidating rivals, moving beyond the pits trading pork bellies, wheat and corn.”  The vast majority of futures volume in all its products have traded electronically for several years now.

Pork belly futures are still listed according to the CME Group Web site but there has been virutally no volume in 2011. Saying CME Group is moving beyond the pork belly pit is akin to saying Ford is moving beyond the Edsel or perhaps Model T.

When Derivatives giant Deutsche Borse announced its proposed acquisition (yes acquisition) of NYSE Euronext earlier this year, it was floated that CME Group would step in to acquire the NYSE, not the other way around. While that has not happened, it gives you an idea  of the size and scope of its business.

 Yet despite all this we still see talk of pork bellies and floor traders.

It was a considerable victory for the upstart exchange because it would make it easier for end users to transfer their open interest to its clearinghouse from the CME Group clearinghouse or vice versa. 

But as we noted at the time it takes two to tango and the rule would not hold much weight unless the CFTC forced CME Group to accept EFF trades. Given a chance to say whether he would compel the CME early in the controversy, CFTC Chairman Gary Gensler told Futures that he would let the issue work through the appropriate channels. That he did.

What ensued was an almost comical back and forth between CME Group lawyers and the CFTC with an increasingly frustrated ELX asking the Commission to take more affirmative action. CME Group claimed that EFFs were illegal wash and or fictitious trades. The CFTC staff concluded that they were not and CME came back with yes they are.

At one point we figured that that we could simply add “CFTC says no they aren’t” and “CME Group says yes they are” to previous stories and be done with it.

Not to make light of the controversy because there were real issues on both sides. Exchange for Risk (EFR) transactions usually involve two related but materially different products such as cash and futures Treasuries where there is a risk involved. It is hard to dispute that the sole purpose of EFFs was to transfer open interest.  At the end of the day CME didn’t want that to happen,  ELX did and the CFTC, while perhaps thinking it may be a good thing, decided to stop short of forcing it.

The Commission did, however, hedge its bet by stating, “It is possible that in the future, under a different set of circumstances, the Commission could conclude that an exchange’s prohibition of EFFs does not comport with Core Principal 18.”

It also reiterated its disagreement with CME Group on its position that EFF trades violated the Commodity Exchange Act and said the exchange could not characterize them that way.

While this particular battle is over, I have a feeling we probably have not heard the end of EFF trades.

But the real competition has to do with the battle over margin efficiencies in the massive Treasury complex. CME Group and prior to the creation of if it (through the Chicago Mercantile Exchange’s acquisition of the Chicago Board of Trade) CBOT has battled to keep its supremacy in interest rate futures. The CBOT pushed aside most rivals with ease but when DB subsidiary Eurex made a serious challenge to list Treasuries while also negotiating with the Board of trade Clearing Corporation (BOTCC) to clear its soon to be listed U.S. Treasury futures contracts, the challenge became more viable.

The two Chicago futures giants answered by creating the Common Clearing Link, which delivered efficiencies to end users that they had been clamoring over for many years. They would later merge.

Contrary to popular opinion at the time, the CBOT had moved into the future and had a viable electronic market so they were not as vulnerable as some had suspected. By moving all CBOT positions to the CME clearinghouse they created additional efficiencies for end users.

NYSE Liffe U.S. offered a glimpse of the real competition it is embarked on with CME after the New York Portfolio Clearing was approved last week. NYSE Liffe U.S., like so many others before it, is attempting to take on the huge Chicago interest rate complex. Can they succeed? Many people like to say that it is impossible for one exchange to move a liquid viable contract from another exchange. That is not quite true. It happened with the bund and was about to happen with the Comex gold and silver contracts when the CME bailed out Comex and the New York Mercantile Exchange by forcing the CBOT to stand down (through its buyout offer along with existing non-competes with Nymex) right when the CBOT was close to gaining the upper hand.

The lesson is that in order gain traction when taking on an entrenched contract you need to offer an additional efficiency.

NYSE LIffe U.S. believes they have it with NYPC, a joint venture between the Depository Trust Clearing Corporation and NYSE Euronext, which will clear both cash Treasuries and futures in a ‘One Pot” clearinghouse. The CME already answered—a day earlier—with a new clearing entity they purport will offer the same efficiencies.

We will not handicap the battle at this point but it is clear that the creation of NYPC ups the ante a bit. Like other attempts to wrestle control of the Treasury complex many of the end users have a financial stake in the competing entity, but as history has proven this is insufficient in itself to create change. But given the expense of the operation it is clear this is not simply an attempt to put a check on CME Group for fear of its pricing power but a serious attempt to provide something new. It will be an interesting battle—NYSE Liffe will launch Eurodollars on March 21 and the entire Treasury suite a week later—and one more interesting than all this merge talk.

Mandelbrot’s historic work on the study of fractals and his study of cotton, debunking the myth of efficient markets for many, represent some of the most significant contributions in the fields of mathematics and markets. I say for many because the efficient market model is still being taught at many of our most prestigious universities.

I would suggest, however, that proof of the obsolescence of this theory is the fact that managed futures has survived and thrived for 30 years. And that is a long time for any investment methodology to last especially one that could not be successful if you subscribe to the efficient market theory. Many academics claim managed futures in general and trend following in particular do not work, they cannot work if you subscribe to that. Easier to ignore one lone mathematician then scrap a faulty model that provides a living to many.

Which brings us up to the recipient of the Fred Arditti award, Dr. David Ferucci. Ironically Ferucci hails from IBM (actually head of the semantics analysis and integration department at IBM’s T.J. Watson Research Center), where Mandelbrot spent most of his career.

Ferucci and his team developed programs in automatic question-answering, intelligent systems and saleable text analytics. The highlight of his research was the creation of a computer system named Watson that challenges players at the game of jeopardy and wins.

He was impressive but I must confess that I did not see the significant practical benefit of this. It is clear that those who selected Ferucci are much better judges on the matter than I but I must report that the whole presentation had the feel of an elaborate parlor trick and did not have the substance of say Mandelbrot’s lifetime of work.

We recently noted that the BarclayHedge database of alternative investments showed that money under management in managed futures has surpassed every individual hedge fund sub category it follows. That is good news for CME Group , which has more than 95% of the market share of U.S. futures trading. That wouldn’t have happened if some folks weren’t paying attention to Mandelbrot’s work and his discovery of fat tails.

The FT concludes its piece with this, “Last years (Nobel Prize in Economics) award to Paul Krugman was widely interpreted as a rebuke to efficient marketeers. If that was the intention, the award should have gone to Mandelbrot.”

One could say the same here. Mandelbrot was a maverick, so much so that his work still has not been fully accepted. Much of CME Group’s incredible volume can be attributed to those other mavericks in the asset allocation world who have accepted that work.

The former President said he agreed with Dodd-Frank in principle but that the regulators needed to push the rules out quickly in order free up lending.

Apparently the Commodity Futures Trading Commission (CFTC) was listening (Commissioner Michael Dunn was in the audience) as they just released a slew of new rules under the Dodd-Frank Act.

President Clinton stated, “The bill, probably out of necessity, left so much up to regulations yet to be published, commented on and approved that one of the reasons we don’t have a lot of  bank lending back in the system today — quite apart for the mortgage overhang — is that people aren’t quite sure yet what their capital requirements will be, what the cost of compliance will be… so on balance I like what I know about the bill, on balance I don’t like anything that is maintaining uncertainty among financial institutions that appear on paper to have $1.8 trillion in cash uncommitted to loans and yet the people are afraid to start loaning because of uncertainties about what the compliance cost will be.”

Not sure if the large banking institutions would agree with the former President when he went on to say even if the cost of compliance ate up a third of that figure that would be OK because at least the remainder could be loaned out.

He also said that bank lending would be preferable to a second stimulus package that has been floated.

Clinton estimated that the hole dug by the financial collapse was roughly $3 trillion, which would be quickly offset if available funds were unleashed on the economy. “If the banks have $1.8 trillion dollars and they all behave like old fashioned mom and pop community banks, in theory they have the capacity to loan $18 trillion tomorrow and this whole thing would be over in a nanosecond.”

Perhaps that is overly simplistic but it should give pause to those folks who believe that legislative gridlock is a good thing. Remember as passing financial reform became more and more difficult this year, more of the details were pushed to regulators, (though CFTC Chairman Gary Gensler says he has clear direction) . Many insiders told us that while any major legislation leaves a lot to the rule writing process that this was doubly so in the case of Dodd-Frank.

Clinton added, “I think the most important thing the Federal Government  could do right now is to get these regulations out, give the banks some certainty. They don’t even have to like everything, just tell them what the deal is and lets calculate the cost and get the show on the road. Every week that goes by is a week that loans aren’t made, businesses aren’t saved, new businesses aren’t started and we are not expanding.”