MF Global Customers Will Get Some Cash, but System Remains Shaken

The trustee of MF Global, James W. Giddens, has court-approved plans to release a block of cash equal to 60% of the customer funds that have been locked up in the bankruptcy of the failed commodities and futures brokerage.

US bankruptcy Judge Martin Glenn approved the payout at a hearing in Manhattan court yesterday. The payout will be equal to $520 million -- about 60% of the client funds, the trustee said. Investigators have yet to locate an estimated $600 million in funds missing from client segregated accounts in the MF Global Bankruptcy. The brokerage imploded over the weekend of October 29 and filed for bankruptcy on Halloween (boo!).

The payout will initially go to customers who held accounts in 100% cash or treasuries on October 31, but Giddens said additional payouts are likely in the next few weeks. Thousands of former MF Global accounts remain scattered, with some being transferred to other brokerages and others remaining in limbo with the trustee. Customers at brokerages with accounts that had been transferred were contacted yesterday and instructed to follow guidelines on the trustee Website to track progress, and were told they will be mailed forms to file claims.

Despite these assurances, many traders in the futures and options market still feel burned and betrayed by the failure of MF Global and the slow reaction by regulators and the major futures exchange, the Chicago Mercantile Exchange (CME), to address the situation. A Wall Street Journal article this week pointed out that thousands of traders have been locked out of their accounts, many of them professionals, and many have lost their ability to do business.

Ann Barnhardt of Barnhardt Capital Management, a money manager in Colorado, announced she was quitting the business following the MF Global episode, despite the fact that she had no accounts at MF Global. In a message posted on her Website, she cited damage to the financial system.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets -- because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The MF Global failure is unique in that it marks what many experts say may be the first major failure of a brokerage firm in which client segregated accounts were taken prior to the bankruptcy. Giddens has pointed out that even during the Lehman Brothers failure in 2008, customer segregated accounts remained safe and that money was returned to them first (Giddens also handled the Lehman bankruptcy).

Regulators, lawmakers, and exchanges have slowly woken up to the damage incurred upon the system. A flurry of activity shows the system swinging into damage-control mode:

• The CME on November 18 offered a $300 million guarantee on customer funds that could not be located in the MF Global bankruptcy. This was nearly two weeks after the bankruptcy. I asked hedge fund manager Bill Fleckenstein of Fleckenstein Capital Management, who had an account at MF Global, what he thought of this. "Too late," he said in an email. Fleckenstein was looking to recover money that he had parked in Treasury bonds at the brokerage, which was still locked up.

• The Commodities Futures Trading Commission is now stepping up the rhetoric in the wake of the MF Global failure. "The inability of MF Global customers as a whole to access their funds has affected trading in futures markets, and has shaken public confidence in our customer protection regime," Scott D. O'Malia, a commissioner of the Commodity Futures Trading Commission, said in comments posted on the CFTC Website today. He acknowledged that moves to free the funds and collateral should have happened sooner.

• US Attorney Patrick Fitzgerald, in Chicago, has issued subpoenas in the probe of MF Global Holdings Ltd. But no arrests or charges have been made.

• CFTC Commissioner Bart Chilton has mentioned that something "nefarious" appears to have happened with the customers funds -- they may have been taken out in the days just prior to the bankruptcy.

As I've chronicled on this Website, I was an MF Global customer. At the moment, about 30% of my funds have been transferred to a new brokerage, and I will be applying to get more on my money as the funds are distributed. But the bottom line is that the account has been illiquid for nearly three weeks now, and the communication and confusion regarding the release of the money has certainly shaken my own confidence in the system.