From the January 01, 2012 issue of Futures Magazine • Subscribe!

MF Global failure highlights cracks in the system

We need a hero

The futures industry has prided itself — particularly following the credit crisis of 2008 — with having an efficient regulatory structure that protects customer funds even, or especially, in the face of a failure of a clearing broker. But nearing two weeks into the MF Global debacle, customers were not close to being made whole and all the so-called industry leaders strangely were silent.

Bankruptcy is bad but a violation of segregated funds is exponentially worse; no one was stepping up and former MF Global customers noticed this. Several insiders called on the CME to move to make customers whole and take over their claims in the liquidation. After all, it was CME users being harmed and its industry’s reputation at stake, even if it wasn’t the CME’s responsibility.

"If I could withhold my dues from the MFA (Managed Funds Association), NFA (National Futures Association), FIA (Futures Industry Association) and CME exchange fees I would do it," says Stanley Haar, founder of Haar Capital Management. "The CFTC and all these other organizations, none of them have proven why they should even exist, what functions they perform."

Haar’s assessment was not uncommon.

Enter James L. Koutoulas, CEO of Typhon Capital Management. On Nov. 8 he announced that he was informally representing about 200 clients and brokers affected by the MF Global bankruptcy on a pro bono basis in conjunction with the Northwestern Law Investor Protection Clinic. The stated goal was to get Koutoulas appointed to the MF Global Bankruptcy Creditors’ Committee to make sure individual clients and brokers were represented.

The group, later named the Commodity Customer Coalition (CCC), grew rapidly, gaining professional help across the futures spectrum. Koutoulas challenged the motives of the trustee as well as firms on the creditors’ committee, and called for all funds held by the trustee to be returned immediately. At the time, the shortfall was believed to be only 11.6% of what was owed customers and Koutoulas and co-founder John Roe, principal at BTR Trading, thought all of it should be returned to customers immediately. In fact, they thought the law allowed that any shortfall should be resolved immediately by dipping into the assets of the parent, MF Global Holdings.

The CCC grew to more than 7,000 members and was joined by others who were bypassing the trustee and communicating their anger directly with bankruptcy Judge Martin Glenn and members of Congress.

Its immediate dispute was a lien placed on the liquidation by JP Morgan. The giant firm was seeking to get ahead of customers; the CCC didn’t like it and raised conflicts issue of the trustee whose law firm did business with JP Morgan. The bankruptcy judge did not grant the motion to put Koutoulas on the
creditors’ committee, but did require the trustee to meet with the group.

And things changed. The trustee put out a proposal for an expedited claims process that could provide quicker interim distributions and clearly separated futures customers from securities customers and general creditors.

After that first bulk transfer was complete, the trustee announced that any remaining transfer would be handled by a claims process. This raised the ire of the CCC and many customers and customer groups. The National Introducing Brokers Association (NIBA) sent a petition that included 700 signatures collected online in 72 hours directly to the Bankruptcy Court, calling for the immediate distribution of segregated funds.

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