11 November 2011

CME Group to Provide Funding to SIPC for MF Global Customers

I am glad for any relief that might be coming for the customers of MF Global whose funds are frozen and at risk.

I wonder how extraordinary these measures referenced in this press release really are, and why they had to be extraordinary given the guarantees presented by SIPC and the regulatory responsibilities of the Exchange in the first place.

As I recall the stated reserves of SIPC are multiples greater than the total customer money said to be at risk. Is the SIPC a legitimate insurance fund acting to secure customer deposits against loss, or a fig leaf? I am therefore struggling with the statement that they required emergency funding from the CME.

Here is the CME's public relations release below.  A copy of it is also available here.

I hope that there will be a thorough investigation so that customers will understand what is insured, for how much and by whom, what is regulated and by whom, and how confident they can be that this will not happen again and require such 'extraordinary measures.'

CME is acting in what is clearly self-preservation and not out of some abundance of charity. Customers are viewing these developments with a critical eye, and choosing in some cases to withdraw their funds.

Rather than rely on the kindness of strangers, I think there needs to be a greater transparency and the clarity of law and much more responsible regulation.

The temptation to hide what happened in a smokescreen and sweep it under the rug must be rather strong. But it would be a great mistake. Once confidence is lost, it can only be regained with a long and difficult effort.

This was a systemic failure of the first order and not some odd exception, or infamous 'black swan.'

The system failed.

Extraordinary measures aside, it must be fixed and made sound so that customers are not placed in such significant risk of loss based on malfeasance and 'accounting errors.'

And the public deserves a real explanation of what happened and who was involved. One benchmark for this is a straightforward answer to a simple question:

"When were the customer funds and assets transferred, to whom were they given, for what reason, and on whose authority?"

News Release Issued: November 11, 2011 3:16 PM EST

CME Group and CME Trust to Provide $300M Guarantee to SIPC Trustee to Help Facilitate Release of Customer-Segregated Funds

- Guarantee intended to assist Trustee in making prompt distribution of customer segregated funds and frozen cash balances

- CME Trust to provide its roughly $50 million in assets to CME Group market participants to offset missing customer funds held at MF Global

CHICAGO, Nov. 11, 2011 /PRNewswire/ -- CME Group, the world's leading and most diverse derivatives marketplace, today took extraordinary measures in order to accelerate the return of substantial customer cash and other assets securely held at CME Clearing, other clearing houses and MF Global custodians following the failure of MF Global.

Though CME Clearing does not guarantee FCM-held assets, CME Group is willing to provide a $250 million financial guarantee to the Trustee to give the Trustee greater latitude to make an interim distribution of cash to customers now, given the monumental task he faces to sort through considerable data and claims in order to complete the MF Global liquidation and make distributions to creditors. Additionally, CME Trust will provide $50 million to CME Group market participants in the event there is a shortfall at the conclusion of the Trustee's distribution process.

Until this point, the Trustee has authorized the distribution of $1.45 billion in customer collateral, which permitted the transfer of open positions and avoided greater losses to customers that would have been incurred through liquidation. Cash balances remain frozen. Today's proposal is designed to ensure that customers would have access to a greater percentage of the total customer-segregated funds MF Global accounted for at CME Clearing, other clearing houses and MF Global custodians.

This unprecedented guarantee offered by CME Group would be used by the Trustee in the event that a final accounting determines that the Trustee distributed more property than was permitted by the Bankruptcy Code and CFTC regulations. In addition, if there is a shortfall at the conclusion of the distribution and the $50 million Trust has not been exhausted, the remainder of those funds will be used to restore the other CME Group customer accounts that suffered a shortfall in customer-segregated funds held at MF Global. The Trust was designed to be used in cases such as this if customers lose money due to the failure of a clearing member.

"The failure of MF Global and the firm's mishandling of customer segregated funds is absolutely uncharted territory for this industry, and this extreme measure will help to provide all former MF Global customers access to their account balances that had previously been frozen in the liquidation," said CME Group Executive Chairman Terry Duffy. "Throughout this process, we have been working with the Trustee to help him release securely-held customer property at CME Clearing to customers and transferee clearing members. We have and will continue to advocate on behalf of customers - wherever they cleared or traded."

"CME Group believes it is critical to pursue this option with the Trustee to distribute additional securely-held customer assets," said CME Group CEO Craig Donohue. "Our primary concerns are the protection of our customers at CME Clearing and the integrity of all futures markets. We recognize that the U.S. Bankruptcy Code requires the Trustee to account for all customer assets and claims to ensure a fair, pro-rata distribution of those assets, and we sincerely appreciate how complex this task is for the Trustee.

We believe this extraordinary measure is necessary to ensure that all customers are treated fairly during the unique and challenging circumstances surrounding the failure of MF Global. We continue to work with the Trustee to return all of the remaining segregated funds to customers as soon as possible as allowed by law."