How MF Global Collapse Pushed CFTC to Approve Client Funds Rule

  • By: Staff Editor
  • Date: December 12, 2011
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The spectacular collapse of brokerage firm MF Global in November, 2011, and subsequent revelations that millions of dollars of its customers’ money was misused and is missing, spurred the Commodity Futures Trading Commission (CFTC) to finally approve its year old “Client Funds” rule.
CFTC delayed the approval and implementation of the rule because of strong opposition by Jon Corzine, the CEO of MF Global, who resigned after the firm filed for bankruptcy. The conflict of interest and the influence that Corzine exerted brought the commission a barrage of criticism, forcing it to speed up its approval of the rule.
Gary Gensler, the CFTC chairman was quoted in The New York Times as saying: “I believe that this rule is critical for the safeguarding of customer money.”
What did MF Global do wrong?
Brokerage firms such as MF Global do invest client money, but what the firm did wrong was to mix these with the company funds in order to meet its own financial liabilities and obligations. The missing client money is estimated to be around $1.2 billion. The CFTC and FBI are both conducting investigations into what exactly has happened to the missing funds.
Summary of the CFTC “Client Funds” Rule
The CFTC’s “Client Funds” Rule, approved on December 5, 2011, will override a 2005 policy that previously allowed brokers to use client money in in-house brokerage firm transactions. These repurchase agreements or repos are banned by the rule. The Wall Street Journal describes repos as swap agreements in which part of a futures brokerage would exchange client funds for securities such as municipal bonds or foreign government bonds held at another part of the same firm. The firm would then ‘pocket’ the higher interest rates generated by these securities.
The rule also prohibits brokerages from investing client funds in foreign sovereign debt (an investment decision that led to MF Global’s downfall.)
Brokers will still be allowed to do the following under the rule:
  • Create third-party deals
  • Invest client money in the following:
    • US Treasuries
    • Municipal bonds and debt
    • Money-market funds
    • Debt of Fannie Mae and Freddie Mac as long as they are under the conservatorship of the FHFA
When will the rule come into effect?
The CFTC Client Funds rule will come into effect 60 days after it is published in the Federal Register and brokers will have to start complying with it within 180 days.

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