COURT ORDERS MF GLOBAL TO PAY OVER $1 BILLION TO CUSTOMERS

FROM:  U.S. COMMODITY FUTURES EXCHANGE COMMISSION
Federal Court in New York Orders MF Global Inc. to Pay over $1 Billion in Restitution to Customers of MF Global Inc.

The court’s Order also imposes a $100 million penalty on MF Global

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court consent Order against Defendant MF Global Inc. (MF Global) requiring it to pay $1.212 billion in restitution to customers of MF Global to ensure customers recover their losses sustained when MF Global failed in 2011.

The consent Order, entered on November 8, 2013 by U.S. District Court Judge Victor Marrero of the U.S. District Court for the Southern District of New York, also imposes a $100 million civil monetary penalty on MF Global, to be paid after MF Global has fully paid customers and certain other creditors entitled to priority under bankruptcy law. The Trustee for MF Global obtained permission from the bankruptcy court to pay restitution in full to customers to remedy any shortfall with funds of the MF Global general estate.

The consent Order arises out of the CFTC’s complaint, filed on June 27, 2013, charging MF Global and the other Defendants with unlawful use of customer funds (see CFTC Press Release 6626-13, June 27, 2013). In the consent Order, MF Global admits to the allegations pertaining to its liability based on the acts and omissions of its employees as set forth in the consent Order and the Complaint. The CFTC’s litigation continues against the remaining defendants: MF Global Holdings Ltd., Jon S. Corzine, and Edith O’Brien.

Gretchen Lowe, Acting Director of the CFTC’s Division of Enforcement, stated, “Division staff have worked tirelessly to ensure that 100 percent restitution be awarded to satisfy customer losses. The CFTC will continue to ensure that those who violate U.S. commodity laws and regulations designed to protect customer funds will be vigorously prosecuted.”

The CFTC’s Complaint charged MF Global, a registered Futures Commission Merchant (FCM), with violating provisions of the Commodity Exchange Act and CFTC Regulations intended to protect FCM customer funds and requiring diligent supervision by registrants. Specifically, the Complaint charged that during the last week of October 2011, MF Global unlawfully used customer segregated funds to support its own proprietary operations and the operations of its affiliates. In addition to the misuse of customer funds, the Complaint alleged that MF Global (i) unlawfully failed to notify the CFTC immediately when it knew or should have known of the deficiencies in its customer accounts, (ii) made false statements in reports it filed with the CFTC that failed to show the deficits in the customer accounts, (iii) used customer funds for impermissible investments in securities that were not considered readily marketable or highly liquid in violation of CFTC regulation, and (iv) failed to diligently supervise the handling of commodity interest accounts carried by MF Global and the activities of its partners, officers, employees, and agents.

The CFTC appreciates the assistance of the U.S. Attorneys’ Offices for the Southern District of New York and the Northern District of Illinois, the Federal Bureau of Investigation, the Securities and Exchange Commission, and the Financial Conduct Authority in the United Kingdom.

The consent Order recognizes the cooperation of the Trustee for MF Global and requires the Trustee’s continued cooperation with the CFTC.

CFTC Division of Enforcement staff members responsible for this case are Sheila Marhamati, David W. Oakland, Chad Silverman, K. Brent Tomer, Douglas K. Yatter, Steven Ringer, Lenel Hickson, and Manal Sultan. Staff from the CFTC’s Division of Swap Dealer and Intermediary Oversight, Division of Clearing and Risk, and Office of Data and Technology also assisted in this matter.

CFTC COMMISSIONER CHILTON'S STATEMENT SUPPORTING THE PROTECTION OF CUSTOMER FUNDS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
“The Law”

Statement of Commissioner Bart Chilton Regarding Customer Protections

October 30, 2013

Each of us took an oath to uphold the law. Sometimes that’s pretty easy, other times, not so much. As rule writers, many times the law allows us a bit of discretion, some latitude. Other times, it’s pretty clear what we are supposed to do. On these customer protections, I think the key components are straightforward. We are supposed to ensure that customers’ money is protected. Our law mandates this: full protection, complete protection, 100% of customer money, 100% of the time.

For too long, we haven’t had the kind of clear guidelines we’re putting in place today to ensure against improper comingling of funds at Futures Commission Merchants (FCMs) and Designated Clearing Organizations (DCOs). This rule will provide greater protection of these customer funds by eliminating some tolerated methodologies for computing the amount of funds held and how funds are treated. It prescribes new modes of calculation, especially for excess funds.  These include: prescribing when foreign funds can be included in the calculation; restricting the amount of customer funds that an FCM may hold in depositories outside of the United States to the amount of margin required by a foreign clearing organization or broker, plus a 20% cushion; and requiring each FCM to compute a targeted amount of excess funds (i.e., proprietary funds or “residual interest”) that the FCM seeks to maintain in customer segregated or secured accounts as a cushion to help ensure that the FCM does not become undersegregated or undersecured.

The rule also imposes some risk management requirements for FCMs, including written policies and procedures reasonably designed to ensure that customer funds are separately accounted for and segregated or secured as belonging to customers as required by the Act and Commission regulations.  The rule requires FCMs to provide the CFTC with notices to provide an early warning system on seg violations; amends FCM capital requirements to require that FCMs demonstrate, upon CFTC request, access to sufficient liquidity; and requires FCMs to file daily seg and secured amount schedules and other reporting.

Section 4d of the CEA is a cornerstone of our law, fundamental to the protection of customers and markets. It requires that an FCM may not use the funds of one customer to margin or guarantee the trades or contracts, or to secure or extend the credit, of another customer.  That is the law. We aren’t Congress. We don’t have the latitude to do something other than what Congress has specifically and clearly required of us. There are some that suggest perhaps Congress didn’t mean what the law says. Fine, if so Congress can change the law. We can’t.

And I disagree with the contention of some that this rule will have the perverse effect of funding customer protections on the back of America’s farmers and ranchers—nothing could be further from the truth. Indeed, quite the opposite is the case: this rule will ensure that, in the event of another MFG, another Peregrine, the U.S. agricultural sector will not find itself funding those kinds of tragic losses. That’s the kind of protection I’m talking about today.

This is a good rule, and I commend the staff for their work. It provides plenty of time for compliance. And it provides for a study to gain more information and a full five years for the commission to act if what we have done needs alteration. And, as always, if there are issues brought before us relating to technological or practical challenges with good faith compliance, I am open to provision of appropriately tailored relief as needed. And again, if Congress has concerns, they can change the law.

It is a good rule and I support it.