The futures market was dealt a wide blow dealing with violations committed by MF Global that has shaken the confidence in a market that allows farms and agribusinesses to manage price risk. Two Congressional hearings were held this week and another Dec. 8 to hear concerns from farmer customers as well as probe top MF Global officials.
The bombshell of the Senate hearing came when CME Group Executive Chairman Terry Duffy stated that he was told by an MF Global employee during a telephone call with regulators that head Jon Corzine personally may have authorized a $175 million loan of customer funds to one of MF Global’s European subsidiaries – an assertion that Corzine subsequently denied.
In his first public appearance since the collapse in addressing the House Agriculture Committee, Corzine testified that he was first made aware of the missing money on Oct. 30, and he “certainly would never intend to direct or have segregated funds move.”
Corzine said he is “hopeful” that after a full understanding of what happened in those last few days will reveal the source of where the missing money is located. “I continue to believe that those resources are in the hands of either counterparties or there has been some mistaken forwarding of that money to someplace I don’t know,” he testified.
In an interview with Reuters, Jill Sommers, who is heading the Commodity Futures Trading Commission’s review of MF Global, noted that agency’s investigation has identified where the money went and is not deciphering which transactions are legitimate and illegitimate. Investigators are now trying to back up thousands of transactions with underlying documentation such as a signature or email to determine whether the customer approved the transfer into a broker-dealer account. Just because it was transferred out of a customer’s account into a broker-dealer account doesn’t make it illegitimate.
Witnesses on Tuesday noted that keeping the futures market whole is just as, if not more important than the farm bill.
“What will have the most impact on your profitability in the future: The passage of the next farm bill? Or the continued safe use of futures contracts?” Sen. John Thune, R-S.D., asked the two farmer-witnesses, each who typically have used either hedges, or forward contracts through their elevators, to manage price risks.
C.J. Blew, a diversified crop and livestock producer from Kansas, replied, “I can answer that pretty quick: The continued safe use of futures contracts.”
Dean Tofteland, a corn, soybean, or pig producer from Minnesota, said he shared the view that restoring confidence in the commodity futures market in the post-MF Global era was at least as important as the new farm bill.
This week at the National Grain and Feed Assn. Annual Country Elevator Conference held in Chicago CME Group chief operating officer Bryan Durkin said that CME’s “number one priority has been to assist customers in securing MF’s return of every penny that rightfully belongs to the customers….Moving forward, we intend to work with regulators and industry leaders on ways to strengthen protection of customer funds at the firm level, and prevent a repeat of this episode.”
But Durkin expressed reservations about covering customer losses, which some estimate as high as $1.2 billion, stating: “CME Group has a fiduciary responsibility to its customers and to its shareholders, and we really feel we can’t expose ourselves to that level of responsibility and risk. It’s not covered as a part of our roles in the clearing facilities.” Durkin repeatedly said the failure was the result of a “firm (MF Global) that broke the rules, not of any clearinghouse.”
George Angelich, partner at New York law firm Arent Fox, told attendees that the MF Global situation has complexities not because it was a futures commission merchant (FCM), but instead because it had 400 securities accounts which makes it subject to Securities Exchange Council regulation and oversight. He noted that without those 400 securities accounts, it would have been a Chapter 7 bankruptcy filing and not held under the SIPA(Securities Investor Protection Act) liquidation currently underway.
Angelich, whose firm is providing NGFA legal counsel on the situation, said Dec. 12 is the deadline for the SIPA trustee to file a brief outlining how he intends to harmonize accounts. Individuals will have until Jan. 9 to reply to that brief.
NGFA could not file a class action lawsuit, but Angelich noted an unofficial ad hoc committee or committee may want to come together to take on some of the tough issues and get traction if it appears things will not be in favor of those left without their funds.
Angelich noted that with MF Global estimated at the eight largest domestic bankruptcy, it puts it above Chrysler in terms of size. “This is bigger than Chrysler and the government bent over backwards to help out Chrysler. If the government can solve Chrysler and General Motors, it seems to me Congress can take an active role to restore confidence of the markets,” he said.
Discussions at the conference and at the hearings stopped short of offering specific recommendations for the dealing with preventing a situation from this happening again. Durkin as well as leaders from the NGFA assured that they plan to be very involved in future prevention while not hindering markets with excess bureaucracy or costs.