CME Group Executive Chairman Terry Duffy provided startling testimony during Thursday’s daylong hearings on MF Global in front of the House Committee on Agriculture. Duffy stated, “At about 2 a.m. Monday (Oct.31) morning, MFG informed the CFTC and CME that customer money had been transferred out of segregation to firm accounts.”
While various reports citing unnamed sources had noted that MF Global customer funds were comingled with the firm’s money, no one has gone on record citing this. Up until now, we only knew of a shortfall, the size of which has not been nailed down and has in fact become less certain the longer the bankruptcy liquidation has played out. Duffy went on to say, “Transfers of customer funds for the benefit of the firm constitute serious violations of out rules and the rules of the Commodity Exchange Act. “
While Duffy offered perhaps the most enlightening testimony, everyone was waiting to hear former MF Global Chairman and CEO Jon Corzine, who also served in the Senate and as Governor of New Jersey. Corzine spoke for several hours answering many questions in addition to his 18-page written statement. He qualified most of his responses with the statement that he does not have access to his records, but on the key question of did he transfer customer money from segregation he said, “[there was] no intention to ever authorize the transfer of customer funds.”
Corzine was asked the question in various ways and each time he responded that there was never any “intentional comingling of funds,” leaving the option perhaps that customer funds may have inadvertently been moved in to a house account.
Corzine said that he was hopeful all customer money would eventually be returned and when asked where missing funds could be, he said, “In the hands of counterparties or there has been some mistaken forwarding of those [funds].”
Unfortunately the most enlightening testimony came at the end of the day from Duffy and a handful of other industry insiders who provided insight that may have been helpful to representatives who often showed a lack of understanding as well as a lack of preparation for the hearings. For instance many representatives confused the MF Global proprietary trading position with positions MF Global may have taken in investing customer funds under rule 1.25.
John Roe co-founder of the Commodity Customer Coalition says he would have liked to ask James B. Kobuk, counsel for the Securities Investor Protection Corp. (SIPC) liquidation trustee who testified earlier in the day, why the trustee didn’t demand the money Duffy testified that MF Global informed him and the CFTC it had moved.
“Why are we in bankruptcy? The customers should have been cut out of this the very first day. The clawback should have happened immediately. You get the accounts moved over to another broker and you deal with the entity in the bankruptcy," Roe says. “I have no idea why the series of mistakes that ended up getting SIPA involved in this happened. Why wasn’t there a clawback? We need an answer to that especially if the CME was informed like that. If they knew right away there was a crime, I have no idea why the CFTC decided to abdicate its role to SIPC.”