During the week of Oct. 24, MF Global was downgraded by several credit ratings firms after announcing poor earnings. During this time, CME Group was in daily contact with MF and we received full assurances that the firm had sufficient liquidity. On Thursday, Oct. 27, two CME auditors went to MF Global’s Chicago offices to review their daily segregation report for Wednesday of that week. That report showed full compliance. Our auditors asked for the necessary materials to check the numbers and reconcile the report and they began to tie out those numbers with third parties. On Friday Oct. 28, the Thursday segregation report was delivered to CME stating that MF Global – not only was in compliance – but had $2 million in excess segregated funds. When our auditors left MF Global that Friday night, they had no indication that any segregated funds were missing. On Sunday, Oct. 30, our auditors returned because they learned from the CFTC, the Commodities Futures Trading Commission, that a draft segregation report for Friday, which we normally would have received on Monday of the following week, showed an approximate $950 million shortfall. MF Global said this discrepancy was cause by an accounting error. Our auditors, with the CFTC and MF Global, worked together for the rest of the day – that Sunday and through Sunday night — to find the so-called accounting error; however, no error was ever found. Instead, at approximately 2 a.m. Monday morning, Oct. 31, MF Global informed CFTC and CME Group at the same time that the shortfall was indeed real and that customer segregated funds had been transferred out of segregation to the firm’s broker-dealer accounts. MF Global filed for bankruptcy, and as a result of their assets — and in this case, customer funds held at the firm — they were frozen by the trustee as soon as soon as the bankruptcy was filed.
Of course, this not our industry’s first bankruptcy, what makes this case different is the shortfall in these funds — which is a clear and significant violation of CME rules and government regulation. Since the beginning of this episode, our No. 1 priority has been to assist our customers in securing MF’s return of every penny that rightfully belongs to our customers. To that end, we’ve acted aggressively and with as much speed as the situation will allow us to share information with our customers and give them full access to their accounts. I say with as much speed as the situation will allow because MF filed for bankruptcy and, as a matter of law, the SIPA trustee has been in full and complete control of the process and all the decisions regarding the distribution of funds.
In the week following the bankruptcy filing, after bankruptcy court approval was received, we successfully transferred 15,000 accounts and $1.45 billion in collateral. Within two weeks, we offered a $250 million guaranty to the trustee so he could accelerate the distribution of funds to customers without a loss to the bankruptcy estate. A week later, we increased the guaranty to $550 million. Now, we offered these guaranties not because a rule says we have to, but because we are in unchartered territory here and we felt an inherent responsibility to help our customers to help them receive distributions as quickly as possible.
In addition to our guaranties to the trustee, the CME trust is providing virtually all its capital — $50 million — to cover CME Group customer losses due to MF Global’s misuse to customer funds. The process of returning warehouse receipts to MF Global customers has also begun. As a result of these actions, all MF Global customers — not just CME customers but all MF Global customers — have already started to see substantial cash returns. By later this week, customers should have access to 2/3 of their balances. This is process, but it only means we are 2/3 the way there. We believe that all customers affected should have their full balances and property returned by MF, and, until then, we don’t feel the process is complete. Again, the decision on the portion of customer collateral transferred to new accounts is ultimately up to the trustee; however, we continue to advocate for the release of addition funds as soon as possible.
As you know, there is also a claims process in place that I know many have found to be a bit cumbersome. Last week we released a Q&A document to address the many questions that former MF customers have had about this process. It can be accessed on the MF Global page of the CME Group website, which we are using to provide complete and updated communications on this situation. [For more MF Global from CME Group, visit http://www.cmegroup.com/clearing/mfglobal.html]
In the MF Global case, some might conclude that the prescribed system of account segregation failed. It’s important to note, however, that this was a failure of a firm — a firm that broke the rules — not of any clearinghouse. At CME Group, we met all of our obligations to our clearing member firms and to the customers. MF Global’s transfer of segregated funds out of the appropriate accounts constitutes serious violations of our rules and of the Commodity Exchange Act. We are currently fully cooperating with the federal agencies investigating MF Global. We recognize, however, that investigations and any future punishment is of little comfort to those customers who are still suffering and awaiting the return of funds they thought were safe. What happened to customers as a result of MF Global’s actions is tragic and an unfortunate first in our industry. That’s why we will continue to use all of our available resources to minimize the impact of this event on our customers and on this fine industry. Our guaranty has already accelerated the return of capital to customers, and we continue to work vociferously with the trustee on additional distributions. Moving forward, we fully intend to work with regulators and industry leaders on ways to strengthen protection of customer funds at the firm level and to prevent a repeat of this episode.