Update on the MF Global Bankruptcy

NGFA Urges Restoring Customer Funds, Assets Receive Top Priority

In the aftermath of the MF Global bankruptcy, the National Grain and Feed Association (NGFA) today said that returning 100 percent of customer-segregated funds and other property to their rightful owners should be the top priority of lawmakers, regulators, commodity exchanges and the trustee.

In testimony before the House Agriculture Committee, the NGFA said there continue to be uncertainties and complexities associated with recouping customer-segregated funds and other property, such as warehouse receipts and shipping certificates, tied up in the bankruptcy.  While former customers of MF Global currently have access to their hedging accounts, the NGFA noted that only about 60 percent of their initial margin funds that were linked to those transferred futures market positions have been returned thus far. 

“Ultimately, the number one immediate goal of the NGFA is to advocate for the return of funds and property to customers as quickly as possible,” said John Fletcher, general manager of Central Missouri Agri-Service LLC in Marshall, Mo., who testified on behalf of the NGFA.  “At the end of this process, customers must be made whole.  Any other outcome will result in a damaging loss of confidence in our risk-management system” among agricultural producers and agribusinesses.   

The trustee responsible for identifying assets of MF Global’s commodity brokerage business continues to investigate the extent of the shortage that exists in supposedly customer-segregated accounts.  MF Global filed for bankruptcy protection on Oct. 31. 

Established in 1896, the NGFA is the nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed ingredients and grain products.  It’s more than 1,050-member companies operate in excess of 7,000 facilities and handle more than 70 percent of the U.S. grain and oilseed crop.  The NGFA was the only agricultural organization invited to testify at the House hearing.

The NGFA said it “welcomed” last week’s proposal by the MF Global trustee to provide an additional distribution of funds and property that would bring the value of customer distributions to about two-thirds of the original account values.  But it said even if the trustee’s proposal is approved by the bankruptcy court, many firms still will have “significant amounts” of margin funds and excess cash tied up with the trustee – or missing altogether. 

Further, the NGFA warned that the process could be slowed by what it termed a “complicated and cumbersome” claims process outlined by the MF Global trustee.  It noted that even the “seemingly simple task” of informing the trustee of the amount of a commodities customer’s claim is not straightforward, with uncertainty about whether the value should be what existed on the date MF Global filed for bankruptcy (Oct. 31) or at the close of business four days later when the bulk transfer of futures accounts previously held by MF Global occurred.  “The difference can be hundreds of thousands of dollars,” the NGFA said.

In its testimony, the NGFA also urged lawmakers and federal agencies to review the protections that were believed to be in place for customer-segregated funds, up to $1.2 billion of which were found to be missing following the MF Global Inc. bankruptcy.  The MF Global bankruptcy has been a “shock to the industry,” the NGFA said, and represents a major challenge to restoring confidence in the future use of exchange-traded risk-management tools. 

“We have believed for decades that the risk to segregated customer funds held by members of the (commodity exchanges’) clearinghouse(s) was virtually zero, and now, we know that was not the case,” Fletcher said.  “We knew we could lose money on a trade.  But we also thought we knew that our funds were safe….”

The NGFA also testified that changes may be needed, and raised several issues that warrant review, including the following:

• Whether it would be more appropriate to vest responsibility for holding and safeguarding customer funds in an entity other than exchanges’ clearing firms – such as the exchange itself or some other independent third party. 

• Whether insurance provided through the Securities Investor Protection Corp. (SIPC) should be expanded to provide coverage for commodities, as well as securities. 

• Whether changes are needed in the ways segregated customer funds are allowed to be invested.

• Whether the commodity exchanges themselves should bear “some responsibility for customer funds lost as a result of a bankruptcy and/or malfeasance by a clearing member of the exchange.”

Further, the NGFA said a review is needed of such issues as how frequently MF Global customer accounts were audited, by whom, and who was responsible for enforcement, as well as whether requirements were administered in a proper and timely way immediately prior to the bankruptcy filing. 

“We make no judgments or recommendations today,” the NGFA said.  “And to be clear, we are not proposing that legislation or additional regulatory authority are needed.  But the issues need to be examined carefully and quickly.”

The NGFA’s membership encompasses all sectors of the industry, including country, terminal and export elevators; feed and feed ingredient manufacturers; biofuels companies; cash grain and feed merchants; end users of grain and grain products, including processors, flour millers, and livestock and poultry integrators; commodity futures brokers and commission merchants; and allied industries.  The NGFA also has strategic alliances with the North American Export Grain Association and Pet Food Institute.  Affiliated with the NGFA are 26 state and regional grain and feed trade associations.

For further information, contact Randy Gordon, vice president, communications and government relations, National Grain and Feed Association; 202-289-0873, ext. 12, rgordon@ngfa.org or Todd Kemp, director of marketing/treasurer, NGFA, 202-289-0873, ext. 16, tkemp@ngfa.org.