MF Global, a large player in world commodity markets, including U.S. grain futures markets, failed after regulators expressed concern over the firm’s huge and risky investments in European sovereign debt and demanded the company hold more capital against the investments, which it was not able to do.
The firm’s ratings buckled, clients panicked, and shareholders sold stock. The company’s value plummeted. In the span of a week, the firm’s market value plunged by two-thirds, and Jon S. Corzine, MF Global’s chief executive, resigned. Efforts to find a buyer for the foundering brokerage firm collapsed once it was discovered that around $630 million in customer money had gone missing. MF Global then filed for bankruptcy on Oct. 31.
On the same day, the Securities Investor Protection Corp. began liquidation proceedings under the Securities Investor Protection Act, and the U.S. District Court for the Southern District of New York appointed James W. Giddens as trustee for the liquidation. The law firm of Hughes Hubbard & Reed LLP was appointed as counsel to the trustee.
Giddens on Nov. 2 obtained an emergency order from the court authorizing the transfer of thousands of commodity customer account positions from MF Global to other futures commodities merchants. Giddens then worked with the exchanges, designated clearing organizations, and regulators through the first week and weekend of the liquidation to affect the transfers.
On Nov. 5, the CME Group, the Kansas City Board of Trade and the Minneapolis Grain Exchange, in light of the problems customers transferring out of MF Global were facing, said their respective clearing organizations were setting the “initial” margin upcharge at zero. The upcharge normally is applied to customer accounts when they receive a margin call.
The intention and effect of the changes were to decrease the size of any margin calls resulting from the bulk transfer of MF Global customers to new clearing members and not to increase them, the CME said.
“This is a short-term accommodation to maintain market integrity and provide temporary relief to customers whose accounts have been disrupted by this event,” the CME Group said.
Giddens was able to report that as of Nov. 7, his office in coordination with the Commodity Futures Trading Commission, SIPC and the CME Group and the other exchanges had been able to transfer approximately 17,000 customer accounts with open commodities positions, along with $1.55 billion in collateral, which was approximately 60% of the collateral that had been associated with these positions at the time of the bankruptcy.
“The court-authorized bulk transfer was the maximum relief available under the law and the circumstances, and it averts mandatory liquidation of the transferred positions under governing CFTC rules,” Giddens said. “In order to protect their transferred positions, MF Global, Inc., customers who have been transferred should consider posting collateral if that action is requested by the transferee’s futures commission merchant. As an alternative, these former MF Global, Inc., customers can request to have accounts liquidated.”
Giddens said his investigation into the business affairs of MF Global was under way. The Federal Bureau of Investigation also was seeking evidence to determine if there was possible wrongdoing.
Giddens said he didn’t know how long the investigations would last or how long it would be before MF Global customers might expect to see the return of additional assets.
“We do know there is an apparent shortfall at MF Global, Inc.,” Giddens said. “My obligations under the law are to reserve assets and identify and marshal other assets to maximize the estate in a manner that is fair to all customers.”
Market participants expressed relief the transfer of MF Global customers to other clearing members has gone as smoothly as it has. The impact on agricultural markets was difficult to ascertain. Certainly, there has been no wave of liquidation to date in connection with the affair.