MF Global's Bankruptcy Filing Sends Clients' Funds Into Limbo

The bankruptcy filing Monday by broker-dealer MF Global Holdings Ltd. (MF) cast billions of dollars in U.S. client assets into a legal limbo, with little clarity on when or how retail investors and financial institutions will be able to access their money, according to people involved in the situation.

Traders and rival brokerage houses complained about a lack of guidance from exchanges and regulators on how to handle the situation Monday, as clients of MF Global scrambled to reassure their own customers and continue doing business.

"Everything is still in limbo," said a senior executive with one major U.S. brokerage, which struggled to advise its clients on how to deal with the downfall of MF Global, one of the derivatives industry's biggest players.

The futures industry's handling of the matter is being closely watched as its practice of clearing trades--collecting and pooling collateral to soften the blow of a major market participant's failure--is being promoted as a way to make safer the trading of more-complex derivatives, such as credit default swaps.

New York-based MF Global maintains memberships at the world's largest financial clearinghouses and more than 70 exchanges. Among its biggest businesses is using this status to clear trades executed by smaller brokers that don't maintain such standing. MF Global holds the collateral posted against outstanding trades and also collects trading commissions for its broker customers, which MF Global then pays back to them.

At the end of August, MF Global ranked as the eighth largest such "futures commission merchant" in terms of client funds on deposit, holding $7.3 billion in U.S. client funds on deposit, according to data compiled by the Commodity Futures Trading Commission.

Operators of financial clearinghouses, which guarantee trades to ensure that a failure like MF Global's does not hit other market participants, had talked Sunday about the prospect of a bankruptcy by one of the top 10 U.S. derivatives clearers. But they went to bed believing that a deal had been set for Interactive Brokers Group (IBKR) to take over the firm, avoiding the pain of navigating a bankruptcy, according to people familiar with the situation.

That deal fell apart in the early morning, according to people familiar with the situation, and left the industry scrambling to deal with the fallout of MF Global's Chapter 11 bankruptcy filing.

A senior legal official at a European bank said Monday afternoon that some clients were reporting problems moving money or holdings from MF Global. The clients "are very concerned," this person said. Part of the problem may be that regulators and the company wants to prepare for a Securities Investor Protection Corporation proceeding, which could be complicated if many of the firm's clients pull their money out Monday.

Staff of the major U.S. clearinghouses were going through the bankruptcy filings to determine how to proceed, and whether customer funds on deposit with MF Global could be allowed to shift to other clearinghouse members, according to people familiar with the matter.

Representatives of CME and ICE had no immediate comment.

As of Monday afternoon, broker customers of MF Global were able to move outstanding contract positions to other clearing firms. For instance, if a broker owned 100 crude oil futures set to pay off if the price of the commodity rises, that trade could be assumed by a rival of MF Global.

However, the broker's collateral put up against such a trade and maintained by MF Global could not be moved as of Monday afternoon, according to people involved in the matter. That meant that brokers seeking to take their business elsewhere would have had to put up double the amount of collateral to hang onto their existing trades done through MF Global.

Exchange operators including CME Group Inc. (CME), IntercontinentalExchange Inc. (ICE), Deutsche Boerse AG (DB1.XE) and others on Monday barred MF Global and its clients from making new trades, allowing them only to close out existing positions.

But some brokers said that they were uncertain what sorts of trades constituted closing out positions, or where such trades could be carried out, piling on uncertainty Monday. A notice from ICE Monday advised traders looking to transfer contracts positions to arrange the process with MF Global.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

--Aaron Lucchetti contributed to this article.

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