A leading UK trade body has warned delays returning client funds by failed broker MF Global may mean buy-side firms will pick up the tab before they receive their own money back.
Guy Sears, director of wholesale at the Investment Management Association (IMA), said the structure of compensation payments in the UK could lead to MF Global clients having to effectively put funds into a compensation scheme before being able to receive client monies owed to them by the failed broker.
The Financial Services Compensation Scheme (FSCS), the UK’s compensation fund of last resort for customers of authorised financial services firms, pays out compensation if failed firms are unable. Both retail and small commercial customers can claim funds of up to £50,000 from the scheme if the failed firm’s administrators cannot return owed monies. Every firm regulated by UK watchdog the Financial Services Authority is obliged to pay an annual levy to the FSCS. If outflows from the scheme are too high, members must stump up further funding.
“There is a need for greater speed in the provision of owed client funds,” said Sears. “Many MF Global customers are compensation scheme members who could potentially have to pay in more money before KPMG can issue monies owed.”
KPMG was appointed special administrators to the UK arm of the failed futures brokerage on 31 October, the day the company was placed in administration.
The collapse of MF Global is the first bankruptcy to be handled by the new special administration regime (SAR) instituted by the UK Treasury after the collapse of Lehman Brothers to ensure a minimum disruption to financial markets as a result of the failure of investment firms.
The SAR’s efforts to repay client money in the UK have been hampered by the US liquidation trustee for MF Global, James Giddens, who is in dispute with KPMG over the classification under UK law of US$600 to US$700 million in US commodities claimant funds purportedly held as segregated assets for US customers dealing in foreign futures.
In December, KPMG said it had so far 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.
KPMG yesterday insisted it planned to begin returning cash to clients as early as this month. The announcement came ahead of a meeting this coming Monday with clients of the former broker. On the agenda of the meeting is a vote of confidence in the administrator and signoff of KPMG’s fee.
But Sears said even if KPMG begins the process of returning money, it was likely the FSCS’s compensation scheme would still kick in before the SAR was able to deal with all claims.
“We are keenly interested in money getting back quickly to clients,” said Sears, who revealed none of the IMA’s members had yet any funds returned. “This is distressing to lots of clients who are trying to anticipate who will be faster – the scheme or KPMG.”
A spokesperson for the FSCS said the body was yet to calculate its next annual levy, which is normally billed to regulated firms in July.
“Although we will not be able to complete claims until KPMG is able to confirm account balances, we want to assure customers of MF Global that we are working with KPMG to ensure eligible claimants are compensated as quickly as possible,” said Mark Neale, FSCS chief executive.
The FSCS this week began its application process for MF Global claim submissions. Private customers of MF Global UK with an individual account only are being mailed an application form from the FSCS to make a claim for compensation. A spokesperson said the FSCS had been working with KPMG to obtain the required data relating to customers’ accounts.
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.