The CME has stepped up and volunteered to advance $550 million to help MF Global customers. This is an attempt to restore some faith in the system and based on the early estimate of the shortfall would have gone a long way toward that goal. At $1.2 billion and climbing, the CME funds may be too little, too late.
In their brochure "The Financial Integrity of CME Clearing" the CME lays out the entire regime for safeguarding the market. In addition to all the risk management controls that CME Clearing can employ, they have three layers of funds to be used in the event of a default by a clearing member such as MF Global. There is a $100 million surplus fund, a $2.3 billion guarantee fund and the ability to assess the remaining clearing members up to 275% of their guarantee fund requirement.
Unfortunately, these funds are only available in the event a clearing member defaults on its obligation to CME Clearing. The CME guarantee does not apply when an FCM appropriates customer segregated funds. Apparently MF Global was in good standing with CME Clearing in the sense that it did not default on its obligation to the CME, and as a consequence the guarantee fund is unavailable to MF Global customers. MF Global customers will be treated in accordance with the bankruptcy statutes as they apply to futures accounts.
I have read a great deal of commentary about who is responsible. The question that I cannot answer is whether the CME, as the designated self-regulatory organization (DSRO) for MF Global, was somehow deficient in their oversight. I think we will have to wait for a complete post mortem to make that call. From what I have heard, the customer segregated accounts appeared to be intact on Oct. 25. The MF Global officers apparently depleted the customer account segregated funds in the few days between Oct. 25 and Oct. 31. It should be noted that auditors only sample and do not examine every transaction. Further, auditors have little ability to detect a well executed fraud in the short-term.
My experiences with the CME this past month have left me with nothing less than admiration and respect. They immediately recognized the seriousness of the event and they put everything aside to do the best they could for the MF Global customers. I recall talking to a CME clearing employee at 6:00 a.m. and then speaking to that employee at 10:00 p.m. that same day. He told me he hadn't gone home in five days. I saw that same dedication and professionalism from all the CME employees with whom I have worked on this matter.