On Nov. 16, the Kansas City Board of Trade (KCBT) sent the following letter to its members in an attempt to clarify confusion and questions resulting from the MF Global, Inc. bankruptcy that was filed on Oct. 31:
The Kansas City Board of Trade (“KCBT”) wishes to clarify any confusion or questions resulting from the MF Global, Inc. bankruptcy that was filed on October 31, 2011. KCBT understands that this has been a difficult period for many of our customers and members who cleared through MF Global, Inc. (“MF Global”). We also recognize that the firm’s bankruptcy presents a complex and time-consuming process. Over the past two weeks, KCBT has worked exhaustively with the CFTC, bankruptcy Trustee for MF Global and the futures brokerage firms, called futures commission merchants (“FCMs”) that agreed to accept MF Global customer positions to complete the transfer of customer positions and a portion of the customer margin collateral held by KCBT Clearing Corporation for MF Global customers to the receiving FCMs, in accordance with the Trustee directions.
We want to make clear that MF Global's customer positions at KCBT Clearing Corporation at the time of the bankruptcy filing were in compliance with clearing margin requirements. Almost all customer positions were transferred to receiving FCMs on November 4, and a portion of the customer segregated funds held by KCBT Clearing Corporation for MF Global customers was transferred to the receiving firms per the Trustee directions on November 7. As of today, KCBT Clearing Corporation has successfully processed and settled all remaining MF Global customer positions and has returned the remaining customer segregated funds held by KCBT Clearing Corporation to the Trustee to assist in the return of customer account balances.
There are some misconceptions that we would like to clarify regarding MF Global’s shortfall of customer segregated funds. There is a difference between the CFTC Part 190 bankruptcy regulations and exchange default rules:
MF Global was required by federal law (the Commodity Exchange Act and CFTC regulations) to maintain adequate segregated funds to cover its liability to all of its customers that had a positive net liquidating value in their segregated account balances. As has been reported, the total pool of MF Global segregated funds is insufficient to cover that customer liability, though the precise amount of the deficiency is at present unknown. Part 190 of the CFTC regulations sets forth the process for handling the pro-rata distribution of funds to customers in the event its FCM is the subject of a U.S. bankruptcy liquidation proceeding and has a shortfall in segregated funds held to keep its customers whole. This is the process that is currently underway overseen by the Trustee. This process is completely different from and bears no relationship to clearinghouse default rules.
Clearinghouse default rules and procedures are in place to protect the financial integrity of the clearing members on the opposite sides of trades in the event a defaulting clearing member fails to pay the variation call necessary to satisfy and make whole the opposite parties to the defaulting firm's trades. These rules ensure that, in the case of MF Global, had the firm not been able to meet its margin call to KCBT Clearing Corporation and there had been a shortfall of margin collateral on deposit at KCBT Clearing Corporation to satisfy all clearing members on the opposite sides of MF Global’s customer positions, then in accordance with Rule 8.03, KCBT Clearing Corporation would have deployed other financial resources to cover the shortfall.
We understand that the MF Global, Inc. bankruptcy and segregated funds shortfall is a challenging event for everyone involved. Although most of the decisions being made are beyond our control, we want you to know that we are working very closely with the regulators and the Trustee to represent your interests. We hope that this release gives all of our market users a better understanding of this process.