In its story on the Commodity Futures Trading Commission’s (CFTC) recently passed “customer protection measures” the New York Times' webpage DealBook references the MF Global debacle in its lead. This must be particularly disturbing for futures commission merchants many of whom claim the new residual interest rule will put them out of business and futures end users who stand to have to put up significantly more margin capital, double by most estimates, to control the same trades. The end result of which could make them less likely to hedge their price risk.
What is so disturbing is the new rule, or more accurately the new interpretation of an existing rule, would not have prevented the MF Global debacle, or the Peregrine Financial Group fraud for that matter. In fact, if the CFTC reinterpretation of the residual interest rule had been in place at the time, it would have put more customer money at risk. Jon Corzine would have had access to more customer money to back his overleveraged foreign sovereign debt positions under this rule, which is particularly disturbing as CFTC Chairman Gary Gensler worked with Corzine while both were at Goldman Sachs and Corzine actively lobbied the Commission regarding potential changes to the way secured funds were dealt with. Corzine was seeking to keep rules in place that allowed him to access these customer funds (Part 30 secured funds held to back positions outside the US). Tighter standards for secured funds were only approved after the MF Global debacle.
And it should be noted that Gensler did not recuse himself from the situation until after the blow-up.
The Financial Times and Reuters also referenced MF Global in its stories. Reuters lead stated, “The U.S. derivatives regulator on Wednesday approved a plan to better protect customers of futures brokers after the collapse of MF Global left clients struggling to get their cash back.”
MF Global failed to segregate customer funds as they were legally obligated to do so we are going to enact a rule to ensure that brokers will hold more customer money. Doesn’t seem to make sense. The rule actually protects customers from fellow customer shortfalls but requires the broker to have contingencies for practically all its customers facing a simultaneous margin call. Sometimes legislators and regulators are accused on enacted laws or regulations that addresses the previous battle but rarely do they enact rules that holds out the potential for magnifying a past disaster.
Equating the new rule to the MF Global situation is particularly disturbing coming from the New York Times whose main interest in the story has appeared to have been passing on leaks from the Justice Department regarding a lack of any criminal prosecution of Jon Corzine.
There have been several stories in the Times citing unnamed sources that no criminal charges of Corzine are expected. One DealBook story even floated the notion that Corzine would soon start-up his own hedge fund once the whole MF Global mess is behind him. At the time I called this journalistic malpractice and have no reason to change my assessment. It also raised the question — still unanswered — as to who is leaking this information and why.
I have pointed out on numerous occasions regarding the MF Global debacle that without holding those responsible for their crimes, the industry will have to answer. And the response from the regulator to its own failures is to enact rule changes that punishes the victim and would have aggravated the situation if they were in places at the time.