MF Global trustee reports show folly of bankruptcy process

This highlights the original sin of the MF Global saga, which is the fact that the parent was allowed to go into Chapter 11 with a hole in customer funds and continue to operate while the business end was put in liquidation.

As the legal claims fly, it is important to make a few things clear. MF Global acted as one entity whose main line of business was as an FCM and broker dealer. As such it held customer funds to back those customers’ trading positions. Those funds were required to be segregated from firm assets. The firm is allowed to earn interest on those funds through certain investments but must back it with equivalent collateral 100% of the time. MF Global was also a public company with shareholders, bondholders and other creditors. A customer with funds protected under segregation rules is very different from a creditor who loaned money or purchased a stake in a public company.

The violation of segregation of customer funds violated the Commodity Exchange Act and can arguably be classified as a crime. You don’t allow those responsible to carry on with a Chapter 11 reorganization when the vast majority of their customers have been cut off from their own money that was legally required to be segregated from firm assets.

Shame on the Judge that allowed this. From the start the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commmission (SEC), CME Group and yes Justice Department should have been there to say this is one company that needs to be put in receivership to find out what happened to customer money. It was a mistake for the court to allow it and a breach of responsibility, chiefly by the CFTC,  to not aggressively fight it.

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About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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