MFGI liquidation trustee motions spark commotion

There was a flurry of activity following recent motions by the MFGI liquidation trustee late on Wednesday after MF Global Holdings Ltd. bankruptcy judge Martin Glenn pushed back a hearing on the trustee’s expedited claim to next week and ordered trustee James Giddens to meet with its objectors.

James Koutoulas, co-founder of the Commodity Customer Coalition, noted, “Customers finally have a seat at the table. We are grateful to Judge Glenn for the opportunity to present our case directly to the Trustee and effect a faster, more equitable distribution of customer assets.”

The Commodity Futures Trading Commission (CFTC), which has been strangely silent throughout the two-week process, put out a release in support of the trustee’s recently filed motions regarding an expedited claims process and emergency transfer to cash only customers.

The CFTC did not comment on the trustee’s motion filed yesterday to charge additional transfer fees to “misdirected transfers.”

The expedited claim motion held out hope that interim distributions would be made in an expedited fashion and not wait for a lengthy claims process. The motion regarding “cash only” customers would distribute roughly $521 million in customer funds to former MFGI customers who have received no distributions of their money because they had no open positions and the requisite margin at clearinghouses that were transferred last week. This angered customers who only received a small portion of their funds because they maintained minimal positions relative to their account size.

In an apparent reference to the aforementioned customers the CFTC noted in its statement of support, “The Commission expects the Trustee to use the mechanisms put in place to move as promptly as is practicable and prudent to determine commodity customers’ pro rata share of MFGI customer funds, return funds to customers, and place all customers on an equal footing.”

It also stated that it preferred the trustee’s approach to one offered by Thomas A. Butler Jr., et al, who sought a return of 85% of his group’s (Movants’) cash balance based on published reports that the shortfall in segregated funds was 11.6% leaving more than 88% of customer funds available.

The CFTC noted in agreement with recent statements by the trustee that “the size of the shortfall remains uncertain despite the diligent efforts of the Trustee and the CFTC to ascertain the precise amount.”

But neither the trustee nor the CFTC could explain why this is the case two weeks into the process and after the CFTC noted in a Nov. 2 letter that “The CME, in its letter, estimated that, at the close of business on November 1, 2011, MF Global's current segregated funds requirement was approximately $5,445,839,890, and that there was a customer segregated funds shortfall at MF Global of $633,027,696, or a deficiency of approximately 11.6%.”

Several group have argued and petitioned judge Glenn that all available margin held in segregated customer accounts be immediately transferred to former MFGI customers.

Though the trustee maintained that the expedited claims process would be separate for commodity customers, securities customers and general creditors, the CCC complained that customers’ funds were still a part of a claims process and that the trustee could distribute available customers’ assets immediately.

When asked directly whether the trustee had comingled customer funds with other MFGI assets in the liquidation process, a spokesmen provided the following written response: “There will be a separate estate for commodity customers and for security customers and an additional general creditors estate…. All to be administered by the Trustee”

Meanwhile, Melinda Shramm, founder of the National Introducing Brokers Association (NIBA), is reporting that all its members have lost business, which may never come back. “Some IBs will be forced out of business, for various reasons: Some could not find FCMs who would/could make suitable agreements to clear the business [and] commissions are being held up by the trustee.”

NIBA has posted a petition asking Judge Glenn to return all customer segregated funds, which collected more than 600 signatures on Wednesday.

CFTC timeline
Trustee update on Nov. 16
CFTC letter in support of trustee motions

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