CME's Duffy: MF Global Broke Rules, Tapped Customer Funds
December 08 2011 - 7:35AM
Dow Jones News
Officials at MF Global Holdings Inc. (MFGLQ) illegally used
customers' money for the firm's own benefit in its final days of
life, according to the executive chairman of exchange operator CME
Group Inc. (CME).
The now-bankrupt broker-dealer in the past year was also found
to have violated some guidelines for investing customer money held
on deposit, and was told to tighten up certain accounting practices
following examinations by CME and other overseers, said Terry
Duffy, CME's chairman, in prepared remarks Thursday.
MF Global "appears to have broken a number of rules and
obligations to protect customer collateral resulting in customer
losses," Duffy said in testimony prepared for a hearing on MF
Global's downfall, called by the U.S. House of Representatives
Committee on Agriculture, which oversees U.S. futures market
matters.
CME has come under focus in the MF Global matter because it
presides over nearly all U.S. futures trading, where MF Global was
a major broker for asset managers and hedgers. CME also was MF
Global's primary regulator at the exchange level, responsible for
auditing the firm's books.
The trustee liquidating MF Global's brokerage has estimated that
as much as $1.2 billion in customer funds remain missing five weeks
after the firm's collapse.
Duffy defended CME's oversight of MF Global, including several
audits in the days prior to its Oct. 31 bankruptcy filing, which he
said left an "unprecedented" blemish on the U.S. futures-trading
business.
"Indeed, this is the first time in the industry's history that a
customer has suffered a loss as a result of a clearing members'
improper handling of customer funds," Duffy said in his prepared
remarks.
Duffy traced for lawmakers a timeline of MF Global's final days,
which included an unannounced Thursday, Oct. 27 audit by CME
officials who examined MF Global's customer money held at close of
business the prior day. That examination turned up only "immaterial
discrepancies" and no funds missing as of Wednesday, Oct. 26, he
said.
But MF Global's condition grew more dire and CME returned to
conduct a second audit on Sunday, Oct. 30, after the exchange
operator was told by the Commodity Futures Trading Commission that
an internal report from MF Global then showed a $900 million
shortfall in client funds driven by an "accounting error." A day's
worth of investigation found no such error, Duffy said, and at 2:00
a.m. Monday morning, MF Global disclosed to its regulators that
customers' money had been transferred into the firm's own
accounts.
"Transfers of customer funds for the benefit of the firm
constitute serious violations of our rules and of the Commodity
Exchange Act," Duffy said.
MF Global later on Oct. 31 corrected figures reported days
earlier, showing a $200 million shortfall in segregated funds as of
Thursday, Oct. 27, that suggested money had been moved out of
customers' accounts that Friday, Duffy said.
Duffy said that CME's most recent regulatory audit of MF Global
commenced Jan. 31, 2011, and wrapped up with a final report date of
Aug. 4. After the investigation CME required MF Global to change
the way it had been investing some customers' money held on
deposit, alongside other "relatively minor" infractions, he said.
These were immediately corrected, Duffy said.
At the same time, according to Duffy's testimony, securities
regulators looked over MF Global's books and records and notified
the firm that it needed to alter some accounting practices.
Duffy told lawmakers in his remarks that no number of rules or
regulations could stop someone intent on breaking the law.
"While it is clear that action is necessary to restore customer
confidence and protect against future failures, the fact is that
[MF Global] broke rules by moving customer segregated funds out of
an account over which it had control," Duffy said. "A firm failed
to comply with applicable rules, but that does not mean the
segregation system is a failed system."
-By Jacob Bunge, Dow Jones Newswires; 312 750 4117;
jacob.bunge@dowjones.com
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