It has been nearly three weeks since MF Global Holdings Ltd. filed for bankruptcy and its futures commission merchant and broker/dealer went into liquidation and more than three weeks since we learned that they were in distress, yet we seem further away from an explanation as to what happened. 

Worse yet, we keep on hearing frustrating tales about poor communication whether it be from the Commodity Futures Trading Commission (CFTC), CME Group or the Securities Investor Protection Corporation (SIPC) trustee from MFGI customers who for years were told by the leaders of the industry that what has been happening could not happen. Namely that their segregated funds where safe and would not be put in jeopardy even — or especially — in case of an FCM collapsing.

While there has been progress of late there still has not been a viable explanation why it has been so difficult to get customers their money back. We understand there is a shortfall in customer segregated funds and we understand an investigation takes time but there has been no logical explanation from the trustee why they can’t pinpoint the size of the shortfall or why what customer money is accounted for hasn’t been returned to them already.

And perhaps most disturbing is that what progress has been accomplished so far has been attributable to a grassroots movement of a handful of angry customers and ad hoc organizations formed on the fly as opposed to the so called leaders of the futures industry who have appeared to be asleep at the wheel and willing to let futures customers twist in the wind.

CME Group blamed MF Global shortly after the bankruptcy claiming that on the week they were in trouble (later determined to be Wednesday Oct. 26) they completed an audit that showed MF Global was in compliance with its segregation requirements. They then learned on Oct. 31 that MF Global had a shortfall in customer segregated funds (and by the way put out a pretty specific estimate of the shortfall of $633,027,696). According to numerous back office sources an FCM is required to report its customer segregated funds to its designated self regulatory organization (DSRO), in this case CME Group, on a daily basis. At the point their audit was completed, it was common knowledge that MF was in much distress so we find it difficult to understand how CME was not more on top of it. As former CME regulator Peter Moy wrote on a comment board, “in previous situations like MF Global, the Audit Department would be present at the firm everyday to insure that all segregated customer funds were properly accounted for. The excuse that they transferred the funds after the audit is lame.”

The CFTC has been MIA for most of this as Chairman Gary Gensler recused himself due to his relationship with former MF Global Chairman and CEO Jon Corzine from their days at Goldman Sachs. The SIPC liquidation trustee has come under a lot of criticism but most of it has to do with his lack of knowledge of the industry, which is why many in the industry were perplexed the CFTC and CME Group didn’t fight for more control of the process. One former MFGI customer who still has nearly $185,000 frozen wondered whether the trustee assumed customers with positions got 60% of their money back instead of just 60% of the margin held at CME Clearing.

It is an important question because the trustee pledged last week—after much external pressure from groups like the Commodity Customers Coalition (CCC)—to have an interim distribution to “cash only” customers. The Intercontinental Exchange (ICE) sent a letter to the trustee pointing out that customers who exited their positions before the bankruptcy did not receive any allocation as the trustee just completed a transfer of positions and a portion of the margin used to hold those positions. While the cash only transfer addresses certain customers, many other had only minimal positions and still have 80%, 90% or 95% of their accounts frozen. Today the trustee noted that there will be another interim distribution that would attempt to get all customers 60% of their assets returned.

Former MF Introducing broker Sean McGillivray just wrote, “The impact on investors have been well documented. Inconsistent and unequal treatment of differing accounts by regulators as well as the exchanges has eroded confidence in the system. It has also forced unnecessary client liquidation losses. Our firm now holds unsecured debits on the books at our new FCM, because of the CME’s (half hearted and really half thought out) transfer plan.” McGillivray went on, “The majority of our client accounts remain frozen with little hope of a speedy resolution. The industry must step up to restore confidence. The CME is one of the few entities capable of guaranteeing any shortfall, effectively allowing for the immediate release of client funds.” 

This is one of many notes we have received detailing the frustration with a broken process and a disconnect between customers and businesses under stress  and those responsible for resolving a problem that was not supposed to happen and has not been well managed.

So lets recap. Tomorrow will be three weeks since MFGI went under. The trustee completed it initial transfer that returned positions and $1.5 billion in customer margin money last week to 14,500 accounts. It has pledged a second distribution of 60%, about $520 million, of the capital in cash only accounts. The second distribution is said to have begun but is not complete. When that is complete it would mean that just over $2 billion of $5.4 billion would have been returned to customers in just under a month. That is a little more than 35% of customer money that was never supposed to be at risk, even in a bankruptcy.

That is not a give job. Not by the trustee and not by the folks who should be looking out for their customers or the folks who are charged with keeping an orderly marketplace.

Throughout the process the language of the trustee appears to confuse the distinction between customer segregated money and general claims in a bankruptcy. Nothing has angered former MFGI customers more than the term “claims process.” They reply that they have segregated accounts. It is their money that by law is kept apart from the funds of the broker. They don’t want to make a claim, they want their money back. And they should have gotten it back by now, or at least what is left of it and they should be first in line for anything that is left.