Trade groups, regulators reportedly considering ‘Corzine' Rule

By Sara Wyant

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, March 28, 2012 -Although the investigation to uncover the true circumstances around the collapse of MF Global and the subsequent $1.2 billion of misplaced customer funds is still progressing, regulators are proposing new rules to prevent another similar event, including a “Corzine rule” proposed by the National Futures Association (NFA).

The NFA joined with the CME Group, Kansas City Board of Trade (KCBOT) and the Minneapolis Grain Exchange (MGEX) in establishing a special committee in January to review how self-regulatory organizations can strengthen safeguards for customer segregated funds.

The “Corzine rule” stemmed from the collapse of the broker-dealer, MF Global Funds, under CEO Jon Corzine last October, marking the first time that segregated customer accounts lost funds in a bankruptcy. When he testified before House and Senate committees last winter, Corzine said he had no knowledge of transfers from customer accounts to the firm's accounts.

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“This is not your ordinary Chapter 11 bankruptcy,” Sen. Pat Roberts, R-Kans., said in a statement. “The process to return customer funds to their rightful owners will take years.

This unprecedented loss of segregated customer funds may well have occurred at the direction of MF Global officials.”

The “Corzine rule,first reported in the Wall Street Journal last week, reportedly would require that any time a futures brokerage wants to transfer more than 25% of its excess funds in a customer account to a firm-based account, a principal at the firm, such as the CEO, would have to approve it and provide “immediate notice” to regulators. The NFA board is expected to vote on the rule proposal in May.

Sen. Debbie Stabenow, D-Mich., the chair of the Senate Agriculture Committee, and Roberts, the committee's ranking Republican, introduced and passed a bipartisan resolution Tuesday opposing bonuses for MF Global executives, with unanimous Senate support. The legislation suggests the trustee overseeing the bankruptcy of MF Global Holding Ltd. should not submit a plan asking a bankruptcy judge to pay bonuses to top MF Global executives.

“It's absolutely outrageous to suggest that bonuses should be paid to the same people who were in charge when the company went bankrupt and lost its customers' money,” Stabenow said. “This was a terrible failure of leadership. The people in charge should be held accountable, not rewarded with bonuses.”

The congressional investigation into the bankruptcy continues today with the House Financial Committee Subcommittee on Oversight and Investigations holding another hearing on the MF Global collapse. Members are scheduled to hear testimony from MF Global's general counsel and chief financial officers. Also set to testify is Edith O'Brien, the assistant treasurer who worked out of the firm's Chicago office, which was responsible for overseeing the handling of customer funds, along with three other former executives.

“After reviewing thousands of documents and interviewing former MF Global executives and regulators as part of our investigation, the subcommittee has concluded that Ms. O'Brien has unique, personal knowledge regarding how and why customer funds went missing,” said Chairman Rep. Randy Neugebauer, R-Texas. “We owe it to the thousands of customers of MF Global - the ranchers, farmers and investors who lost money - to get to the bottom of how this could have happened.”

The Subcommittee learned during its review of thousands of documents and emails that the day before MF Global filed for bankruptcy, staffers from the Commodities Futures Trading Commission (CFTC) were on-site in MF Global's Chicago office and saw a draft statement indicating a shortfall existed in segregated customer accounts.

“MF Global staff originally attributed the deficiency to an accounting error,” according to the Subcommittee's statement. “However at 1:00 a.m. the following day - Oct. 31, 2011 - MF Global informed its front-line regulator, the CME Group, that the shortfall in segregated customer funds was not due to an accounting error but was an actual deficiency. About an hour later, MF Global's senior management informed federal regulators of the shortfall during a conference call.”

The Subcommittee suggests the shortfall in customer funds was the result of three types of transactions: intra-day loans between MF Global's futures commission merchant and its broker-dealer; funding of broker dealer client outgoing funds; and a $175 million transfer to MF Global UK Ltd., the firm's London-based European operation.

The House Subcommittee is sure to question O'Brien about an Oct. 28 email she wrote three days before the bankruptcy, in which she said a $200 million transfer to an MF Global account at JP Morgan Chase in London was completed from direct instruction from Corzine. Reports indicate O'Brien's attorneys have shared information from their client with Justice Department officials. However, she is expected today to invoke her Fifth Amendment rights against self-incrimination before the committee.

However, Corzine continues to stand by his previous testimony that he never instructed any misuse of customer funds. "He never directed Ms. O'Brien or anyone else regarding which account should be used to cure the overdrafts, and he never directed that customer funds should be used for that purpose," said Corzine spokesman Steven Goldberg in a statement last week. "Nor was he informed that customer funds had been used for that purpose.”


Original story printed in March 28, 2012 Agri-Pulse Newsletter.

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