After reviewing orders from bankrupt securities firm MF Global Holdings Ltd., CME Clearing, a trading arm of CME Group, said it was holding “substantial excess margin collateral” and continued to be in a “strong financial position” with respect to MF Global and in general.
MF Global filed for Chapter 11 protection following an ill-timed bet on the European debt markets (see Daily GPI, Nov. 2). In response, CME, IntercontinentalExchange and the New York Mercantile Exchange, among others, restricted electronic access to their markets and said they would accept “liquidation only” orders from MF Global clients.
“MF Global’s customer positions on CME Group exchanges were and continue to be substantially over-collateralized at CME Clearing,” the trading house said. As of Wednesday, “the proprietary positions of MF Global have been liquidated with no adverse market impact, leaving a substantial part of that collateral to be applied to MF Global’s obligations at CME.”
CME Group said its primary focus is protecting its customers and the integrity of its markets. Current efforts, it said, are in working with the Commodity Futures Trading Commission (CFTC) and the Securities Investor Protection Commission (SIPC) “to facilitate the transfer of customer positions to other qualified clearing member firms, with as much CME Clearing held collateral as will be legally permitted.
“CME has no control over the disposition of customer segregated funds that are held by MF Global and not held by CME Clearing. Those funds are now under the control of the SIPC trustee. Nevertheless, we have urged the SIPC trustee to facilitate the transfer of such funds from MF Global to MF Global customers.”
In response to an “apparent shortfall” in customer segregated funds held by MF Global, which CME Clearing said it did not have on deposit, “it appears that any transfer of such funds occurred following the completion of CME audit procedures respecting such funds and in violation of CFTC regulations and CME rules.”
CME Clearing said it completed its on-site review last week and at that time the review found that MF Global “was in compliance with its segregation requirements. It now appears that the firm made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday…CME fully discharged its auditing procedures in accordance with applicable procedures and standards and is working with regulators and authorities to investigate these transfers.”
The clearinghouse said it conducts regulatory financial examinations according to joint audit committee procedures and standards, which “effectively monitor the firm’s financial records to determine the firm’s full segregation compliance and to monitor any necessary corrective action. CFTC regulations and CME rules require maintenance of excess segregated funds at all times.”
Clearing firms aren’t permitted to transfer funds from a segregated account, which would result in an under-segregated condition, CME Clearing noted. CFTC regulations and CME rules also require clearing firms to calculate their customer segregated position daily and notify both the CFTC and CME whenever it knows or should have known that the customer segregated position was under-segregated.
“None of MF Global’s reports reflected any under-segregated positions,” CME Clearing said. “The reports actually reflected excess segregated funds.”
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