MF Global situation becomes less clear

November 25, 2011 01:37 PM

The MF Global bankruptcy and liquidation procedure is getting stranger by the day. As those involved in figuring it out looked to take a Thanksgiving break — though MFGI customers still are looking to be made whole — an odd series of seemingly contradictory news items  came out. 

The good news is that the trustee located and began to bring in $1.3 billion in customer segregated funds. This may have prompted CME Group to increase the guarantee it made to the trustee to $550 million from $250 million. This is not an allocation but a “good faith” attempt by CME Group to expedite allocation of customer funds by the trustee. This followed the shocking news that nearly three weeks after the bankruptcy filing the trustee stated that the shortfall in customer funds could be twice as much as previously believed. 

Adding to the growing confusion was the trustee’s insistence that the additional $1.3 billion in customers segregated funds did not change their opinion that the shortfall was larger, $1.2. billion or more, than what had been reported basically from when it was first discovered. 

The trustee did not explain how this could be even though a trustee spokesman acknowledged that the total of customer funds secured — funds that have been allocated back to customers and funds being held to eventually be allocated in an expedited claims process — was now north of $5 billion. CME Group disputed that the shortfall was much larger.

The apparent anomaly is in what MF Global should have had segregated at the time of the bankruptcy. CME Group estimates this number to be just short of $5.5 billion, the trustee does not acknowledge what this number should be, though they acknowledge that they have secured more than $5 billion so the only conflict appears to be what that number should be.

We do know that many customers going into the bankruptcy were pulling funds away from MF Global and that MF Global had, in the weeks prior to the bankruptcy, altered its approach to moving customer funds. We have heard from several sources that the broker stopped executing wire transfers and instead began cutting checks to move customer funds. Some of those checks bounced. If the difference in what should have already been moved out and what actually had been moved out is the cause for this discrepancy, the process could become even sloppier.

We do not understand how there can be confusion over this point at this stage of the game. We have heard plenty of anecdotal first person evidence that the trustee does not have a good grasp on futures operations and has not shown the appropriate sense of urgency in getting customer property back to them.

At the heart of this anomaly seems to be confusion over what customer segregated funds are or are supposed to be vs. typical claims in a bankruptcy. This may be because this is not the trustee’s area of expertise, which has been our first question in the whole process.

By some strange anomaly in the law regarding dually registered entities, a securities regulator was put in charge of what is predominantly a futures commission merchant liquidation. This made little sense and the entity we would expect to make this clear to the judge appointing a trustee, the Commodity Futures Trading Commission (CFTC), has been much less active than one would expect in this situation.

 The futures industry has grown exponentially in recent years not only because of its value in managing risk, but  in its structure that promises that customer funds are secure, even in case where a clearing broker fails. That principle is at stake. Great damage has already been done. In our December issue, that went to press just a week after the bankruptcy, we noted that a rather large story — the failure of MF Global, the eight largest bankruptcy ever — had become a sidebar in a larger story of why the customer protections we assumed would work in such cases, was not working. 

We already are seeing regulatory fixes, such as securities style insurance programs, being recommended for the futures industry. This seems extremely odd seeing that we still don’t know what happened in this case. The one focus should have been getting account holders their money back.

They are still waiting.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.