The Trustee is already putting it out in the media that customers of MF Global may have to share in the loss of segregated client funds pro rata with other creditors. By subordinating customers with collateral in segregated client funds to creditors of MF Global’s estate, the Trustee is essentially subordinating the claims of an Iowa farmer who was supposed to be protected by segregation of client funds to the claims of JP Morgan, an unsecured creditor currently seeking a motion in court 1) to place itself first in line for MF Global assets, before commodity clients who must share in the loss of $633 million of customer funds; and 2) to disallow all investor claw-back lawsuits so that it may keep millions of dollars it withdrew from MF Global’s accounts within the last 90 days.
Paying such a creditor’s claim with an Iowa farmer’s money is not only morally and legally wrong, it risks the future of the American economic model. Segregation of customer funds is the cornerstone that assures the financial integrity of our markets and any violation of these segregation requirements cannot be tolerated...
Please consider reading the entire letter below, personalizing, and sending it to the CFTC and your elected representative, whether or not you were personally affected by the MF Global theft of client funds. -Doc
Dear xx,
As you well know, MF Global, Inc. recently declared bankruptcy. Despite its obligation as a commodity broker to keep its customer funds completely segregated from the firm’s own assets, about 11.6% of the segregated client funds have yet to be accounted for—approximately $633 million.
However, 88.4% of the segregated client funds have been accounted for, and have not been returned to the clients. There is no reason, whatsoever, that these funds should not be immediately returned to their rightful owners.
Commodity futures markets are very different from securities markets—futures traders are more interested in price movements rather than owning financial instruments. Thus, the effect of freezing funds in a futures market is many times more devastating than in a securities market. A delay in “un-freezing” and returning funds can destroy the entire futures industry. For this reason, the portion of segregated client funds that have been accounted for must be returned to clients immediately.
Keep in mind that commodity futures are used not just by financial firms, but also by farmers, airlines, oil producers, and any business that deals with commodities. They use commodity futures to ensure that they receive and/or pay a fair price for the commodities that they sell and/or use and are not held hostage by price fluctuations that may affect their future sales and/or consumption.
For example, farmers who have crops in the field need to sell futures in commodity markets so they can lock in prices for their future yields today, instead of taking on market risk as they would otherwise be exposed to volatile price swings. Large corporations like Coca-Cola that make money in foreign markets do not want to lose money when they repatriate revenue earned in foreign currency. They have to be able to forecast future expenses and profits accurately in the currency of their domicile and hedge currency price risks in futures markets accordingly.
I fear that the SIPC Trustee overseeing the bankruptcy is not acting in the best interests of commodity futures clients. SIPC, or Securities Investor Protection Corporation, was created by the Securities Investment Protection Act of 1970 and was designed to protect securities in a similar way to how the FDIC protects bank depositories. (Commodities remained unprotected simply because commodities trading was too new and uncommon when SIPA was passed.) As a securities insurance regulator, the Trustee’s actions thus far demonstrate an almost total ignorance of how commodity futures markets operate.
To insist on the completion of a months-long investigation into the missing 11.6% of client funds before returning any of the 88.4% of funds that have been accounted for is patently ridiculous. If customers do not have additional collateral to post for trading purposes, they will lose their positions and will face bankruptcy as they are unable to do business.
For example, farmers whose collateral is locked up may have to sell their land and equipment to post new collateral so they can hedge their crops—or face financial ruin through exposure to volatile price swings in the market. Furthermore, while this collateral is locked up, those price swings will become worse as volume dries up in smaller markets—which, according to the Wall Street Journal, is already happening.
Note that the most recent bankruptcy of a major commodities clearing firm, Refco, Inc., involved no freezing of assets and no cessation of trading for any customer.
Even worse, the Trustee is already putting it out in the media that customers of MF Global may have to share in the loss of segregated client funds pro rata with other creditors. By subordinating customers with collateral in segregated client funds to creditors of MF Global’s estate, the Trustee is essentially subordinating the claims of an Iowa farmer who was supposed to be protected by segregation of client funds to the claims of JP Morgan, an unsecured creditor currently seeking a motion in court 1) to place itself first in line for MF Global assets, before commodity clients who must share in the loss of $633 million of customer funds; and 2) to disallow all investor claw-back lawsuits so that it may keep millions of dollars it withdrew from MF Global’s accounts within the last 90 days.
Paying such a creditor’s claim with an Iowa farmer’s money is not only morally and legally wrong, it risks the future of the American economic model. Segregation of customer funds is the cornerstone that assures the financial integrity of our markets and any violation of these segregation requirements cannot be tolerated.
Therefore, as I see it, it is flagrantly unreasonable that MF Global’s clients have no representation on the Creditor’s Committee, but big banks do. Without intervention on behalf of MF Global’s commodity futures clients (and not the kind of intervention contemplated by SIPC and its Trustee—freezing and investigating client funds for months whilst client positions are liquidated for lack of collateral), I am afraid that the future of commodities trading is sunk.
For all these reasons, please support the immediate release of 88.4% of segregated client funds and the addition to the Creditor’s Committee of a representative for commodity clients and brokers. The futures industry depends upon this action.
Sincerely,
[Your Name]
