The National Grain and Feed Association (NGFA) spearheaded a joint letter submitted to Congress, signed by 18 other national trade associations, banks and lending organizations, that urged lawmakers to review the protections that were believed to be in place for customer-segregated funds following the Chapter 11 Bankruptcy Petition filing of MF Global Inc. on Oct. 31, in which an estimated $600 million to $1.2 billion of MF Global customer funds were unaccounted for.
In a nearly identical letter to the Commodity Futures Trading Commission (CFTC), the NGFA also urged the agency to review the adequacy of purported protections believed to exist for such customer-segregated accounts.
The NGFA and other groups said in their letter to Congress that the aftermath of the MF Global bankruptcy has presented a major challenge in restoring confidence in the future use of exchange-traded risk-management tools.
“Producers and agribusiness firms that rely on exchange-trading to facilitate risk management, as well as lending institutions that support them, have had their confidence shaken,” the letter said. “We always have believed that the risk to customer funds when trading on exchanges was virtually zero. Now, we see that is not the case.”
Third party involvement
The groups also posed questions about whether it might be more appropriate to vest responsibility for holding and safeguarding customer funds in an entity other than exchanges’ clearing firms, such as the exchange itself or some other independent third party.
“Weaknesses in customer protections brought to light by MF Global’s failure have left customers unsure of whether segregated funds will continue to be fully available at other clearing firms,” they said.
The groups also said that perhaps insurance provided through the Securities Investor Protection Corp. (SIPC) should be expanded to provide coverage for commodities, as well as securities.
In addition, the NGFA and the other signatories urged the House and Senate Agriculture Committees — which have oversight of futures trading — to dig into issues surrounding the adequacy of protections for customer-segregated accounts. Such issues include how frequently customer accounts were audited, by whom, and who was responsible for enforcement, as well as whether requirements were administered in a proper and timely way immediately prior to the MF Global bankruptcy filing.
In addition, the letter asked the House and Senate Agriculture Committees to examine whether changes are needed in the way segregated customer funds are allowed to be invested, and whether exchanges should bear some legal responsibility for customer funds “lost” in a bankruptcy and/or through malfeasance by a clearing member.
“The U.S. agricultural sector relies heavily on regulated exchanges for risk management,” the letter concluded. “The ability of both commercial and producer hedgers to use futures markets … depends on lenders agreeing to meet margin calls, which demands full confidence by all lenders in the safety of those funds. We must be confident the system works, that it properly safeguards customer funds, and that customers can have full confidence in continuing to utilize exchange-traded [risk-management] tools.”
Returning customer funds
The letter to Congress also urged members of the House and Senate Agriculture Committees to assist in ensuring that customers’ commodity-segregated funds receive the highest priority in the hierarchy of claims as the bankruptcy trustee distributes funds, and that such customers not be considered unsecured creditors.
“Our goals are twofold: Pursue all possible actions that will ensure that assets of MF Global customers will be returned quickly, and make sure this situation never recurs,” the organizations wrote.
On Dec. 9, U.S. Bankruptcy Judge Martin Glenn approved Trustee James W. Giddens’ request for approval of a bulk transfer and distribution to former MF Global retail commodities customers with U.S. futures positions, resulting in those account holders receiving approximately 72% of their property.