UK entered administration after its parent company has filled for bankruptcy protection in the US, on 31 October.
After the bankruptcy announcement of MF Global Holdings, the UK subsidiary decided it was not worth to split the business from the main company and to continue offering spread betting in the UK. Clients received an email last Monday stating the company decided to discontinue operations and asking them to offset any open positions during that day. The company is currently working with financial authorities to assure clients are fully refunded as soon as possible.
MF Global is said to be the second victim of the European sovereign debt problem, after Dexia bank reorganization. In the particular case of MF Global, the problem derives more from gambling and improper risk management than from the European sovereign debt itself. Jon Corzine, the company CEO, made a bet of $6.3bn (approximately £3.94bn) on risky European sovereign debt. The rapid erosion of value led the company to report a huge loss at the quarter end that cost it a ratings downgrade to junk. In a matter of one week, there was no other option than filling a chapter 11 for bankruptcy protection.
Jon Corzine’s bet was equivalent to six times MF Global capital, leveraging the company assets-to-capital ratio to 40 to 1. With such huge leverage, any small unfavourable move would put Jon Corzine feet in quicksand, as it did.
Financial spread betting traders should take some learning from MF Global fallout. As we have been pointing out in several articles, one of the main rules when placing trades is too avoid being overconfident as to risk everything in one single trade. Any trade should rarely represent more than 2-3% of a portfolio. You can be successful in one, two, or maybe six highly leveraged trades, but a single bad trade is sufficient to make you lose everything, when proper risk management is not in place.
After the bankruptcy announcement of MF Global Holdings, the UK subsidiary decided it was not worth to split the business from the main company and to continue offering spread betting in the UK. Clients received an email last Monday stating the company decided to discontinue operations and asking them to offset any open positions during that day. The company is currently working with financial authorities to assure clients are fully refunded as soon as possible.
MF Global is said to be the second victim of the European sovereign debt problem, after Dexia bank reorganization. In the particular case of MF Global, the problem derives more from gambling and improper risk management than from the European sovereign debt itself. Jon Corzine, the company CEO, made a bet of $6.3bn (approximately £3.94bn) on risky European sovereign debt. The rapid erosion of value led the company to report a huge loss at the quarter end that cost it a ratings downgrade to junk. In a matter of one week, there was no other option than filling a chapter 11 for bankruptcy protection.
Jon Corzine’s bet was equivalent to six times MF Global capital, leveraging the company assets-to-capital ratio to 40 to 1. With such huge leverage, any small unfavourable move would put Jon Corzine feet in quicksand, as it did.
Financial spread betting traders should take some learning from MF Global fallout. As we have been pointing out in several articles, one of the main rules when placing trades is too avoid being overconfident as to risk everything in one single trade. Any trade should rarely represent more than 2-3% of a portfolio. You can be successful in one, two, or maybe six highly leveraged trades, but a single bad trade is sufficient to make you lose everything, when proper risk management is not in place.