Market Insider

Did MF Global Break Segregated Account Trust?

The fall of MF Global has all the potential for a blockbuster movie:

MF Global
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200+ year old firm, commodity traders, missing money and a fallen hero, Jon Corzine.

But for its former clients that had money in segregated accounts, it’s nothing short of a nightmare on Wall Street.

Sean McGillivray of GP Trading wrote this on his blog:

This story isn’t about Jon Corzine or whether or not he gets a golden parachute or prison jump suit. It is about the estimated 150,000 investors who have been locked out of their account since Sunday night. The victim is the futures traders. These clients are comprised mostly of retail investors. The mom and pops so to speak, these folks are not the “evil” sophisticated hedge fund managers, but small traders at a big firm.

McGillivray and thousands of other traders had trusted in the system, had left money in segregated accounts at a reputable firm. This money included money needed for margining purposes against trading accounts.

When another trader was asked why he would have left his money in MF Global, when it was clearly on the ropes, he answered simply, it was in a segregated account.

Therein lies the rub.

Rick Santelli ranted in the pits of the CME today that “segregated funds are going to get a haircut which would change a part of the business forever."

150,000 customers had assets parked in segregated accounts — money that is theoretically separate from the capital of the firm. But as we now think we know, that may not have been the case at MF Global.

Of those 150,000 accounts at MF Global, 50,000 were regulated commodities customer accounts. The positions in those accounts can now be moved to one of six futures commission merchants (FCMs) but, the collateral backing them up is not free to go. Of the $2.5 billion being held in segregated funds at CME Clearing according to Trustee filings and confirmed by a CME spokesperson, only $1.5 billion has been authorized to be released.

After the close on Friday, the CME said that it was "...completing the total transfer of customer positions at CME Group exchanges in approximately 15,000 MF Global accounts and approximately $1.45 billion in associated clearing collateral, as approved by the Trustee and bankruptcy court."

Why should anyone care? Because there is still $1 billion in collateral in these clients accounts that has not been released. Money was never supposed to be used for — or by — anybody else. CME ended its email tonight with this:

"These transfers do not include any warehouse receipts, certificates or warrants, which remain part of the assets under administration by the Trustee. Receipts/certificates and warrants not available for delivery as of November 4, 2011 due to the MF Global bankruptcy are summarized by issuing facility in the Deliverable Commodities Under Registration Report and the Warehouse and Depository Stocks reports."

Back to Sean’s blog:

According to CFTC reports roughly $633 million is missing from MF Global’s segregated client accounts. This amounts to about 11.6 percent of their almost $5.5 billion on the books. Why is this not being released so that clients are at least partially made whole and able to conduct a reasonable majority of their business at their new FCM?

Marc LoPresti, partner at Tagliaferro & LoPresti, agrees that the firm violated the "sacrosanct nature of the customer's accounts." And while it's hard to shock traders and engage an already jaded society, LoPresti says that Corzine could be just the trophy that could satisfy Main Street.

"He's just too tempting of a target for those still looking for a face to put on the financial crisis," he said. Corzine and the fall of MF Global represent "everything that Occupy Wall Street is all about."

Corzine, in resigning from MF, said he voluntarily resigned and he intends "to continue to assist the company and its board in their efforts to respond to regulatory inquiries and issues related to the disposition of the firm's assets."

Why the Trustee has not decided to release all but the funds that are allegedly missing is not yet clear. But, it is clear that there will be more repurcussions from this violation of trust. LoPresti says those repurcussions might even include possible criminal charges against MF and maybe even the man who, until today, was CEO of MF Global, Jon Corzine.