WASHINGTON, Dec. 8- What led to the misuse of MF Global customer funds is unknown, largely due to the enormous number of transactions made in the hours before the firm’s collapse, said Former MF Global CEO Jon Corzine when he testified before the House Committee on Agriculture today.
“I never intended to break any rules,” he said in response to questions from Chairman Frank Lucas (R-Okla.). “I am not in a position, given the number of transactions, to know anything specifically about the movement of any specific funds. I can only say I know I had no intention to ever authorize the transfer of segregate moneys.”
Farmers and ranchers across the country used MF Global to make commodity market trades as financial hedges intended to protect them against volatile market prices. An estimated $1.2 billion in customer funds went missing after the firm’s collapse.
“I think about this every day,” Corzine said. “I could not be more regretful of the distress we’re bringing into people’s lives.
Corzine departed MF Global on Nov. 3 after the firm declared bankruptcy on Oct. 31. He told the Committee he did not become aware of un-reconciled customer accounts until the evening of Oct. 30.
“I was stunned when told MF Global could not account for millions of clients’ money,” he said. “I simply do not know where the money is.”
Executive Chairman of the CME Group Inc., Terrence Duffy, said that MF Global reported stable segregated accounts until reports on Monday, October 31 indicated otherwise.
Investigators described the state of the firm’s records during the last days before the bankruptcy as “a mess.” Corzine cited the unusually high number of transactions taking place during the last few hours before Oct. 31.
"It's my understanding that our books and records were reflecting the chaos that occurred in the last two or three days as the firm was under severe pressure," he said. "It's clear that in the last hours there were many, many more transactions than before."
During the hearing, Corzine discussed the firm’s choice to invest in European sovereign debt. According to Corzine’s testimony, he met with MF Global’s senior traders in 2010 to discuss ways to improve the company’s profitability. One of those ways was to purchase European sovereign debt using “repurchase transactions to maturity,” or RTMs, which he said would reduce finance and market risk at a time when the spread on European sovereign debt securities appeared favorable.
“Through these discussions, I became an advocate of purchasing European sovereign debt using RTMs,” he said. “At the time that MF Global entered into the transactions, I believed that its investments in short-term European debt securities were prudent.”
Several members characterized the firm’s investment in sovereign debt as irresponsible. Ranking Member Collin Peterson (D-Minn.) questioned the MF Global betting strategies. “They just seem pretty risky,” he said.
Corzine emphasized that during his tenure at MF Global, the firm actually reduced leverage from 37.3 to 30.
MF Global existed jointly as a futures commission merchant (FCM) and a broker-dealer firm before the bankruptcy. The broker-dealer firm of MF Global placed the investments in sovereign debt. Corzine stated repeatedly during the hearing that he has no recollection of ever authorizing customer funds from the FCM to be used in the sovereign debt investments.
Commodity Futures Trading Commission (CFTC) Commissioner Jill Sommers said during her earlier testimony that this investigation would result in policy changes and “lessons learned.”
“We might consider that operating as a combined broker-dealer and FCM should not exist,” said Vice Chairman of the Financial Industry Regulatory Authority, Stephen Luparello.
“We need to seriously examine whether we should put these segregated accounts into a third party,” Peterson said. “Hopefully the committee can spend some time looking at this and working with people to determine what a solution should be.”
A court-appointed trustee is attempting to transfer and distribute $2.1 billion in MF Global funds frozen by the bankruptcy. A New York bankruptcy judge is expected to consider the transfer Friday.
“Many firms still will have significant amounts of margin funds and excess cash tied up with the trustee-- or missing,” said Central Missouri Agri-Service manager, John Fletcher, on behalf of the National Grain and Feed Association. “Even at a relatively small firm like Central Missouri Agri-Service, we are trying to manage a $600,000 deficit in the value of our account.”
The CFTC adopted a rule earlier this week that eliminates foreign sovereign debt as a permitted investment by an FCM. The rule updates regulation 1.25. However, Corzine and Commissioner Jill Sommers testified that the regulation 1.25 never made customer funds available for sovereign debt investments, except if the customer made deposits in foreign currency and authorized an amount.
CFTC initially proposed the update to the regulation in October 2010, but deferred it after multiple financial firms, including MF Global, objected the change as too costly.
Whether this rule would have prevented the consequences of MF Global’s collapse is not certain. The investments MF Global made in Europe were not made by its FCM, but by the MF Global broker-dealer firm. The location of the misplaced customer funds, as well as the timing, is still unknown.
“My impression is that in the chaos of the last few hours and days, either a miscalculation occurred or money that was expected to come in did not.” Corzine said.
The Dodd-Frank Act, enacted to enhance regulatory oversight of large financial institutions, is in the stages of final rule approval. House Agriculture Committee members debated during the past few months whether these rules are being enacted too quickly. Some are using MF Global’s failure and the recent bankruptcies of Lehman Brothers and Refco as examples that these new regulations are urgent.
“There have to be some rules in place that limit high risk and give the farmers and ranchers confidence in these markets,” said Rep. Joe Courtney (D-Ct.). “Our job here is to try to figure out the right way to balance rules to prevent these events form occurring again. I think implementing these rules can create a structure of stability in our economy.”
Corzine will testify before the Senate Committee on Agriculture, Nutrition and Forestry next Tuesday, Dec. 13.
“We have discovered fascinating information that unfortunately still leaves many, many questions unanswered,” said Chairman Lucas at the hearing’s close.
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