A thousands-strong alliance of former MF Global clients today called on the US trustee of the failed broker to change its stance on returning client monies.
The Commodity Customer Coalition (CCC) this week filed a brief with the United States Bankruptcy Court for the Southern District of New York, intended to help return customer funds that can be traced through MF Global subsidiaries, affiliates and counterparties, back to the company’s estate.
The lobby group, formed soon after the bankruptcy and now representing over 8,000 MF Global customers, believes MF Global’s estate is not in control of the customer funds it needs to return all property to those who held commodity trading accounts with the broker. CCC is demanding the courts provide court-appointed trustee James Giddens with the power to go after those funds, wherever they have been transferred.
“The CCC is asking the court to order what the law requires – that the segregation protection of commodity customer funds travels with those funds as the futures commission merchant (FCM) moves them throughout its organisation,” said James Koutoulas, co-founder of the CCC and CEO of Chicago-based commodity trading advisor Typhon Capital Management. “The trustee has an obligation to trace customer funds wherever they travelled and claw them back to the estate of MF Global, or sue the entity who accepted them to recover them, so he may distribute those funds to customers.”
Giddens believes if there is a shortfall in customer funds, the loss will have to be shared on a pro-rata basis with the creditors of the estate. However, CCC believes the trustee should liquidate assets in the estate to pay back segregated account holders first.
Former clients of the broker met with Giddens today in New York to discuss the client claim process. So far in the United States, US$3.8 billion of client funds has been returned but the trustee said today it had no plans at this stage to release further funds.
“At this point we are not in a position to do another transfer,” said James Kobak, a lawyer for the trustee. “That situation might change as we get through the claims process.”
MF Global overshadows CFTC Dodd-Frank proposals
In a meeting yesterday proposing Dodd-Frank measures designed to protect swap client funds in segregated accounts, all five Commodity Futures Trading Commission (CFTC) heads directly evoked MF Global as a reason for ensuring the new financial regulations did their job.
“For so many years, we had the confidence customer funds were very well protected by the federal commodities segregated account statutes and regulations,” said Democratic CFTC commissioner Bart Chilton. “But MF Global was a slap in the face wake-up call for us all and hit the very heart of who we are as regulators.”
Chilton said of the CFTC’s enquiry into MF Global: “We’re pursuing – along with other civil and criminal authorities – all the available enforcement avenues. At the same time, I think we need to look at what we can do to change our oversight system.”
In the public discussion of new swap protection rules, commissioner Jill Sommers, a Republican, called for the CFTC to treat the monies of swaps and futures customers the same. “But we need to make sure that this doesn’t happen again,” said Chilton, alluding to the CFTC futures account segregation rules that MF Global allegedly broke.
“Rulemaking, properly understood, is simply a first step in the commission’s reconsideration of the customer segregation regime for both futures customers who bore the brunt of the MF Global failure and cleared swaps customers,” said Republican commissioner Scott O’Malia.
Mark Wetjen, a Democrat sworn in as commissioner in October 2011, outlined a guaranteed clearing participant relationship that would permit a customer to hold its collateral in a third-party custodial account with a guarantee from the FCM’s clearing member.
The CFTC’s new rules on segregating customer’s funds require FCMs and derivatives clearing organisations (DCOs) to hold customer collateral in a separate account from that belonging to the FCM or DCO.
But Wetjen said there were still risks under the proposed model. “Although fellow customer risk is significantly reduced, it is not completely eliminated. In the event of a double default, customers continue to face the risk that substantial variation margin will not be credited and ported immediately with non-defaulting customer collateral due to payment netting practices,” he said.
In addition, Wetjen argued excess collateral in an FCM’s customer account was always exposed to operational risks, including risks of fraud or misappropriation.
“But no regulation – indeed, no segregation model in itself –will in every case prevent the wilful misappropriation of customer funds,” he said.
MF Global filed for bankruptcy after counterparties reacted adversely to the disclosure of a US$6.3 billion bet on European debt. The unwinding of client positions is being further complicated by the varied liquidation policies of futures clearing houses in Europe and the US. It has also been reported widely that regulators have determined that days before the 31 October bankruptcy filing, MF Global may have moved more than US$100 million in client money to its own brokerage accounts. Some US$1.2 billion in client monies are still believed to be missing.
In the UK, administrator KMPG last week insisted it planned to begin returning cash to clients as early as this month. So far KPMG has recovered £594 million (US $916 million) of client monies held by clearing houses, exchanges and brokers, representing 82% of known non-US segregated funds. However, Giddens believes much of these monies were segregated for US customers who traded on foreign exchanges and should be returned to US customers.
At a creditor’s meeting in London on Monday, British MF Global customers demanded their money back as KPMG said it has already racked up £17.5 million in fees without returning anything to clients. KPMG told clients that those with unsegregated accounts would be treated as unsecured claims alongside other creditors. A first payment to segregated account is scheduled to be rewarded after a London court hearing on 3 February.
UK bank Lloyds today hired former European CEO of MF Global, Richard Moore, as its new head of trading.