MF Global bankruptcy files a "disgraceful disconnect"

Chronology

From the very outset of this debacle, Dorman Trading has been at the forefront of those firms trying to help make the transition as painless as possible for MF Global customers. At approximately 11:00 a.m. on Oct. 31, we were contacted by a non-clearing FCM. They cleared their trades through MF Global and their thousands of customers were now locked out of the market. I'm proud to say that by 4:00 p.m. we had them and their thousands of customers trading.

The following day we met with two employees of MF Global. They ran a division of MF Global that catered to "local traders" and operated at the CME under their own divisional clearing number. We quickly reached a verbal agreement to accept their traders and their traders' positions in what ultimately would be a bulk transfer from the bankruptcy trustee for MF Global. On Nov. 2, the Commodities Futures Trading Commission (CFTC) issued a letter permitting the transfer of the MF Global customer accounts and acknowledging that the transfer of the "local customers" would present some difficulty because of the unique risk profile that they can present. Dorman Trading was identified by the CFTC as one of five clearing firms in good standing that would participate in the bulk transfer. We immediately set out to repaper these customers and get them back on the floor or in front of their computers. The timing of the trustee's bulk transfer still was uncertain, but we got most of our new customers back onto the floor or in the market by Nov. 3.

We could not accept the MF Global customer positions without adequate cash to meet the required margins. The message coming from CME Clearing was unclear. Would the gross margin be transferred or would it be net? Insufficient cash could put us in the same position as MF Global.

On Thursday, Nov. 3, Durkin and CME President Phupinder Gill came to our office to explain the terms of the bulk transfer. For customers with open positions, we would receive the cash equivalent of the futures margin plus the value of short options, less a haircut of approximately 25%. The long options would transfer without cash, but we would have the value on our books. There was no discussion of the customers who were flat or even the true account balances of the customers with positions being transferred.

The assignment was signed by the trustee and on Nov. 4 we received the positions from MF Global. The cash to support the positions arrived with an allocation table from CME Clearing. We were allowed to aggregate accounts with identical ownership, which allowed for a more equitable allocation of the cash. A second cash distribution was provided to us before we allocated cash to customer accounts. None of our accounts was seriously under margined.

The next week the CME embarked on a "true up" process whereby they clawed back cash from accounts that were allocated funds in excess of their balances at MF Global. The trustee was able to compare the funds transferred to an account with the account balance at MF Global as it existed on the day of the bankruptcy filing. No account was permitted to become an MF Global debtor. Some issues arose because of the failure of MF Global to properly relate accounts with identical ownership. The CME was very helpful in resolving discrepancies and ensuring that there were no grossly inequitable results.

On Nov. 23 the trustee assigned the "cash only" accounts from MF Global. We received approximately 60% of the account balances as they existed at MF Global on Oct. 31. At the time, we did not have an accounting for those accounts with T-Bills, other collateral or the accounts that received bad checks, but on Dec. 9 the bankruptcy judge approved a third bulk transfer meant to true-up all account to 72%.

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