The CFTC has declared that there is an $633 million shortfall in MF Global’s customer commodity fund accounts, about 11.6% out of the segregated fund requirement of about $5.4 billion. The Futures Commission Merchant (“FCM”) and broker-dealer jointly registered with the CFTC and SEC abruptly entered bankruptcy proceedings earlier this week.
MF Global’s bankruptcy trustee James W. Giddens believes that the sum may be recovered. Giddens also secured permission to transfer 50,000 customer accounts (containing 3 million positions and a notional value of more than $100 billion) to help avoid liquidation. The CME Group-held accounts will be transferred with 60% collateral, leaving MF Global the remaining 40%. “MF Global will have rights to that 40 percent, and there may be rights the exchange itself will assert,” said Giddens’ lawyer. All accounts not transferred will be liquidated beginning Monday. Customers with accounts to be transferred will be notified, and they may transfer again if they are unsatisfied.
MF Global filed for bankruptcy protection on October 31, after losing bets made on European sovereign debt. The CFTC and SEC released the following statement: “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. 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).”
While regulators began structuring the bankruptcy process, 150,000 customer accounts were frozen, including 50,000 commodities accounts. According to the CME, MF Global was significantly “over-collaterialized”, holding $1 billion more in segregated accounts than the approved clearing level. MF Global holds three types of customer funds in its segregated accounts: 1) the minimum margin required to clear trades on the CME; 2) additional margin above that sum that the broker itself may have required for smaller or less credible customers; 3) any excess funds above the collateral that customers would have simply left.