December 26, 2012:  We’re back after a short Christmas holiday. Today’s issue features a number of predictable prediction stories for 2013, including one from former IMF economist Simon Johnson and another from Forbes.  There is also a  break though in the bankruptcy case for MF Global customers as trustees announced a major settlement.  Also, if you missed it yesterday, take a look at the ongoing Restoring Customer Confidence series with James Gellert, who talks about rating FCMs, and our Allan Schoenberg video interview, as he explains how CME Group increasingly utilizes social media as a content distribution platform to discuss market issues with customers, partners and other stakeholders.

MF Global trustee James Giddens struck a deal with the CME Group that recovered $130 million in customer funds from the exchange group. The agreement must be approved by a bankruptcy court and is not associated with the $1.6 billion in missing customer funds. In addition, CME Group will assign $16.5 million to cover future claims against them and will give $28.5 million to the judge overseeing the case for later assignment.

Coverage:

• CME Group to return $130 million in MF Global funds – SunTimes
• MF Global Clients Get $130M From CME But $1.6B Is Still Missing – Forbes
• MF Global Trustee Gets $130 Million From CME for Payouts – Bloomberg
• CME to Return $130 Million in MF Global Assets – NY Times DealBook

By John J. Lothian

The world of trading is experiencing a recession. If you were to define industry GDP as traded and cleared volumes times commissions and fees, we would have experienced two consecutive quarters of lower GDP in futures, equities and options markets.  

Besides this metric, we are seeing proprietary trading firms start to shed traders, support staff and executives. A sure sign of a recession is higher unemployment. Crain’s Chicago Business reporter Lynne Marek yesterday reported that the venerable electronic trading firm GETCO had laid off 40 workers, including managing director Ed Boyle.

I believe the trading world is suffering from several shocks simultaneously, which is causing volumes to decline. First is the financial crisis. It is not over yet and the lasting impact of flat-lined interest rates has taken a key fundamental variable for every market and turned it into a near constant.  

By Jim Kharouf, Editor-in-Chief

There isn’t much left out of the June 4th report from MF Global Trustee James Giddens “Report of the Trustee’s Investigation and Recommendations.” It’s a thorough 181 page (275 if you count all the charts and graphs at the end) Titanic journey of MF Global under Jon Corzine’s leadership. While much has been made of the report’s focus on Corzine, as well as chief financial officer Henri Steenkamp and assistant treasurer Edith O’Brien, who often and ultimately sent money to various places, this report is most valuable for its recommendations at the end.

Giddens recommends a number of changes, among them, that customer funds should be segregated, “regardless of whether they are invested domestically or overseas.” He adds that for overseas investments, funds and assets “be segregated to the maximum extent provided for under the stricter of U.S. law and applicable foreign laws and regulations as a condition to allowing funds to be held abroad.”

This is designed to address the shell game MF Global was playing with customer funds that were invested in overseas markets, and thus given a lighter regulatory touch.

Link to the report: http://jlne.ws/NcOJYp (PDF)

Press release from James W. Giddens, the Trustee for the liquidation of MF Global Inc.:

June 4, 2012 – New York, New York – James W. Giddens, the Trustee for the liquidation of MF Global Inc., today filed a report on his independent investigation into the failure of the broker-dealer with the United States Bankruptcy Court for the Southern District of New York, the Honorable Martin Glenn, presiding.

“As attempts were made to transform MF Global into a full-service global investment bank, management failed to add to its Treasury Department and technology infrastructure, which was needed to meet the demands on global money management and liquidity,” Giddens said. “My investigation has concluded that management’s actions, along with the lack of sufficient monitoring and systems, resulted in customer property being used during the liquidity crisis to fund the extraordinary liquidity drains elsewhere in the business, including margin calls on European sovereign debt positions.”

“In light of these conclusions, I have determined there may be valid claims against individuals and entities. In my capacity as Trustee, I will make every effort to ensure that such claims result in the greatest possible returns to customers in an efficient and fair manner, whether those claims are pursued by my office or others,” Giddens said.

The Trustee’s findings in the report are based on his counsel’s interviews of more than one hundred people, along with review of hundreds of thousands of documents, and an extensive forensic investigation conducted with the assistance of forensic accountants at Ernst & Young LLP.
Because the Trustee does not have law enforcement or regulatory authority, the report draws no conclusions about possible criminal liability or whether sanctionable regulatory violations occurred. The Trustee has been cooperating with the various law enforcement and regulatory agencies investigating MF Global’s collapse and does not wish to impede those efforts.

Press Release from the CFTC:

Washington, DC – On June 1, 2012, the Commodity Futures Trading Commission (Commission) filed a general creditor claim in the liquidation of MF Global, Inc., No. 11-02790 (Bankr. S.D.N.Y.). The Commission took this action in relation to the Division of Enforcement’s ongoing investigation related to the failure of MF Global, Inc. If that investigation results in an enforcement action against MF Global, Inc., the Commission could pursue a restitution award for the benefit of commodity customers, which in turn could be the basis for a Commission claim as a general creditor against the MF Global, Inc. estate.  The Commission’s claim as a general creditor would not have priority over customer claims.  It has been filed solely to preserve all possible options for recovering funds for the benefit of commodity customers.

The CME Group released the following notice on April 2, 2012:

To: Chief Executive Officer, Chief Compliance Officer, Chief Financial Officer
From: Audit Department, Clearing House Division
Advisory #12-04
Notice Date: April 02, 2012
Effective Date:May 01, 2012

As a leader in the industry, and in conjunction with recommendations we have developed with several industry groups to further safeguard customer funds at the firm level, CME is adopting several enhancements to its reporting requirements. Customer segregation is the cornerstone of the futures industry, and it is critical to ensure the protections afforded under segregation are as strong as they can be for our market participants. In conjunction with recommendations already put forward by National Futures Association, Futures Industry Association and others, the following enhancements are being adopted.

Video of Part 3 of “The Collapse of MF Global” hearing of the House Financial Services Subcommittee on Oversight & Investigations, plus links to written testimony. Featuring:

Panel I

• Laurie Ferber, General Counsel, MF Global Holdings Ltd. (View Written Testimony – PDF)
• Henri Steenkamp, Chief Financial Officer, MF Global Holdings Ltd. (View Written Testimony – PDF)
• Christine Serwinski, Chief Financial Officer for North America, MF Global Inc. (View Written Testimony – PDF)
• Edith O’Brien, Assistant Treasurer, MF Global Inc. (no written statement submitted)

Panel II

• Diane M. Genova, Deputy General Counsel, JPMorgan Chase & Co. (View Written Testimony – PDF)
• Daniel J. Roth, President and Chief Executive Officer, National Futures Association (View Written Testimony – PDF)
• Susan M. Cosper, Technical Director, Chairman, Emerging Issues Task Force, Financial Accounting Standards Board (View Written Testimony – PDF)

View Part 1 & Part 2.

William Birdthistle is an associate professor of law at the IIT Chicago-Kent College of Law, where he specializes in investment funds, corporate governance and executive compensation. Birdthistle sat down with editor/producer Nicole V. Rohr and discussed the U.S. Securities and Exchange Commission’s (SEC) timeline for Dodd-Frank, how issues like corporate organizational structure and say-on-pay rules will progress in 2012, and how MF Global changed the landscape of corporate governance.

By John J. Lothian

“John is looking out for his self-interest,” said a reader.  “John must be out money,” said another.

It is often assumed that what motivates each of us is our own self-interest.  We could not take a breath without that being true.  We have to breathe.

I am not without self-interest.  However, my self-interest in the MF Global case is the best interests of my customers.  The customer comes first.  Always.  Ever.

As a futures broker for the last 22 years (and some before that), I am a customers’ man.  That is what the position used to be called; Customers’ Man.