Apr.SBC Examines MF Global Collapse – Policy Implications, Lessons Learned
AT TODAY’S SENATE BANKING, HOUSING, AND URBAN AFFAIRS HEARING, lawmakers questioned leading figures investigating the MF Global bankruptcy. In his opening statement, Chairman Tim Johnson (D-S.D.) expressed “deep concern” that in the six months since MF Global filed for bankruptcy, customers still have “not recovered the $1.6 billion removed from what should have been protected customer accounts.” Johnson also stated that effective market oversight “demands that we fully fund our regulatory cops on the beat.”
In his opening statement, Richard Shelby (D-Ala.) said the MF Global was “the greatest consumer protection failure since the enactment of the Dodd-Frank Act.” He added, “the purpose of today’s hearing should be to help the Committee determine which regulators failed to do their job, and why.”
Shelby also said the Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler’s recusal “now shields him from explaining his actions. This is unacceptable.”
Testimony
In his testimony, James Giddens, Trustee for the Securities Investment Protection Act Liquidation of MF Global Inc., offered the following proposals “that may merit further study:” 1) Strict liability for the senior officers and directors of a commodities broker; 2) Establishment of a commodities customer protection fund; 3) Suitability requirements for commodities customers; 4) Segregation requirements in excess of 100 percent of customer funds; notice requirements for the withdrawal of “excess” segregated funds; 5) Complete segregation of 30.7 “secured” funds and elimination of alternative calculation; 6) Improved international cooperation.
In his first proposal, Giddens suggested requiring the chief executive officer, the chief financial officer, the chief compliance officer, and the general counsel of a futures commission merchant (FCM) “to certify not only their company’s financial statements but also their compliance with customer segregation requirements on a frequent and continuing basis.” He added that these senior officers should also be responsible for “establishing and overseeing a company’s internal controls and procedures and certifying that they have done so.” Congress should consider making senior officers “personally and civilly liable for their certifications without any requirement of proving intent and without permitting them to defend on the basis that they delegated these essential duties and responsibilities to others,” he said.
For his second proposal, Giddens said a fund should be established to protect smaller accounts, up to $100,000, which would make customers whole “very quickly” if a shortfall is discovered in customers’ segregated accounts.
Under his third proposal, commodities customers should be subject to suitability requirements, “such as those that the Securities and Exchange Commission (SEC) has approved and are applicable to securities customers.” In addition, under Giddens fourth proposal, consideration should be given “to requiring an FCM to segregate an amount in excess of 100 percent of customer funds.”
For this fifth and sixth proposals, Giddens called for FCMs to be required to compute the secured amounts for customer funds under the Net Liquidating Equity Method, and called for international cooperation on insolvency laws.
In his testimony, Louis Freeh, Trustee of MF Global Holdings, said it was “never my intention to pay any bonuses,” and refuted the media report alleging his intention to pay bonuses to senior officials at MF Global that Freeh has retained to help maximize the value of the MF Global estate for its creditors.
Turning to the investigation, Freeh will file a report with the Bankruptcy Court “on or before June 4, 2012,” and has also filed a motion seeking authority to issue subpoenas for the production of documents and examination of witnesses, which will be heard on April 25, 2012.
In her opening testimony, Jill Sommers, CFTC Commissioner, discussed why the claims of MF Global’s commodity customers are in a Securities Investment Protection Act (SIPA) proceeding. Because MF Global was a registered broker-dealer (BD) and FCM, “it is not possible to initiate a SIPA liquidation for the BD and a separate bankruptcy proceeding for the FCM.” She noted that when placed into a SIPA liquidation proceeding, the relevant provisions and protections of the Bankruptcy Code, the Commodity and Exchange Act (CEA) and the Commission’s regulations “apply to the claims of the commodity customers just as they would if the entity were solely an FCM and in a non-SIPA bankruptcy proceeding.”
Turning to Part 30 secured accounts, Sommers said “they provide for an alternative calculation of the amount of funds required to be segregated that does not afford the same protections as the net liquidating equity calculation that is used for Section 4(d) funds.” She added, “this is something that I think should be changed.”
In addition, while CFTC staff have “not yet proposed amendments to Commission regulations, it is expected that the staff will make recommendations in several areas, including rules requiring FCMs to establish certain internal controls and other requirements related to their handling of customer funds, rules requiring greater transparency and reporting regarding the investment and holding of customer funds, and amending the requirements governing Part 30 secured accounts,” she said.
In his opening testimony, Robert Cook, Director of the Division of Trading and Markets and the Securities and Exchange Commission (SEC), said the SEC continues to work with self-regulatory organizations (SRO) to strengthen BD financial stability requirements. Cook added that the SEC is currently reviewing comments on a June 2011 rule proposal that would clarify and strengthen the rules governing the audits of BDs. He added that the SEC “is working to finalize a recommendation to the Commission.”
SEC staff are also evaluating other possible rule changes such as limiting, for purposes of the customer reserve fund required by Rule 15c3-3, “the amount of cash a BD could maintain in any one bank, as a percentage of capital of the broker-dealer or the bank.” Cook said the SEC continues to engage in a number of efforts – both domestic and international – “to share more and better data and qualitative assessments of firms and markets,” with some efforts involving the coordination with the SROs.
In his opening statement, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (FINRA), discussed FINRA’s involvement with MF Global in the months leading up to MF Global’s bankruptcy. Ketchum said the firm’s failure “provides an important opportunity to improve regulations.”
FINRA and the Chicago Mercantile Exchange (CME) have established regular coordination calls to share information on roughly 50 firms that are both BDs and FCMs. Ketchum also touched on FINRA’s two rulemaking efforts aimed at enhancing financial surveillance and expediting the return of customer funds and securities in the event of liquidation.
In his testimony, Terrence Duffy, Executive Chairman at CME, said Congress can help protect customers whose collateral is safeguarded at a clearing house by “changing the bankruptcy code to permit clearinghouses to transfer fully collateralized customers to other clearing members despite the failure of a clearing member.” Duffy said the CME group “is already implementing proposals” including: 1) Requiring all FCMs to file daily segregation reports; 2) Performing more frequent periodic spot checks to monitor FCM compliance with segregation requirements; 3) Requiring a principal of the FCM to approve any disbursement of customer segregated funds not made for the benefit of customers and that exceeds 25% of the firm’s excess segregated funds; and 4) Requiring all FCMs to file bi-monthly Segregation Investment Detail Reports, reflecting how customer segregated funds are invested and where those funds are held.
The CME has also established the CME Group Family Farmer and Rancher Protection Fund which protects customers and their cooperatives against losses of up to $25,000 per participant, with cooperatives eligible for up to $100,000.
Question and Answer
Both Sens. Johnson and Jon Tester (D-Mont.) touched on reports about bonuses to former and current MF Global employees. Freeh said he would not be issuing bonuses, nor would he in the future.
Johnson asked Giddens whether Congress should revisit extending an insurance coverage to commodities accounts similar to coverage provided under securities accounts issued by the Securities Investor Protection Act (SIPC).
Giddens said yes, adding that the SIPA fund has several billion dollars of assets and the ability to assess the financial industry for additional funds. He added that those funds would assist to cover shortfalls and enable the trustee to transfer customer accounts to other solvent FCMs.
Asked by Johnson whether the CFTC is bringing any legal actions to recover $700 million of U.S. customer funds held in the U.K., Sommers said the CFTC does not have the authority to bring an action in a U.K. court proceeding. She added that the CFTC is working closely with Giddens and his staff and will continue to monitor all actions that come about from the proceeding.
In a question from Sen. Robert Menendez (D-N.J.) regarding what individuals at what level “created the set of decisions that created the challenge that we have,” Freeh said “we’re just beginning this process” adding that we cannot identify the responsible parties “at this point.”
In a follow up question from Menendez on the likelihood that Gidden’s would be able to recover money from customer segregated accounts held up in the U.K., Gidden’s said “we’re reasonably confident” that there will be a positive outcome from the U.K. court, “but there’s no guarantee of that.”
Sens. Jerry Moran (R-Kan.) and Shelby questioned Sommers about CFTC Chairman Gensler’s recusal. Sommers said she was not familiar with the reasons behind Gensler’s recusal, that it was never discussed amongst the CFTC commissioners, and she does not know whether something happened in the days following the MF Global bankruptcy that caused Gensler to recuse himself.
For more information on the hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:Senate Banking Committee,Publish Year:2012
AT TODAY’S SENATE BANKING, HOUSING, AND URBAN AFFAIRS HEARING, lawmakers questioned leading figures investigating the MF Global bankruptcy. In his opening statement, Chairman Tim Johnson (D-S.D.) expressed “deep concern” that in the six months since MF Global filed for bankruptcy, customers still have “not recovered the $1.6 billion removed from what should have been protected customer accounts.” Johnson also stated that effective market oversight “demands that we fully fund our regulatory cops on the beat.”
In his opening statement, Richard Shelby (D-Ala.) said the MF Global was “the greatest consumer protection failure since the enactment of the Dodd-Frank Act.” He added, “the purpose of today’s hearing should be to help the Committee determine which regulators failed to do their job, and why.”
Shelby also said the Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler’s recusal “now shields him from explaining his actions. This is unacceptable.”
Testimony
In his testimony, James Giddens, Trustee for the Securities Investment Protection Act Liquidation of MF Global Inc., offered the following proposals “that may merit further study:” 1) Strict liability for the senior officers and directors of a commodities broker; 2) Establishment of a commodities customer protection fund; 3) Suitability requirements for commodities customers; 4) Segregation requirements in excess of 100 percent of customer funds; notice requirements for the withdrawal of “excess” segregated funds; 5) Complete segregation of 30.7 “secured” funds and elimination of alternative calculation; 6) Improved international cooperation.
In his first proposal, Giddens suggested requiring the chief executive officer, the chief financial officer, the chief compliance officer, and the general counsel of a futures commission merchant (FCM) “to certify not only their company’s financial statements but also their compliance with customer segregation requirements on a frequent and continuing basis.” He added that these senior officers should also be responsible for “establishing and overseeing a company’s internal controls and procedures and certifying that they have done so.” Congress should consider making senior officers “personally and civilly liable for their certifications without any requirement of proving intent and without permitting them to defend on the basis that they delegated these essential duties and responsibilities to others,” he said.
For his second proposal, Giddens said a fund should be established to protect smaller accounts, up to $100,000, which would make customers whole “very quickly” if a shortfall is discovered in customers’ segregated accounts.
Under his third proposal, commodities customers should be subject to suitability requirements, “such as those that the Securities and Exchange Commission (SEC) has approved and are applicable to securities customers.” In addition, under Giddens fourth proposal, consideration should be given “to requiring an FCM to segregate an amount in excess of 100 percent of customer funds.”
For this fifth and sixth proposals, Giddens called for FCMs to be required to compute the secured amounts for customer funds under the Net Liquidating Equity Method, and called for international cooperation on insolvency laws.
In his testimony, Louis Freeh, Trustee of MF Global Holdings, said it was “never my intention to pay any bonuses,” and refuted the media report alleging his intention to pay bonuses to senior officials at MF Global that Freeh has retained to help maximize the value of the MF Global estate for its creditors.
Turning to the investigation, Freeh will file a report with the Bankruptcy Court “on or before June 4, 2012,” and has also filed a motion seeking authority to issue subpoenas for the production of documents and examination of witnesses, which will be heard on April 25, 2012.
In her opening testimony, Jill Sommers, CFTC Commissioner, discussed why the claims of MF Global’s commodity customers are in a Securities Investment Protection Act (SIPA) proceeding. Because MF Global was a registered broker-dealer (BD) and FCM, “it is not possible to initiate a SIPA liquidation for the BD and a separate bankruptcy proceeding for the FCM.” She noted that when placed into a SIPA liquidation proceeding, the relevant provisions and protections of the Bankruptcy Code, the Commodity and Exchange Act (CEA) and the Commission’s regulations “apply to the claims of the commodity customers just as they would if the entity were solely an FCM and in a non-SIPA bankruptcy proceeding.”
Turning to Part 30 secured accounts, Sommers said “they provide for an alternative calculation of the amount of funds required to be segregated that does not afford the same protections as the net liquidating equity calculation that is used for Section 4(d) funds.” She added, “this is something that I think should be changed.”
In addition, while CFTC staff have “not yet proposed amendments to Commission regulations, it is expected that the staff will make recommendations in several areas, including rules requiring FCMs to establish certain internal controls and other requirements related to their handling of customer funds, rules requiring greater transparency and reporting regarding the investment and holding of customer funds, and amending the requirements governing Part 30 secured accounts,” she said.
In his opening testimony, Robert Cook, Director of the Division of Trading and Markets and the Securities and Exchange Commission (SEC), said the SEC continues to work with self-regulatory organizations (SRO) to strengthen BD financial stability requirements. Cook added that the SEC is currently reviewing comments on a June 2011 rule proposal that would clarify and strengthen the rules governing the audits of BDs. He added that the SEC “is working to finalize a recommendation to the Commission.”
SEC staff are also evaluating other possible rule changes such as limiting, for purposes of the customer reserve fund required by Rule 15c3-3, “the amount of cash a BD could maintain in any one bank, as a percentage of capital of the broker-dealer or the bank.” Cook said the SEC continues to engage in a number of efforts – both domestic and international – “to share more and better data and qualitative assessments of firms and markets,” with some efforts involving the coordination with the SROs.
In his opening statement, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (FINRA), discussed FINRA’s involvement with MF Global in the months leading up to MF Global’s bankruptcy. Ketchum said the firm’s failure “provides an important opportunity to improve regulations.”
FINRA and the Chicago Mercantile Exchange (CME) have established regular coordination calls to share information on roughly 50 firms that are both BDs and FCMs. Ketchum also touched on FINRA’s two rulemaking efforts aimed at enhancing financial surveillance and expediting the return of customer funds and securities in the event of liquidation.
In his testimony, Terrence Duffy, Executive Chairman at CME, said Congress can help protect customers whose collateral is safeguarded at a clearing house by “changing the bankruptcy code to permit clearinghouses to transfer fully collateralized customers to other clearing members despite the failure of a clearing member.” Duffy said the CME group “is already implementing proposals” including: 1) Requiring all FCMs to file daily segregation reports; 2) Performing more frequent periodic spot checks to monitor FCM compliance with segregation requirements; 3) Requiring a principal of the FCM to approve any disbursement of customer segregated funds not made for the benefit of customers and that exceeds 25% of the firm’s excess segregated funds; and 4) Requiring all FCMs to file bi-monthly Segregation Investment Detail Reports, reflecting how customer segregated funds are invested and where those funds are held.
The CME has also established the CME Group Family Farmer and Rancher Protection Fund which protects customers and their cooperatives against losses of up to $25,000 per participant, with cooperatives eligible for up to $100,000.
Question and Answer
Both Sens. Johnson and Jon Tester (D-Mont.) touched on reports about bonuses to former and current MF Global employees. Freeh said he would not be issuing bonuses, nor would he in the future.
Johnson asked Giddens whether Congress should revisit extending an insurance coverage to commodities accounts similar to coverage provided under securities accounts issued by the Securities Investor Protection Act (SIPC).
Giddens said yes, adding that the SIPA fund has several billion dollars of assets and the ability to assess the financial industry for additional funds. He added that those funds would assist to cover shortfalls and enable the trustee to transfer customer accounts to other solvent FCMs.
Asked by Johnson whether the CFTC is bringing any legal actions to recover $700 million of U.S. customer funds held in the U.K., Sommers said the CFTC does not have the authority to bring an action in a U.K. court proceeding. She added that the CFTC is working closely with Giddens and his staff and will continue to monitor all actions that come about from the proceeding.
In a question from Sen. Robert Menendez (D-N.J.) regarding what individuals at what level “created the set of decisions that created the challenge that we have,” Freeh said “we’re just beginning this process” adding that we cannot identify the responsible parties “at this point.”
In a follow up question from Menendez on the likelihood that Gidden’s would be able to recover money from customer segregated accounts held up in the U.K., Gidden’s said “we’re reasonably confident” that there will be a positive outcome from the U.K. court, “but there’s no guarantee of that.”
Sens. Jerry Moran (R-Kan.) and Shelby questioned Sommers about CFTC Chairman Gensler’s recusal. Sommers said she was not familiar with the reasons behind Gensler’s recusal, that it was never discussed amongst the CFTC commissioners, and she does not know whether something happened in the days following the MF Global bankruptcy that caused Gensler to recuse himself.
For more information on the hearing, please click here.