3rd UPDATE: CME Group: Questions Persist Around MF Global Recordkeeping

The chief executive of futures exchange operator CME Group Inc. (CME) said Tuesday that exchange staff and regulators were still trying to get a handle on the collapse of broker-dealer MF Global Holdings Ltd. (MF), which slid into bankruptcy Monday.

A troubling mismatch in MF Global's books, centered on how it handled billions in customer funds, was still being investigated after CME and other exchanges on Monday took emergency action to bar the firm and its clients from doing further business.

"CME has determined that MF Global is not in compliance with [Commodity Futures Trading Commission] and CME customer segregation requirements," said Craig Donohue, chief executive of CME, on a conference call discussing third-quarter results for the world's biggest futures exchange operator.

Currently, Donohue said, officials are "unable to determine the size or scope of the failure."

The comments deepen questions around the recordkeeping of MF Global, one of the biggest players on derivatives exchanges around the world. By law, clearing firms like MF Global are required to "segregate" the funds of their customers from the firm's own assets and from one another, among the safeguards built into the futures market to shield brokers and corporate hedgers from the failure of a major market participant.

On Monday it was revealed that major discrepancies in the level of client funds held by MF Global -- at one point seen in the hundreds of millions of dollars -- were the main factor in the firm's failure to secure a deal to sell assets to Interactive Brokers Group Inc. (IBKR) over the weekend.

Donohue said Tuesday that the situation with MF Global remained "very fluid" and that the exchange continued to work with MF Global and its clients to transfer trading positions to other clearing firms.

The bankruptcy process for firms that run both a broker-dealer and futures-clearing business is complicated, Donohue said, because it involves two different regimes for protection of customer assets.

CME's regulatory responsibilities as an exchange involve auditing and supervising the members of its markets and clearinghouse, and Donohue said the exchange group was working with regulators to resolve issues related to customer collateral and trading positions held with MF Global.

"We are working with the CFTC and will be contacting the trustee to facilitate the transfer of customer positions and a portion of the supporting collateral," he said.

On Tuesday CME Group reported that third-quarter earnings jumped 29% as the exchange operator booked a double-digit jump in clearing and transaction fee revenue and significantly improved margins.

Churning markets drove CME's revenues for the quarter to a record level and boosted its operating margin to 65%, the Chicago-based firm's highest ever, and costs were more strictly controlled.

CME reported a profit of $316.1 million, or $4.74 a share, up from a profit of $244.3 million, or $3.66 a share, a year earlier. Revenue climbed 19% to $874.2 million, helped by a 22% jump in clearing and transaction fee revenue.

Analysts polled by Thomson Reuters expected a per-share profit of $4.69 on revenue of $876 million. Operating margin widened to 65.4%, a record.

The exchange last month reported third-quarter contract volume jumped more than one-quarter over prior-year levels, with equity-index and metals derivatives both setting quarterly records for turnover.

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

(Mia Lamar contributed to this article.)

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