Important notice to all clients

1 July 2009

Short-selling in UK financial services stocks – update

The FSA’s prohibition on short-selling in UK financial sector stocks lapsed on 16 January 2009. At that time, disclosure requirements in respect of designated financial sector stocks were also extended with a lapse date of 30 June 2009.

The disclosure rules require any person whose short-position has reached, exceeded or fallen below 0.25% and each 0.1% threshold thereafter in a UK designated financial sector stock to disclose this position to the market via a RIS. On 26 June 2009, the FSA published new rules which effectively extend this disclosure requirement until further notice.

We would like to remind all clients that it is their responsibility to ensure that they comply with all rules in place in respect of short-selling, in particular the FSA disclosure requirements. Restrictions on short-selling continue to remain in force in several other jurisdictions.

If you are not sure of the meaning or effect of short-selling regulations in place, either in the UK or any other jurisdictions, you are advised to seek legal advice before you trade.

Link to FSA press release - http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/084.shtml

List of UK financial sector companies - http://www.fsa.gov.uk/pubs/other/Shortselling_list.pdf

Link to CESR List of short-selling measures - http://www.cesr.eu/popup2.php?id=5237

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The customer charter *

* Please note that this Customer Charter applies only to customers of MF Global UK Ltd. as defined in our TCF Policy.

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Policy and explanation of margin

Margins - A Basic Introduction

Initial margin is the amount of money required to open a derivatives position, whether in futures, forex or CFDs. It is in effect a security deposit to ensure that traders have sufficient funds to meet any potential loss from a trade. When a position is closed out or settled money deposited by way of margin is returned, plus or minus any resulting profit or loss.

If a position involves an exchange-traded product, the amount or percentage of initial margin is set by the exchange concerned. However brokerage firms often require a larger amount of margin than that set by the exchange. In times of market volatility margin requirements can change quickly and brokers such as ourselves have the right to change margins at any time at our discretion.

If a position is making a loss and the value of the initial margin is being eroded, the broker will make a margin call in order to restore the amount of initial margin available. Often referred to as "variation margin", margin called for this reason is usually done on a daily basis, however, in times of high volatility a broker can make a margin call or calls intra-day.

Calls for margin are usually expected to be paid and received on the same day. If not, the broker has the right to close sufficient positions to meet the amount called by way of margin. After the position is closed-out the client is liable for any resulting deficit in the client's account.

Some US Exchanges also use the term "maintenance margin", which in effect defines by how much the value of the initial margin can reduce before a margin call is made. However, most non-US brokers only use the term "initial margin" and "variation margin"

Consider the example below:

A gold futures contract of 100 ounces with an initial margin of &$3000:

Day 1

A client lodges $3000 margin and buys a June gold future at a price of $920 per ounce. (every $1 movement in the price of gold generates a profit or loss of $100)

Gold closes the day at $915.00, which means the client is losing $500.

Day 2

The broker makes a margin call for $500 and expects to receive funds on the same day.

Three scenarios:

  1. The client pays his margin call and on day 2 gold closes at 918. In this case the client now has $300 surplus in his account
  2. The client does not pay his margin call and on day 3 the broker sells out the contract at 910. The client is debited $1000 and now has a balance of $2000
  3. The client does not pay his margin call but promises to meet the call on day 3. The broker uses his discretion to give the client an extra day to pay. On day 4 the price drops to $880 and no margin has been received. The broker closes out the trade creating a loss of $4000. The client is now left with a $1000 deficit in his account (i.e. initial margin $3000 less loss of $4000) for which he is legally liable to pay.

In addition to the above information, you are advised to carefully read the risk disclosure statement and associated documents issued to you regarding your account. Should you not understand any aspect of the trading you intend to undertake or the financial consequences of doing so you should consult with an independent financial adviser.

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Definition of segregation

Client Money Statement

As a regulated firm MF Global UK Limited (MF Global) offers "segregated" account facilities to its customers. If you hold a segregated account with MF Global this will mean that any money in your account with MF Global will be treated as "client money" for the purposes of the client money rules of the Financial Services Authority ("FSA"). These rules may be found in the FSA's Handbook of rules, in the business standards section which deals with client assets (CASS). The FSA Handbook is available online on the FSA's website; www.fsa.gov.uk.

In broad terms the client money rules require MF Global to act as trustee in respect of client money it holds and to ensure that such money is held separately from its own funds. The rules dictate where MFG may place client money and the steps MFG must take to ensure that the client money it places with third parties (e.g. MF Global's bankers) are held in suitable segregated facilities. These rules form an important part of the UK regulatory system, which is designed to protect consumers and other users of the financial services markets especially in the event of the failure of a regulated firm. If a regulated firm fails a Liquidator would not be able to utilise client money to meet the demands of the general creditors of that firm.

The client money rules only apply to cash and there are other rules which apply to non-cash assets you may hold with MF Global, for example the FSA's rules regarding custody arrangements.

In respect of certain products MF Global does not offer segregation and customers are asked to place funds and non-cash assets with MF Global as collateral. In these circumstances the customer's cash will be placed in a "non-segregated" account and will not be subject to the FSA's client money rules.

If you have any questions regarding the status of your account or the segregation of your funds, please contact your MF Global account handler.

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