Some MF Global account holders may see their money earlier than originally expected, following the broker’s bankruptcy and subsequent freezing of customer positions.
The US Bankruptcy Court, Southern District, New York yesterday granted a petition filed by liquidation trustee James Giddens, which sought an expedited transfer of funds to customers. The ruling – which had the backing of futures watchdog the Commodity Futures Trading Commission (CFTC) – puts in place mechanisms for the prompt initiation of claims for all MF Global customers and the transfer of 60% of customer funds that have been frozen in “cash-only” accounts.
The CFTC has requested to work with the bankruptcy trustee to ensure a swift claims process and transfer of customer funds. “My number one priority at this point is to work with the trustee and facilitate an equitable distribution of funds to all MF Global customers as quickly as possible,” CFTC commissioner Jill Sommers said.
MF Global filed for bankruptcy 31 October after counterparties recoiled at the disclosure of a US$6.3 billion bet on European debt. Approximately US$600 million of client funds is currently not fully accounted for. 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.
The regulatory framework to protect futures brokers’ customers has also been debated in the US Congress. Tuesday, Senate Agriculture Committee Chairman Debbie Stabenow asked CFTC to speed up its MF Global investigation.
“That funds are missing highlights an extraordinary breach of trust – it is unacceptable there are any doubts about the safety of customer assets,” Senator Stabenow, a Michigan Democrat, said in a letter to CFTC head Gary Gensler.
Various investigations are now taking place into the events surrounding the collapse of the broker, including those by the CFTC, the Securities Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI).
But while CFTC rules require firms to segregate client accounts, MF Global was ‘regulated’ by CME Group – the largest futures exchange operator in the US and a ‘self-regulatory’ organisation for the sector. It was up to CME to make sure MF Global’s accounts were in order. The week before the collapse, CME had audited MF Global’s customer accounts and found nothing untoward on the books.
Daniel Harris, a New York-based analyst for Goldman Sachs, has suggested that CME could face regulatory scrutiny for not disclosing what it knew about MF Global quick enough.
“CME has been under pressure owing to worries it may face liability over the timing of its communication with the CFTC following discovery of a shortfall in MF Global’s segregated client accounts, given its obligations as the DSRO (designated self regulatory organisation),” Harris said in a note to clients. “Given the DSRO’s responsibility to provide immediate notification to the CFTC of such information, any potential liability is likely to hinge on the timing of when CME initially discovered discrepancies.”
CME has insisted it followed CFTC requirements and its own rules and procedures in reviewing MF Global’s segregated funds statements and coordinating that review with the CFTC.
“CME was advised in the early hours of Monday, 31 October that there was an actual shortfall in the segregated funds account and was told the CFTC was advised concurrently,” the company said. “Shortly thereafter, CME Group discussed the shortfall in a conference call with the CFTC and other regulators.
CME Group is confident that it complied with all its obligations as a DSRO pursuant to the Commodity Exchange Act.”
Concern for lost cash
Industry bodies are also concerned about missing client funds. On Monday, lobby group the National Introducing Brokers Association, said to the extent there are sufficient segregated funds available, they should be seen as the assets of the customers. NIBA also backed the trustee’s petition to the US Bankruptcy Court to release the remaining cash balances of former MF Global customers.
“Those funds are absolutely vital for the marketplace to function fully,” the association said. “The result of withholding these funds is affecting the ability of customers to maintain and trade their positions, and will impact liquidity and trading volume – absolutely necessary for an efficient market.”
Last Friday, in order to accelerate the return of customer cash and other assets held at CME Clearing, other clearing houses and MF Global custodians, CME provided a US$250 million financial guarantee to the trustee to give the trustee greater latitude to make an interim distribution of cash. It also ensured a further US$50 million in assets to CME Group market participants to offset missing customer funds held at MF Global.
“The failure of MF Global and the firm’s mishandling of customer segregated funds is absolutely uncharted territory for this industry, and this extreme measure will help to provide all former MF Global customers access to their account balances that had previously been frozen in the liquidation,” said CME Group executive chairman Terry Duffy.
Investigations by the CFTC, SEC and the FBI continue.