While at times the MF Global Inc. liquidation process has seemed slow and plodding, in February the MF Global trustee released reports that shed some light on the situation.
A Feb. 10 release corrected the math by defining the gap between customer claims and assets under the trustee’s control. The gap is $1.6 billion when you add the $700 million under the control of the MF Global UK administrator, which means the shortfall in customer funds (including 4d seg funds and part 30.7 secured funds) — previously stated as $1.2 billion by the trustee — is no greater than $900 million.
The trustee confirmed the total of customer money at MF Global was $6.9 billion; $6 billion in 4d customer segregated funds and $900 million in Part 30.7 secured funds (funds held outside U.S.). The trustee has distributed $3.9 billion and is holding $1.4 billion in reserve.
“We are now taking the UK money and putting it in the gap,” says MF Global trustee spokesman Kent Jarrell.
The bad news is that getting the money out of the United Kingdom will take a long time. “We realized the $700 million in the UK is going to be a long slog, so we simply decided that it was time to [issue] one statement and give a breakdown,” Jarrell says. “We traced most of the cash, so now our job is to go get the money, and we have to get $6.9 billion worth.”
A few days earlier, the trustee released a preliminary report that pegs the beginning of the shortfall in segregated customer funds to Wednesday, Oct. 26. The report indicates that segregation was violated a day prior to when CME Group put it in a timeline presented to Congress. In November, CME indicated MF Global was in compliance following a review they completed during the week of Oct. 24-28 and stated, “It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection.”
John Roe, co-founder of the Commodity Customer Coalition (CCC), says, “The trustee’s report shows clear fraudulent conveyance and that should help develop the legal framework for recovering customer funds from counterparties who received those funds from the MFGI estate.” Roe is hoping this release will cause Bankruptcy Judge Martin Glenn to approve a CCC motion mandating that customer priority moves with the funds as they are transferred.
Let’s form a committee!
Industry associations are beginning to get their arms around the situation. In January, the Futures Industry Association launched a special task force to look at issues related to MF Global, and CME Group partnered with the National Futures Association and other exchanges to examine ways to strengthen the self-regulatory organization (SRO) structure.
Roe says these organizations failed the industry because they were not at the forefront of the crisis. “Inevitably, whenever something like this happens, there is this alphabet soup of industry associations that are supposed to jump in and help, but they never do,” he says. “They are ill-equipped to do so, they’re not funded well and they just can’t react quickly. Otherwise, they’re representation is so broad that they just can never get to the plate.”
That perceived failure to stand up for traders affected by the bankruptcy was one of the factors in the formation of the CCC.
Because of the broad scope of their representation, Willa Bruckner, partner at Alston & Bird LLP, says industry associations were in a tough position and had to gather facts before making any decisions. “A lot of the trade associations represent the big dealers, rather than the other side of the market. They have to be careful in their response because it’s their side of the market that appears to have created the problem,” she says.
Nonetheless, Bruckner says the industry needs to respond because Dodd-Frank used the futures model for the over-the-counter swaps market because it had worked so well.
In addition to the joint committee on SRO, CME Group announced the creation of the $100 million Farmer Fund to protect customer segregated funds of farmers and ranchers that use CME Group futures markets to hedge their business.
Roe likened the new fund to insurance, something he says most market participants are against. “It’s not going to be sufficient to mitigate the risk of future bankruptcies,” he says. “Congress is going to take one look at that and ask, ‘Why can’t that be industry wide?’”
In response to CME Group’s support to customers, S&P lowered the company’s long-term credit rating to AA– with a negative outlook. In the move, S&P credit analyst Charles Rauch said the financial impact of the Farmer Fund and guarantee likely would not be a rating issue, but “we believe that the ramifications of CME Group’s support of its clearing members’ customers expand the firm’s long-standing mandate of guaranteeing trades among its clearing members.”
Following the downgrade, a CME spokesman defended the exchange’s actions. “The protection of our customers and integrity of our markets are our primary concerns. Throughout the unprecedented MF Global failure, we have acted aggressively to speed the return of customer monies — not because we had to, but because it was the right thing to do for our customers.”
In other MF Global news, Judge Glenn rejected the “Sapere motion,” which would have administered the case pursuant to Commodity Exchange Act bankruptcy rules and given MF Global Inc. customer segregated accounts first priority over the Chapter 11 creditors. He also rejected a discovery motion, which would have allowed plaintiffs to conduct examinations of any party-in-interest related to the relevant facts.