Wednesday, November 2, 2011

MF Global accounts shock leaves clients scrambling

CHICAGO/NEW YORK (Nov 1): MF Global Holdings Ltd failed to protect customer accounts by keeping them separate from its own funds, said a top U.S. exchange regulator, another shock for commodity markets scrambling to contain fallout from the brokerage's bankruptcy.

The revelation on Tuesday by CME Group Inc suggests MF Global violated a central tenet of futures brokerage. It could put client money at risk and erode confidence in a market that for decades has enjoyed a sterling reputation for safety.

The Associated Press, citing a U.S. official, reported that MF Global admitted to using client money as its troubles mounted. A company executive made the admission to federal regulators in a phone call Monday, the AP said.

Government regulators, increasingly alarmed at what went on inside MF Global, earlier said that segregated customer accounts suffered "possible deficiencies."

At the U.S. Bankruptcy Court in Manhattan, MF Global's lead attorney Ken Ziman, said all of the funds in the company's broker dealer are accounted for.

To management's best knowledge, "there are no shortfalls" in brokerage accounts, said Ziman, of law firm Skadden, Arps, Slate, Meagher & Flom, as MF Global's first bankruptcy hearing began on Tuesday.

The fall of the brokerage led by ex-Goldman Sachs boss and former New Jersey governor Jon Corzine sent shockwaves through commodity markets as futures traders feared the damage could spread or that similar problems could hit other brokers.

While MF Global began what could be a complicated process of liquidating customer positions, some customers feared that millions of dollars were tied up. Others expected lawsuits, according to interviews with brokers, funds and lawyers.

"We're basically putting out fires," said an MF Global employee. "Our customers are upset, and we're upset that they are upset."

A company spokeswoman declined to comment.

The New York Times, meanwhile, reported that federal regulators discovered that hundreds of millions of dollars in customer money -- supposed to be segregated, and protected from the rest of the business -- had gone missing.

"Reports of shortfalls of client money ... if true, would be a disaster for all the smaller brokers and banks as nobody will trust them anymore," one London trader said.

MF Global had $7.3 billion in customer assets on August 31, according Commodity Futures Trading Commission data. It was the eighth-largest U.S. futures broker and had a big presence in commodity markets worldwide. The company filed for Chapter 11 bankruptcy on Monday after failing to find a buyer.

Bets Corzine made on euro zone sovereign debt led to a plunge in the company's stock last week, and credit rating agencies cut its debt to junk. Its collapse over less than a week was reminiscent of, though smaller than, that of investment bank Lehman Brothers in 2008.


MF Global did not keep customer accounts separate from the firm's funds, CME Chief Executive Craig Donohue said on a conference call. Asked if CME's clearinghouse would be on the hook for losses, Donohue said that it would not be. But the same may not go for customers, he said.

"I'm sure that customers of MF Global are not feeling very good right now, and (are) madly investigating their rights and the facts of this case," said Michael Greenberger, a former director of the CFTC'S trading and markets division, and a University of Maryland law professor.

CME is MF Global's main exchange regulator and is responsible for ensuring that its clearing members stay in compliance with rules on customer funds.

"We do have a big problem with a hole in the segregation, and that is a serious first-of-a-kind problem that we've ever seen here," a source familiar with the CFTC told Reuters. "We're trying to figure out what MF Global did with it and where is it."

KPMG, appointed as administrator to MF Global's British arm, said it was closing out positions under a system set up to prevent a repeat of the work-out of the Lehman collapse.

"It's still a large number. It's still billions," said Richard Fleming, KPMG's head of restructuring. Fleming said he was confident clients would see their money again.

The bankruptcy filing put a sudden end to Corzine's drive to transform the more than 200-year-old MF Global into a mini Goldman, and made it the most prominent U.S. victim of the euro zone debt crisis.

In Australia, grain futures and options trading were suspended by bourse operator ASX Ltd.

"We're sitting out here with risk that we can't cover," said Jonathan Barratt, head of Sydney-based Commodity Broking Services.

Commodity traders pointed to MF Global's turmoil and Greece's surprise referendum to explain why U.S. oil prices fell more than 2 percent.

"MF Global has caused the markets and all of their traders lots of heartburn," said Todd Horwitz, chief strategist at The Adam Mesh Trading Group.

The London Metal Exchange and the U.S. Options Clearing Corporation suspended MF Global, following a similar move by the CME Group, which operates the Chicago Mercantile Exchange.

The New York Stock Exchange has begun the process of delisting MF Global shares. - Reuters

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