Republicans on the Senate Banking Committee put the head of the Commodity Futures Trading Commission (CFTC) on the hot seat because of his ties to the former chairman of MF Global Holdings Ltd., which collapsed in late October and took with it an estimated $1.2 billion in customer funds.

CFTC Commissioner Jill Sommers, who is overseeing the agency’s investigation into the missing customer funds, testified that while CFTC auditors, investigators and attorneys are working with MF Global’s bankruptcy trustee and forensic accountants, it has not yet found the customer funds. New York-based MF Global, which had been headed by New Jersey’s former Gov. Jon Corzine, filed for bankruptcy on Oct. 31 following an ill-timed bet on European debt markets (see Daily GPI, Nov. 2).

“We have not located all of the funds that are missing,” Sommers told Sen. Richard Shelby of Alabama, the ranking Republican on the banking panel. However, “we all are working through these issues and hope to resolve them very shortly,” she said.

Initially it was believed that about $600 million in customer funds overseen by MF Global, primarily a futures brokerage, was missing. But “according to the MF Global bankruptcy trustee, as much as $1.2 billion or more of customer funds are missing. Where…have you [CFTC] been?” Shelby asked CFTC Chairman Gary Gensler.

“As I’m not participating in the [investigation], it may be appropriate” for Sommers to answer the question, he said.

“Why are you not participating for the record?” Shelby asked.

“Though the attorneys at the CFTC, the chief ethics officer and the general counsel had indicated to me [Gensler] that they didn’t see a reason — legal or ethical — for me not to participate, as it [the case] turned to an enforcement matter, I really didn’t want my participation to be a distraction. There already had been some questions,” Gensler told the committee.

“Are you not participating because of a prior relationship with the chairman of MF Global, Jon Corzine?” (Corzine, also a former senator from New Jersey, was Gensler’s boss at Goldman Sachs until 1997.)

“I had left Wall Street 14 years ago,” Gensler said.

“But are you recusing yourself because of your relationship — past or present — with the chairman of MF Global? Answer yes or no,” the Alabama Republican said.

The reason for his recusal was “broader” than that, Gensler said. “I just didn’t want to be a distraction because I had been at the same firm and he had been my boss.”

Shelby asked whether Corzine had contacted Gensler since he became CFTC chairman or the CFTC staff regarding the regulation of MF Global. “I don’t know about his contacts with the rest of the agency. There was one courtesy call” in the spring of 2010, where Gensler said he and CFTC staff met with Corzine.

“Did you or any of the staff ever have any conversations, dialogue or interaction with Mr. Corzine regarding the regulation of what he could do [or] not do at MF Global?” Shelby asked.

Gensler said he and staff had a telephone conversation last July with Corzine about the agency’s rule on the investment of customer funds.

Sen. Mike Johanns (R-NE) accused Gensler of shirking his responsibilities. “Why would you be a distraction? When this got uncomfortable because money isn’t there that should be there…you don’t want to come up here [to Capitol Hill] to answer questions,” he said.

“Every hard question your are asked, you say, ‘Well, I’m not participating,’ and you ask Commissioner Sommers to step up and offer something. To me, it looks like you’re ducking the responsibilities of your job,” Johanns noted.

“Senator, I take the responsibilities of my job very seriously,” Gensler countered.

Sen. Jerry Moran (R-KS) questioned Gensler about a rule that the CFTC approved Monday, which would limit a futures commission merchant’s ability to invest customer money in foreign sovereign debt, as well as prevent in-house lending of customer money through repurchase agreements (see Daily GPI, Dec. 6). The rule is intended to prevent a repeat of the meltdown of MF Global.

“I thought the CFTC at first blush made a sensible reform yesterday. But I don’t see how [the] rule would have changed the outcome at MF Global.” He asked Gensler to respond to his concerns in writing.

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