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MF Global Puts Focus on Changing Rules for Customer Cash

Tuesday, November 15, 2011

MF Global collapsed into bankruptcy last month. It got into trouble after it made failed bets on European debt. Regulators still can’t locate more than $600 million dollars in client funds at the failed brokerage house.

Bart Chilton, a Democratic commissioner with the U.S. Commodity Futures Trading Commission, said words cannot express his concern over the issue. “These are customer funds, they're supposed to be sacrosanct, they're supposed to be protected, and they're not where they should be,” said Chilton.

Speaking at New York Law School on Tuesday, Chilton said regulators have no clear idea what happened to the money, and are still searching for clues.

But in one scenario, some of that customer cash could have been used as collateral, and then lost as the company imploded into bankruptcy because of its failed bet on European debt.

Back in 2005, rules were changed that allowed brokerage houses to make internal repurchasing agreements. Firms are permitted to take segregated money, that is, client money, for overnight loans, then repurchase, or pay the loan back, the next day. But firms are supposed to get collateral for this kind of deal.

“That's how it’s supposed to work,” said Chilton. And often, it doesn't happen that way. Additionally, it’s less likely that firms keep paper trails for these internal repurchasing agreements.

Chilton wants to change the rules back again, so that segregated money, including customer funds, would no longer be available for brokerage houses to use as collateral for overnight loans. He also called for so-called “deep data dives,” to ensure that money is actually where brokerage houses say it is.

“Even if that means going to bank accounts and reviewing statements to make sure the money is there,” Chilton said. He added that should be done to ensure client funds are not misused. The new rules on these repurchase agreements would apply to about 120 firms.

But the changes are opposed by several trading institutions.

Regulators are continuing to investigate MF Global Holdings. But so far, no one has been charged with any crimes. The firm was headed by former New Jersey Governor Jon Corzine. A trustee has been appointed to help clients recover lost funds. MF Global will be in court Wednesday to defend a deal its made with JP Morgan Chase.

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