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MF Global Implosion Puts Spotlight on Regulatory Gaps
Shocking details surrounding the surprise bankruptcy of securities firm giant MF Global Holdings Ltd. were coming to light last week after the company turned in its Chapter 11 papers Monday following an ill-timed bet on the European debt markets.
While trading exchanges all over the globe rushed to protect their markets from the fallout, reports began to surface that the firm, which is headed by former New Jersey Gov. Jon Corzine, had failed to keep the company’s money separate from its customers’ accounts. According to the New York Times, “hundreds of millions” of MF Global customers’ dollars are currently missing. Subsequent reports said the number could be even larger. In its bankruptcy filing to the United States Bankruptcy Court for the Southern District of New York on Monday, MF Global said the company had debt of $39.7 billion and assets of $41 billion.
On Friday, Corzine, who was chief executive of Goldman Sachs in the mid-1990s, resigned from MF Global.
“The MF Global story is a fast-moving one. Tuesday morning people were saying a couple hundred million dollars of customer funds were missing. By Tuesday afternoon that number had ballooned to $700 million,” said Ed Kennedy, a broker with INTL Hencorp Futures LLC. “This MF Global implosion will change the entire game because something is not passing the smell test here. Moving customer funds into the company’s account is not a one-person operation. With the way regulations are now, an entire chain of people would have to be involved…and each one of those people sat through the ethics class. Also, what about the exchanges? What about their clearing operations? They know what is supposed to be in that segregated customer account.”
Kennedy told NGI the shake-up and resulting investigation will certainly impact how the Dodd-Frank regulatory reform rules are written and implemented. “I guarantee a month from now this is what everyone is going to be talking about, and we’ll take a look at it at our hedging seminar in Chicago in December,” he said.
Giving tips and teaching people how to use market tools to their advantage in today’s market, Kennedy and his colleague Tom Saal will be holding their popular “Where the Market is Going and What Can You Do About It?” seminar Dec. 7-9 in Chicago. Visit https://seminar.intelligencepress.com/Hedging2011/ for more information.
In responding to the MF Global crisis, trading exchanges such as CME Group, Nymex and ICE said Monday they were accepting “liquidation only” orders from MF Global clients and have restricted electronic access to their markets. In a statement on its website, MF Global said, “This means that you may place offsetting orders for current open positions at MF Global but may not place any new orders. Performance of your trades is guaranteed by exchange clearinghouses.”
During a 3Q2011 earnings conference call, CME Group CEO Craig Donohue said the exchange will no longer recognize MF Global or any of its divisions as a guarantor for purposes of floor trading privileges. “Throughout the day [Monday] our team worked closely with the firm, public customers and exchange members to assist customers in establishing new accounts in dealing with open positions and market exposures,” Donohue said, adding that Monday was a “very difficult day for all concerned.
“CME has determined that MF Global is not in compliance with CFTC [Commodity Futures Trading Commission] and CME customer segregation requirements.” Donohue said it is unclear what the scope of the firm’s violation is at this time. “We are investigating the circumstances of the firm’s failures,” he said. “We are working with the CFTC and will be contacting the trustee to facilitate the transfer of customer positions and a portion of the supporting collateral.”
For its part, ICE said MF Global is accepting and processing liquidating orders from customers with outstanding open positions in ICE Futures U.S. Inc. contracts. “MF Global customers seeking to enter liquidating orders should contact the MF Global Order Desk at (312) 548-7800; orders will only be accepted during the business day and up to 6:00 pm NY time/5:00 pm Central time each day,” ICE said.
The CFTC and Securities and Exchange Commission (SEC) made a joint statement regarding MF Global on Tuesday. “For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global, Inc., a jointly registered futures commission merchant and broker-dealer, in anticipation of a transaction that would include the transfer of customer accounts to another firm,” the regulators said. “Early this morning, MF Global informed the regulators that the transaction had not been agreed to and reported possible deficiencies in customer futures segregated accounts held at the firm. The SEC and CFTC have determined that a SIPC-led bankruptcy proceeding would be the safest and most prudent course of action to protect customer accounts and assets. SIPC announced today that it is initiating the liquidation of MF Global under the Securities Investor Protection Act (SIPA).”
As the week progressed, affected exchanges took further action. 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’s customer positions on CME Group exchanges were and continue to be substantially over-collateralized at CME Clearing,” the trading house said. As of last 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.”
The exchange said it had 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.”
Last Thursday CME said it successfully transferred nearly 5,300 MF Global customer accounts and more than $410 million of CME Clearing-held collateral to other qualified clearing firms. CME Clearing continues to hold MF Global proprietary and customer collateral that will be distributed upon instructions from the Trustee and the bankruptcy court.
After issuing a Notice of Default last Monday, ICE’s ICE Clear Europe advised customers of MF Global to make arrangements to move open positions to an alternate clearing member. For ICE customers looking to move open positions, ICE Clear Europe has issued a Customer Position Transfer Form and Position Transfer Template. The exchange said both forms must be completed and submitted to the prospective transferee clearing member for it to complete and submit to the clearing house together with the completed U.S. Additional Customer Position Transfer Request Form. The U.S. Additional Customer Position Transfer Request Form is an additional requirement only for customers of MF Global Inc, ICE said, adding that transfers will not include corresponding transfers of margin deposits.
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