WASHINGTON, D.C., U.S. — The National Grain and Feed Association (NGFA) and the North American Millers’ Association (NAMA) on Dec. 8 urged the U.S. Congress to take action following the bankruptcy of MF Global.
NGFA said that returning 100% of customer-segregated funds and other property to their rightful owners should be the top priority of lawmakers, regulators, commodity exchanges and the trustee.
In testimony before the House Agriculture Committee, the NGFA said there continue to be uncertainties and complexities associated with recouping customer-segregated funds and other property, such as warehouse receipts and shipping certificates, tied up in the bankruptcy. While former customers of MF Global currently have access to their hedging accounts, the NGFA noted that only about 60% of their initial margin funds that were linked to those transferred futures market positions have been returned thus far.
"Ultimately, the number one immediate goal of the NGFA is to advocate for the return of funds and property to customers as quickly as possible,” said John Fletcher, general manager of Central Missouri Agri-Service LLC in Marshall, Missouri, U.S., who testified on behalf of the NGFA. “At the end of this process, customers must be made whole. Any other outcome will result in a damaging loss of confidence in our risk-management system” among agricultural producers and agribusinesses.
The trustee responsible for identifying assets of MF Global’s commodity brokerage business continues to investigate the extent of the shortage that exists in supposedly customer-segregated accounts. MF Global filed for bankruptcy protection on Oct. 31.
The NGFA warned that the process could be slowed by what it termed a “complicated and cumbersome” claims process outlined by the MF Global trustee. It noted that even the “seemingly simple task” of informing the trustee of the amount of a commodities customer’s claim is not straightforward, with uncertainty about whether the value should be what existed on the date MF Global filed for bankruptcy (Oct. 31) or at the close of business four days later when the bulk transfer of futures accounts previously held by MF Global occurred.
“The difference can be hundreds of thousands of dollars,” the NGFA said.
In its testimony, the NGFA also urged lawmakers and federal agencies to review the protections that were believed to be in place for customer-segregated funds, up to $1.2 billion of which were found to be missing following the MF Global Inc. bankruptcy. The MF Global bankruptcy has been a “shock to the industry,” the NGFA said, and represents a major challenge to restoring confidence in the future use of exchange-traded risk-management tools.
NAMA also called on Congress to take action and limit futures market risk, exacerbated by the MF Global bankruptcy, to millers and other futures market participants.
“Millers and other futures contract participants are experiencing a crisis of confidence in the markets as a result of the MF Global situation,” NAMA said.
NAMA pressed the point that segregated customer funds are sacrosanct and that millers and similar hedgers should be the first in line when MF Global funds are disbursed.
Changes recommended by NGFA and NAMA include:
- Direct CFTC to immediately enact rules requiring customer segregated funds be kept in escrow accounts, in cash or very liquid government-backed instruments.
- Affirm that legislative intent underlying relevant statutes in this area call for the first priority for funds from segregated accounts is they be distributed to the customers that deposited them.
- Direct the CFTC to conduct an immediate audit, or the agency should request third party audited statements of all brokers and Futures Commission Merchants to ensure confidence that customer funds remain segregated.
- Study the creation of an industry insurance fund to cover commodity futures contracts.
- Conduct a complete review of CFTC audit procedures.
- Determine if it would 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.
- Determine if insurance provided through the Securities Investor Protection Corp. (SIPC) should be expanded to provide coverage for commodities, as well as securities.
- Determine whether the commodity exchanges themselves should bear “some responsibility for customer funds lost as a result of a bankruptcy and/or malfeasance by a clearing member of the exchange.”