MF Global Bankruptcy Ripples Through Grain Industry

CME Group Transfer of Accounts to Other Brokerage Firms Set to Begin

The bankruptcy filing on Oct. 31 of the financial firm MF Global created far-reaching ripple effects into the grain, feed and grain processing industry. 

For much of this week, customers of MF Global’s commodity brokerage operations faced uncertainty and a dearth of information concerning their futures market positions and disposition of cash on deposit with the firm.  But as the NGFA Newsletter went to press, senior leadership at the CME Group told the NGFA that a transfer of accounts from MF Global to other brokerage firms was scheduled to occur by Nov. 4.  Transfers to new futures commission merchants (FCMs) are expected to take place in bulk, with customers subsequently given the opportunity to request an additional transfer to another brokerage firm subsequently.

Reports are that 60 percent of associated collateral is expected to accompany the account transfers; following that, additional margining will be required with the new FCM.  It is expected that margin funds will accompany the transfers.  According to CME Group representatives, excess cash that had been held in MF Global accounts will not accompany account transfers.  The remainder of the collateral will be retained by the CME Group to cover any potential shortfall in MF Global’s brokerage accounts. 

The industry leadership of the NGFA, as well as the Risk Management Committee and NGFA staff, have been engaged directly and actively with the CME Group and the Commodity Futures Trading Commission (CFTC) throughout the week in efforts to provide timely and accurate information, and to begin assisting members who may become enmeshed in MF Global’s bankruptcy proceedings.

The Risk Management Committee has conducted two conference calls thus far – and will conduct a third on Nov. 4 – to discuss the situation.  It also has conducted calls with top CME Group officials to:  1) encourage expected account transfers and greater information from the exchange; 2) determine how the NGFA can best respond to member companies’ needs in the context of the bankruptcy proceeding; and 3) discuss potential responses in the public policy arena. 

Bankruptcy Proceeding Implications:  Meanwhile, a bankruptcy attorney with the NGFA’s outside legal counsel, Arent Fox, has advised that the MF Global bankruptcy proceeding will follow two largely discrete tracks:

• First, and of most immediate relevance to MF Global customers, there is the Securities Investor Protection Corp. (SIPC) proceeding that involves broker-dealer MF Global Inc.  A bankruptcy trustee will administer that process, which will involve forensic analysis to determine whether a shortfall exists of customer funds, which are required by law to be segregated from company funds.  If a shortfall in customer accounts is determined to exist, the trustee would make appropriate distribution of remaining funds.  Customers will need to file claims, and the forensic accounting process could be lengthy. 

Concerning potential losses of customer funds that were required to be segregated by MF Global, the CME Group has told NGFA leadership that there is no provision currently for CME or its Clearinghouse to stand behind those customer losses.

Normally, individual customers would need to file their own separate claims.  But Arent Fox has advised that there is a possibility that NGFA-member firms could band together to have one counsel handle all claims, possibly streamlining the process.  That potential option will be explored by the NGFA’s industry leadership, and further information will be provided when available.

• A second proceeding is the Chapter 11 bankruptcy involving MF Global Holdings Ltd. and MF Global Finance USA Inc.  Arent Fox has advised that if customer funds from segregated accounts have been transferred to MF Global, those funds would be demanded back by the SIPC trustee and distributed appropriately to customers. 

The CME Group issued a statement on Nov. 2 saying that it was holding “substantial excess margin collateral” from MF Global Inc., and thus remained in a “strong financial position, both with respect to MF Global and more generally.”  The CME Group said MF Global’s customer positions on the CME Group exchanges “were and continue to be over-collateralized” at CME Clearing, and that MF Global’s proprietary positions had been liquidated with no adverse market impact, leaving a substantial part of that collateral to be applied to MF Global’s total obligations at CME.

Additional information will be provided through NGFA E-Alert publications as developments warrant.

Reprinted as a courtesy and with permission of the National Grain and Feed Association (NGFA), as published in its Nov. 4, 2011 NGFA Newsletter.  The NGFA is sharing this copyrighted information because of its extreme importance to many of our members.  For those of you who are not NGFA members yet, this is the kind of valuable activity and information in which it is involved to represent the industry’s interests.  Contact NGFA Director of Marketing/Treasurer Todd Kemp at 202-289-0873, ext. 16 or at tkemp@ngfa.org for membership information.