The key element in the controversy over transfers from MF Global customer segregated accounts to JP Morgan in the final days of MF Global is whether the money transferred was customer segregated money or MF Global money in excess of customer seg held in the account. The difference, perhaps, is five to 10 years in prison for someone.
The reason Futures Commission Merchants hold excess funds in customer segregated accounts however is to ensure that those accounts do not dip below the minimum segregation level. It has been described by many as a buffer. FCMs place excess capital in segregation accounts in case one customer busts out and the account goes negative or when volatile markets cause a great deal of movement of capital in and out of those accounts. If a specific customer account goes negative, firm funds cover this deficit instead of other customer funds. It is appropriate to have this excess particularly in volatile market conditions and times of stress because it is a firm's responsibilities to perform due diligence on its accounts.
When an e-mail from Edith O’Brien stating the transfer was “Per JC’s [Jon Corzine’s] direct instructions” was leaked two weeks ago many thought it provided a smoking gun implicating Corzine in illegal activity.
It created such a stir that the staff of the House Financial Services Committee, where the leak likely originated from, sent out a second memo explaining, “the Hearing memo does not purport to directly link Mr. Corzine to the loss of $200 million in customer funds.”
It goes on to explain that FCMs are permitted to place excess funds in segregated accounts and draw from them so the fact that Corzine directed money be transferred from that account is not necessarily proof of wrong doing.
It is however, an “abrupt change in standard business practices” to have the Chairman and CEO direct such a transfer that can be seen as a “badge of fraud” as explained in a memo by the Commodity Customer Coalition earlier this week.