WASHINGTON, Dec. 1 – The Senate Agriculture Committee used today’s Wall Street Reform Act oversight hearing to question regulators on the collapse of MF Global Holdings Ltd.
“MF Global’s collapse has shattered the faith of many in the futures market,” Chairwoman Debbie Stabenow (D-Mich) said. “Customers were shocked to find out that money could be invested without their consent. The idea of sacred, segregated customer funds has really been thrown out the window.”
Federal officials have been unable to find an estimated $1.2 billion in customer funds since MF Global placed risky bets on European sovereign debt and then declared bankruptcy at the end of October. The Senate Committee on Agriculture, Nutrition and Forestry has jurisdiction over the sort of commodity trading in which MF Global was engaged.
Stabenow, Ranking Member Pat Roberts (R-Kans.) and other committee members began their inquiries as to who is accountable for the missing funds during today’s oversight hearing. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler and Securities and Exchange Commission (SEC) Chairman Mary Schapiro testified.
“MF Global is the most pressing issue facing us today,” Roberts said. “For many decades, the futures market has served as a way for agricultural producers and numerous small businesses to hedge risk. Without this ability, many could not stay in business.”
Farmers and ranchers commonly use futures contracts to avoid market volatility by locking in a price for their crops or livestock in advance. Accounts held at MF Global were frozen when the firm filed for bankruptcy and many customers have yet to receive the majority of their funds. Roberts commented that more of his constituents are calling about the MF Global bankruptcy than the upcoming Farm Bill.
“The Wall Street Reform Act is bringing transparency and accountability to over-the-counter swaps markets for the first time,” Stabenow said. “The MF Global bankruptcy underscores the importance of having effective oversight in all of our financial markets. MF Global’s customers included farmers, ranchers, co-ops, small businesses, and individuals who use these markets to hedge their business risk.”
The ability for the agriculture industry to confidently hedge in the commodity futures market is nearly as important as growing the crops, said Senator John Thune (R-S.D.). MF Global’s loss of customers’ supposedly segregated accounts is creating a lack of confidence and certainty that used to exist in the regulated futures market.
“Over the history of our country, there have been very few situations like this,” Stabenow said. “But our farmers and our business people need to be able to use the system. We’re going to work to provide the oversight and address these questions as soon as possible.”
CFTC Chairman Gary Gensler told the Committee that customers’ segregated funds are required to remain segregated at all times of day and can only be invested in particular, outlined situations. The investigation of MF Global will determine if the firm’s actions were illegal.
“We’re asking ourselves what we can do better and what we’re doing now along with CME (Chicago Mercantile Exchange) is conducting onsite reviews of merchants, including looking at segregated accounts,” Gensler said. “We’re hoping to finish during this month of December.”
Gensler also noted that an open meeting at the CFTC on Dec. 5 will include votes on a final rule of the Dodd-Frank Act entitled, “Investment of Customer Funds and Funds Held in an Account for Foreign Futures and Options Transactions.”
“The rules are too loose in terms of segregation,” he said. “What we might do next Monday will help.”
Gensler issued a formal letter of nonparticipation in the investigation of the MF Global bankruptcy, citing the fear of distractions due to his previous working relationship with former MF Global CEO, Jon Corzine. The CFTC appointed Commissioner Jill Sommers as the lead investigator on Nov. 9. Gensler’s position proved frustrating for some members of the Senate Agriculture Committee today.
“We had two regulatory questions and you said you were not participating,” Roberts said as he addressed the Chairman. “That’s a dodge; that’s not right. I’m having a lot of trouble with your nonparticipation or recusal, because now it is a distraction.”
The Senate Agriculture Committee scheduled a hearing on December 13 as a continuation of the investigation into the firm’s bankruptcy. Former MF Global CEO, Jon Corzine, is called on to testify.
“Despite an effort from several of us, there wasn’t a lot of specificity from Chairman Gensler about exactly how and when the CFTC learned of the MF Global collapse and how and when he talked to Jon Corzine about the problem,” said Senator Chuck Grassely (R-Iowa) in a statement after the hearing. “Congress will need to keep drilling down. The hearing left a lot of questions unanswered.”
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