Trustees bicker as MF Global customers wait

James GiddensLitigation between MFG UK and MFGI.

Mike Pink, MF Global UK Special Administrators with KMPG reported to UK customers that in addition to the ongoing legal actions against the UK estate, administrative hurdles to returning customer assets include:  The details of establishing a client distribution plan, lack of filing claims forms, the still undefined costs of returning UK assets to clients and the ongoing need for continued forensic accounting. 

When asked if the U.S. SIPC trustee for the brokerage unit (MFGI) shared information of the U.S. brokerage forensic account, Kent Jarrell, spokesperson for SIPC Trustee James Giddens stated, “The trustee publicly filed a report on his independent investigation into the failure of MF Global Inc. in June 2012 (updated in December), and as a public report, it was available to the Joint Special Administrators.”  In a UK Customer’s meeting on Oct. 31, 2012 in London, however, Pink reported to customers that the SIPC Trustee is not sharing this information with the UK Special Administration. 

On both sides of the Atlantic, the SIPC trustee and the UK Special Administrators hold funds in reserve to meet ongoing claims litigation. This, in turn prevents complete distribution to customers in the United States and the UK. These ongoing claims between the UK Special Administrators and the SIPC Trustee can be summed up in three actions: One regarding segregation of secured funds sent to London, the second regarding collateral on the return-to-maturity (RTM) repos, and the third regarding the losses incurred closing out the RTM positions.

The first and most pertinent for U.S. customers are claims on the 30.7 funds. This is property the U.S. commodity brokerage sent to the UK Brokerage in Treasury bills for security on non-domestic positions traded on, for example, the London Metal Exchange or Eurex. To date, the SIPC Trustee has distributed approximately $50 million, or approximately 5% of these funds, to U.S. customers. The UK Administrators have liquidated the T-bills and holds them in reserve in the event the SIPC Trustee is successful in this claim, which is an estimated $429 million.

In April 2013, the UK Courts will address the question if the T-Bills sent to the UK were segregated assets or not. The SIPC Trustee  asserts these are segregated U.S. customer assets; whereas, MFG UK asserts they are non-segregated and were transferred to the UK with absolute title. Remember, under UK law customer funds enjoy segregation only in status of an assigned trust where title is not transferred.  Further, the ability for rehypothecation of these assets may have provided an incentive to hold the T-bills in the UK. However, a recent opinion by the UK Supreme Court concerning segregation at Lehman Brothers International ruled that client funds that were not segregated can share in the distribution of client cash that was set aside in segregated accounts. While this was a victory to a degree, it is yet to be determined if it will have impact for MF Global Inc.’s U.S. customers.  On this ruling, KPMG adds, “This has created uncertainty as to what money is to be treated as being part of the client money pool and, therefore, as to the value of assets that constitute the unsecured estate.”

The second claim, constituting about $600 million, is on the T-bills sent to the UK as margin collateral for the brokerage unit’s Sovereign Bond Return to Maturity (RTM) positions. The UK brokerage acted as an agent for these positions. Collateral for this trade was also sent to the UK unit and then placed with LCH.Clearnet, a UK-based clearinghouse. 

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