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

Terry Duffy: Staring down his biggest challenge

Q&A

FM: The CME as the Designated Self-regulatory Organization (DSRO) for MF Global got criticized for being late to catch this. What changes, if any, should be made on that level?

TD: If people have viable solutions that could enhance the system, CME Group is open to listening to them. But what is important is that we had one incident in 75 years where somebody admittedly said they transferred funds out of the customer seg into their broker dealer. They also falsified reports of $200 million. We tied out 90% of the Wednesday’s monies against third-party validations, and that is against banks and other participants, to make sure the seg money was whole. So we have Wednesday’s (Oct. 26) money on Friday, 90% of it is tied out to say it is there and the firm is saying ‘we have $200 million excess’ and then they say, ‘oh by the way’ — after they admit that they transferred the money to the broker/dealer — they say ‘here is the real report from last week.’ We validated that the money is there on Wednesday so one can only surmise that something happened on Thursday and Friday before the bankruptcy. It is known that there were wire transfers overseas for large sums of money and they admitted that they transferred the money, but they didn’t tell us that until Sunday; they said it was an accounting error. So we are looking for a $900 million accounting error, with the CFTC not alone. We are talking about something that happened in a 48-hour period. The money was there Wednesday, it is not there Friday but we don’t know that until Sunday because you don’t get the report until a day later; to tie out a segregation report you cannot do it on a real-time basis because you have to validate it against banks and other records to make sure that money is really there. It takes 24-36 [hours] to validate and that is where we were Friday. We had 90% of Wednesday’s money tied out, saying the money was there. And it was there.

FM: Do you think the 1.25 rule was the problem?

TD: No. I think they dipped into customer segregated funds to make their other obligations good and were hoping to put the money back, but the candle burned out. That is my opinion.

FM: Could the last 10% not validated have been a problem?

TD: We were finishing it up, we had 90% validated of $5.5 billion, we had a report that shows they had [in] excess of $200 million; so far things are looking pretty good for Wednesday. The transaction was going to go through with Interactive Brokers and then all of a sudden there is a $900 million accounting error and everybody [is looking] for the accounting error. And then they say to us it is not an accounting error. That is the story here. It is not about what the CME did or didn’t do; it is people telling us that they took $900 million and moved it to their broker/dealer.

FM: Obviously it is the firm that is at fault here but the CME is its DSRO.

TD: Agreed. But when people are hell bent on doing things that are improper, they will find ways to do things that are improper. I have given a very succinct timeline to Congress. Read my testimony — that shows that we fulfilled our obligations as a DSRO.

Duffy testimony to House Agriculture Committee on Dec. 8, 2011

Duffy testimony to Senate Committee on Agriculture on Dec. 13, 2011

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