Showing posts with label MICHAEL LEW. Show all posts
Showing posts with label MICHAEL LEW. Show all posts

COMMODITY FUTURES TRADING - THE MIFE WAY (CIRCA 1985)

I started out as a commodity futures trader in 1986. I was recruited and trained by the staff of a member-broker of the now defunct Manila International Futures Exchange for two weeks. After which, the company already let me out to solicit clients. I still had a basket full of questions that were left unanswered after the training so I had to content myself to doing a lot of research on my own to fully equip myself. Afterwards, I immediately called on close acquaintances, personal contacts, and family friends as I thought that one or two may dabble into this because of personal cognizance. And true enough, one of our family friends did! In fact, the guy was already trading in Copra futures (dried coconut meat from which coconut oil is extracted). He happened to be trading with another company ( also a member broker of MIFE) and was losing heavily. Knowing me personally, he decided to open up an account with me to try me out. We sold the 6 month forward contract of Copra futures and immediately we got caught up in a losing position. We sold the contracts at Php10 at that time when the current price of Copra was only Php6 in the real market. Both the guy and I were baffled by the way the prices at the exchange were moving…they were going up while the actual market price as well as the price of the end product (coconut oil) in the world market were going down. We went through a series of successive margin calls specially when the contract month of our holdings got nearer. What the people at the headquarters did not know was my guy was “loaded” and can absorb the uncanny rise of prices in the exchange. But the most important bit of information the headquarters did not know about my client was the fact he was one of the biggest copra trader in southern Philippines and supplies copra to large multinational companies in Manila.

When the contracts we were holding for six months became spot month, the price went all the way up to Php18 (while the actual market price was only Php5). My client and I already sensed that something was amiss. It was as if the market was doing all it can to break our resolve and get us out of the market and take our loss. So, the last time I went to my client to collect the required deposit to cover the full amount of the contracts, we both decided we will deliver. And when I served notice to the company that my client will deliver, it practically got everyone in the exchange truly worried. I received successive phone calls from my own manager asking me to discourage my client because of “the many obstacles we needed to hurdle to get our deliveries accepted by the exchange.” However, I made it very clear to my manager that my client was unwavering on his decision to make the deliveries. It didn’t make sense then to decide not to deliver because doing so will mean taking a whooping loss. Besides, the price of copra in the world market dropped to only Php5, and if we deliver to the exchange, we will get paid with the contract price of Php10 ( a reasonable profit for the 6 month ordeal the exchange made us go through, so we thought).

My manager decided to visit my client personally. I didn’t know what they talked about since they had a one-on-one session while I was sipping coffee at the hotel lobby. But after their talks, my client gave me specific instructions not to liquidate our positions without a reasonable profit.

In the next few days after that, I saw an unbelievable reversal in the price of the spot month of copra futures. From Php18 it went down to Php12. My manager started calling me again to liquidate our positions. My client and I stood firm. When the price reached Php8, my manager called me again and was practically begging me to liquidate. Sensing the utter desperation in him, I called up my client and we liquidated all our positions.

What a nerve racking experience it was for a neophyte trader like me. It was quite revealing though. I found out so early in my career as a commodity futures trader that prices in the Manila International Futures Exchange could be manipulated.

I got the chance to find out how extensive their scam operations were when I was transfered to the main office after they decided to close the branch I was working in. I shall share them with you in my next blog.

(Watch out for my succeeding blogs as they will be more revealing.)

HANGING BY A THREAD (PART1 ) - (OR HOW PFEC MANAGE TO REMAIN AFLOAT)


I am publishing herewith excerpts from the Supreme Court’s decision [G.R. No. 154131, July 20, 2006] citing the letter from the Central Bank which became the basis for the dismissal of the case filed by the SEC against Performance Foreign Exchange Corporation, to wit:

“Meanwhile, on August 13, 2001, Amado M. Tetangco, Jr., then Officer-in-Charge, Office of the Governor, BSP, in answer to SEC Chairman Lilia Bautista’s letter-request of February 8, 2001, stated that respondent’s business activity “does not fall under the category of futures trading” and “can not be classified as financial derivatives transactions,” thus:

Dear Ms. Bautista,

This refers to your letter dated February 8, 2001 requesting for a definitive statement that the foreign currency leverage trading engage in by private corporations, particularly, Performance Foreign Exchange Corporation (PFEC), is a financial derivatives transaction and that it can only be undertaken by banks or non-bank financial intermediaries performing quasi-banking functions and/or its subsidiaries/affiliates.

As indicated in your description of the transactions and the documents submitted, the foreign currency leverage trading, subject of your query, is essentially similar in mechanics to currency future trading, particularly with respect to the margin requirements, standard contract size, and daily market-to-market of open position. However, it does not fall under the category of futures trading because it is not exchange-traded. Further, we can not classify it as being financial derivatives transactions as we consider the transaction as plain currency margin trading, which by its mechanics, involve the set-up of margin and non-delivery of the currencies involved.

In view of the foregoing facts, the activities of the aforesaid corporation are not covered by BSP guidelines on derivative licensing.

We hope we have satisfactorily clarified your concerns.

Very truly yours,

(Sgd.)
AMANDO M. TETANGCO, JR.“

THE SEC WAS TRYING TO PIN DOWN PFEC ON THE BASIS OF OUTDATED DEFINITIONS OF SECURITIES AND REGULATORY GUIDELINES AS SET IN THE Republic Act 8799 OTHERWISE KNOWN AS THE SECURITIES REGULATION CODE OF THE PHILIPPINES ENACTED ON JULY 19, 2000.

WHY OUTDATED? BECAUSE REPUBLIC ACT 8799 FAILED TO ENCOMPASS THE FAST BECOMING POPULAR SPOT CURRENCY TRADING WHICH WAS BEING CONDUCTED ELECTRONICALLY OFF-EXCHANGE AND NON-BANK BASED, CREATING A LEGAL LOOPHOLE WHICH PFEC IS NOW EXPLOITING TO THE HILT.

IT IS FUNNY, THOUGH, TO NOTE THAT WHILE REPUBLIC ACT 8799 PRACTICALLY GAVE THE SEC A BLANKET AUTHORITY TO REGULATE PRE-NEED PLANS (SEE THE PROVISION BELOW) , IT FAILED TO ADDRESS AND DEFINE THE SEC’S OVERSIGHT FUNCTIONS OVER SPOT CURRENCY TRADING WHICH BY THEN WAS FAST DEVELOPING INTO A PARALLEL MARKET TO INTERBANK FOREIGN CURRENCY MARKET. TOTALLY DIFFERENT IN ESSENCE WITH COMMODITY FUTURES TRADING AND DEFINITELY NOT A FINANCIAL DERIVATIVE BY DEFINITION.

(CHAPTER IV
REGULATION OF PRE-NEED PLANS

Section 16. Pre-Need Plans. – No person shall sell or offer for sale to the public any pre-need plan except in accordance with rules and regulations which the Commission shall prescribe. Such rules shall regulate the sale of pre-need plans by, among other things, requiring the registration of pre-need plans, licensing persons involved in the sale of pre- need plans, requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing for uniform accounting system, reports and recording keeping with respect to such plans, imposing capital, bonding and other financial responsibility, and establishing trust funds for the payment of benefits under such plans.)


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