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MF Global faces segregation claims

Tuesday 1 November 2011 – by Will Henley

Regulators are probing the collapse of brokerage MF Global Holdings amid allegations that the firm did not keep customer accounts separate from its own funding sources.

Some reports allege that hundreds of millions of dollars of client money may have gone missing in recent days and weeks, despite the company insisting as recently as last week that it was in good health.

The company announced a chapter 11 filing under the US bankruptcy code in New York on Monday after it made a failed $6.3bn (€4.6bn) bet on the sovereign debt of beleaguered eurozone nations including Italy and Spain and was downgraded by Moody’s.

Described by one analyst as a “baby Lehman”, it was the eighth largest failure of a financial firm in US corporate history.

In a conference call on Tuesday, Craig Donohue, chief executive of the Chicago Mercantile Exchange, which oversaw MF Global, added fuel to the fire by saying that the company had breached its own and CFTC regulations.

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“MF Global is not in compliance with CME and CFTC regulations related to customer segregation,” said Donohue.

On Monday, CME Group had said it was limiting trading for MF Global’s customers for liquidation only, saying it would no longer recognise the firm as a guarantor on its trading floor.

“Accordingly, floor brokers and traders guaranteed by MF Global or its divisions may not access the trading floor,” it said.

That same day the US Securities and Exchange Commission said it had been monitoring the firm, while it attempted a failed bid to sell off assets to rival Interactive Brokers Group.

“For several days, the SEC, CFTC and other regulators had been closely monitoring developments affecting MF Global, Inc,” said the SEC.

“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 asked the Securities Investor Protection Corporation to move ahead with bankruptcy proceedings, which will see liquidation of assets under the Securities Investor Protection Act.

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