{
  "id": "R42091",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "R42091",
  "active": true,
  "source": "EveryCRSReport.com",
  "versions": [
    {
      "source": "EveryCRSReport.com",
      "id": 422969,
      "date": "2013-08-01",
      "retrieved": "2016-04-06T21:02:51.471863",
      "title": "The MF Global Bankruptcy, Missing Customer Funds, and Proposals for Reform",
      "summary": "On October 31, 2011, MF Global, a large brokerage firm registered with the Securities and Exchange Commission (SEC) as a broker-dealer and with the Commodity Futures Trading Commission (CFTC) as a futures commission merchant (FCM), filed for bankruptcy, marking the eighth-largest bankruptcy in U.S. history. Based on the subsequent investigation by the bankruptcy trustee, it appears that the firm failed as a result of a \u201crun on the bank\u201d by customers seeking withdrawals, combined with increased margin calls on the firm\u2019s proprietary trading positions related to distressed European debt, which the firm could not meet. \nNormally, brokerage customers are protected from brokerage failure. On the securities side, investors may receive up to $500,000 from the Securities Investor Protection Corporation (SIPC) if the failed brokerage\u2019s assets are insufficient to meet customer claims. In futures markets, there is no insurance scheme comparable to SIPC, but customers are supposed to be protected by strict segregation rules: customer funds entrusted to FCMs are required to be kept in separate accounts and the FCM is not allowed to use them for its own purposes.\nIn the MF Global case, however, about $1.6 billion in customer funds were found to be missing after the bankruptcy. This consisted of about a $900 million shortfall for domestic U.S. accounts at MF Global trading securities and commodities and a $700 million shortfall related to trading by customers on foreign exchanges. The CFTC, SEC, Justice Department, and the bankruptcy trustee investigated to locate the missing funds and determine causes of the loss. During the investigation, the bankruptcy trustee found that customer funds had been wired to various banks and trading partners of MF Global to meet overdrafts and collateral calls. As of June 2013, the trustee announced that 89% of U.S. futures customers\u2019 funds had been located and returned. The trustee anticipated that figure would reach 94% once certain legal agreements were acted upon. However, for futures customers overseas, or who had had accounts set up in which to trade on foreign exchanges, the figure was significantly lower, with only 18% of their missing funds returned as of June 4, 2013, albeit with an ultimate expected return rate of 84%-91%, according to the trustee.\nViolation of segregation rules can be subject to civil and criminal penalties. The CFTC launched a civil lawsuit for monetary penalties in June 2013 against the firm and its former CEO, Jon Corzine, and former Assistant Treasurer, Edith O\u2019Brien. Numerous private lawsuits have also been commenced, and some have been settled. However, no criminal charges have been filed.\nThe MF Global failure raised questions about whether enforcement mechanisms for segregation of futures market customer funds were reliable\u2014particularly in times of unusual stress. It also provided an opportunity to evaluate the effectiveness of regulatory cooperation during a rapid failure of a large, complex financial institution. It prompted a number of policy questions: is the enforcement of segregation requirements for futures customers\u2019 accounts sufficient for unusual market conditions, such as a run? Should some type of SIPC-like insurance, such as is offered for customers of securities broker-dealers, be contemplated for futures customers or would costs be too great? The CFTC on November 14, 2012, proposed a rule aimed at increasing disclosure requirements for futures brokers to give customers greater accounting for their funds.\nThis report provides information about MF Global\u2019s failure, the rules for handling of customer funds, the enforcement of those rules, the bankruptcy proceeding, related policy issues and reform proposals to ensure greater protections for futures customers. It will be updated as events warrant.",
      "type": "CRS Report",
      "typeId": "REPORTS",
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      "topics": [
        {
          "source": "IBCList",
          "id": 4575,
          "name": "Derivatives Regulation"
        }
      ]
    }
  ],
  "topics": []
}