From the December 01, 2011 issue of Futures Magazine • Subscribe!

MF Global fails; industry takes hit

Where’s the money?!

That the liquidation of a futures firm was put under the control of securities regulators has frustrated customers waiting for their money. And even if it was stipulated by law, many industry veterans felt the CFTC and CME Group should have fought for greater control. "Make the argument, even if you lose the argument tell the judge why it is important to keep [futures seg funds] separate," Matteson adds.

What followed was the task of moving all of the accounts, and some of the customer funds, to other firms. CME Group identified the accounts that could be moved and the firms willing to take them, working with the trustee who needed to get approval from the bankruptcy judge. A total of 17,000 accounts were moved along with $1.55 billion in capital that represented approximately 60% of the margin capital held at CME Clearing.

But this process was not without controversy. James L. Koutoulas, CEO of Typhon Capital Management, says customers were not allowed to keep open trade equity. "Our livestock clients had big winning trades on with a lot of positive open trade equity, but when they closed that out at MF Global all those profits stayed on the MF Global books."

Many customers needed to place additional margin at their new brokers despite having profitable trades. Several other traders complained about this process that stripped equity from winning trades.

Meanwhile, the trustee is conducting a forensic audit to determine what happened to the missing seg funds. At one point an MF Global attorney claimed there were no missing funds. There were reports that the funds were found at JP Morgan, who operated as both a custodial bank to MF seg funds and one of its proprietary trading creditors.

JP Morgan has filed a lien on some of MF Global assets that has some customers afraid they could be pushed aside. SIPC trustee spokesman Kent Jarrell says, "We are looking into the accounts of JP Morgan," adding, "[the forensic accounting] will be an independent, deliberative and thorough investigation."

But many people don’t understand why it is taking so long. Pauline Modjeski, president of Horizon Cash Management, says that it shouldn’t be so difficult to find out what happened. "This is customer segregated money. They should know where the money is. It shouldn’t take this long."

Koutoulas is informally representing MF Global customers and brokers and is attempting to be put on the Bankruptcy Creditors’ Committee. His charge that customers are not being represented has been echoed throughout the industry. After the transfer, futures customers still have roughly $3.8 billion in funds frozen.

The claims process is another bone of contention as it illustrates the industry’s frustration with the SIPC trustee. After the bulk transfer was completed the trustee indicated that no other client money would be released until the completion of a claims process. "All the account holders will get a mailing and be notified of the claims process, and after that we will certify the claims. At the same time we have to certify the assets and at that point a distribution should be made," Jarrell says. One day and many angry letters later the trustee indicated that he would file a motion for an "expedited claims process" which could provide distributions in increments.

One attendee on a conference call with Koutoulas’ group voiced customer frustration with the claims process. "We are not claimants," she bellowed, "we are customers and this is our money."

On Nov. 11, CME Clearing announced it "is willing to provide a $250 million financial guarantee to the trustee to give the trustee greater latitude to make an interim distribution of cash to customers... Additionally, CME Trust will provide $50 million to CME Group market participants in the event there is a shortfall at the conclusion of the Trustee’s distribution process."

The CME proposal does not cover the reported shortfall but it is a move many industry vets say CME should have made at the outset. It appears to be a reaction to an angry client base, one that feels abandoned by all the leaders of this industry.

"We have a complete financial disaster. We needed leadership among the financial institutions and regulators, that is what we needed, creative leadership. We didn’t see any of that creative leadership that could have made this a smoother transition for the customers," Matteson says.

It is hard to say what the lasting damage to the industry will be, but if customers are not made whole soon, that damage will be substantial.


European exchanges said they were completing transfers of MF Global client positions to other companies in mid-November even as the administrator overseeing the process in the United Kingdom said that more than half of the 1.6 million positions in place when MF Global Holdings filed for bankruptcy protection were still open.

European customers of MF Global — particularly those with positions on the London Metal Exchange (LME) —struggled to close or transfer positions to other brokers. The LME gave clients until Nov. 8 to submit requests for transfer to LCH.Clearnet, the clearinghouse for the exchange, and KPMG, the special administrator appointed to wind down MF Global’s European arm.

Intercontinental Exchange said ICE Clear Europe had completed the transfer or termination of contracts or the closure of all MF Global UK Ltd. client and proprietary positions by Nov. 9, acting on the requests of customers, and that contracts that had not been transferred to alternative clearing members would be liquidated.

Diarmuid O’Hegarty, deputy chief executive of the LME, said in a notice to LME members that the unsettled contracts that had not been transferred to other LME members would be subject to a 59-page, written default regulation that the LME had last updated in 1991. The default regulations will provide settlements based on metal prices published by the exchange on Nov. 1, O’Hegarty said.

Counterparties to unsettled contracts with MF Global were asked to submit to both the exchange and KPMG by Feb. 1, 2012, details of the contracts and supporting evidence. The LME and KPMG had not yet agreed on procedures for processing unsettled contracts but O’Hegarty said those procedures eventually would be made public.

"Counterparties would be aware that the reconciliation of unsettled contracts and the processing of such unsettled contract under the default regulations may take some time," he added.

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