During , MFGI started acquiring significant proprietary positions in European sovereign debt, which were financed using an instrument called a "repo-to-maturity" "RTM" 4.
The SEC's net capital rules which are similar to those of the CFTC in important respects require broker-dealers, including MFGI, to maintain certain minimum amounts of liquid capital based on their business activities. Corzine, to discuss this issue. Following the resolution of that issue, the regulators also discussed with MFGI: 1 whether MFGI needed to provide a formal net capital deficiency notice under SEC Rule 17a, which generally requires broker-dealers to provide a "hindsight notice" of any deficiency in their compliance with the SEC's financial responsibility rules; and 2 whether MFGI needed to restate and refile its monthly "FOCUS" report containing capital and certain other financial information for July , which could result in the net capital deficiency becoming public.
Its stock price declined almost 50 percent that day and continued to decline over the week. During this same week, certain credit rating agencies downgraded the firm's credit rating or put it on negative watch. SEC staff commenced a continuous on-site presence at MFGI's New York office beginning on October 27 to monitor the firm's condition, and to engage with senior management regarding the steps that were being taken by the firm. According to the firm, it was in discussions with various parties regarding potential strategic transactions, such as the sale of the firm, the sale of the RTM positions, and the sale of the firm's customer business.
By Sunday afternoon, MF Global reported that the firm was close to concluding a strategic transaction with a potential purchaser of the customer business of MFGI, which could provide customers with continued access to their accounts.
However, MF Global subsequently reported in the early morning hours of Monday, October 31, that MFGI had identified a significant deficiency in its segregated accounts for futures customers, and that the acquisition negotiations had terminated.
On that same day, the U. Giddens as trustee for the liquidation. The case was then removed to the U. Limited entered administration proceedings in the United Kingdom. The preferred method of returning securities customer assets in a SIPA liquidation generally is to transfer those assets in bulk to another solvent broker-dealer.
This approach typically provides customers with access to their securities and funds more quickly than the claims process. Accordingly, shortly after the initiation of the SIPA proceeding, the trustee solicited from other broker-dealers interest in taking over MFGI's securities customer accounts. Based on the available expressions of interest, on November 30, , the trustee filed an expedited motion seeking authorization to sell and transfer substantially all securities custody accounts to another broker-dealer.
This sale and transfer applied to approximately accounts held for non-affiliated securities customers of MFGI. The transaction was approved by the Bankruptcy Court on December 9, Securities customers are able to trade their securities and use their funds upon completion of the transfer of their accounts. Moreover, each customer is given the option of maintaining the customer's securities account at the receiving broker-dealer or moving the account to a different broker-dealer selected by the customer.
Although the claims submission deadline was January 31, , for former MFGI commodities customers and former MFGI securities customers seeking the maximum protection under SIPA, securities customers and all general claimants may still submit claims to the trustee through June 2, To that end, SEC staff has been in frequent communication with the trustee with respect to the status of the transfers and claims made by securities customers.
MFGI acted as a "carrying" firm for a small number of securities customers, meaning that it held their funds and securities. MFGI also had additional securities customers for which it executed purchases and sales of securities but did not hold funds and securities — rather, such securities were held at other custodians that settled transactions executed through MFGI on a "delivery versus payment" basis.
This rule requires that each broker-dealer that holds securities or cash for customers take two primary steps to safeguard customer property. These steps are designed to protect customer property by prohibiting broker-dealers from using customer funds and securities to support their proprietary positions or expenses. Together with the applicable SEC capital requirements, this regime also is meant to make it more likely that, if the broker-dealer fails, segregated securities and funds will be readily available to be returned to the customers.
The first step required under the customer protection rule is that the broker-dealer must maintain physical possession or control over securities that customers have paid for in full. This means that if a customer has fully paid for his or her securities, they cannot be used by the broker-dealer in its business — for example, they cannot be pledged as collateral to finance the firm's own trades or to raise funds for the firm to invest.
Further, if a customer has a margin loan, the customer protection rule strictly limits the amount of securities that can be used by the broker-dealer for financing purposes. The goal in both cases is to require broker-dealers to hold customer securities in a manner that allows those securities to be readily available to customers, either on demand or upon the liquidation of the firm.
James Giddens, the trustee overseeing the liquidation of MF Global Inc, told the Senate Banking Committee on Tuesday that his team's analysis of how the money went missing "is substantially concluded. MF Global failed last year after its disclosure of billions of dollars worth of bets on risky European debt sparked a panic among investors. It has since emerged that MF Global tapped customer funds for its own use during this crisis and failed to replace them, in violation of industry rules.
Giddens said he is "reasonably confident" that these funds will be recovered, though he added that it will be a lengthy process with no guarantee of success.
That money is now in limbo amid a dispute over which customers it belongs to, said Kent Jarrell, a spokesman for Giddens. Giddens said his team has "a solid basis for seeking the recovery of some of the funds that were transferred to JPMorgan," and is engaged in ongoing talks on the issue.
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