Bloomberg News

CFTC Plans Vote on ‘MF Rule’ to Restrict Use of Client Funds

November 25, 2011

(Updates with commissioner comments starting in eighth paragraph.)

Nov. 16 (Bloomberg) -- The U.S. Commodity Futures Trading Commission may vote Dec. 5 to restrict how derivatives brokers invest client funds, a measure that gained urgency after $600 million went missing in MF Global Holdings Ltd.’s collapse.

CFTC Chairman Gary Gensler said today during a speech in Chicago that he plans to set a vote on the rule, first proposed in October 2010. It would govern how client assets may be invested in money-market funds as well as limit investments in foreign sovereign debt and internal repurchasing agreements.

Gensler delayed the rule in July after being lobbied by broker-dealers and their executives including former New Jersey Governor Jon S. Corzine, then MF Global’s chairman and chief executive officer. There was little further discussion until MF Global filed for bankruptcy Oct. 31, according to two people familiar with the matter.

Restrictions on how brokerages handle customer assets may hurt some small independent firms, whose profits are being pinched as yields on short-term investments shrivel.

“It has to be liquid,” said Niamh Alexander, an analyst with KBW Inc. whose coverage of brokerages included MF Global. “Could this further crimp the earnings potential? Yes, but I think we’re already living through a very, very lean time just because the rates are so low on a lot of these short-dated instruments in which they have to invest.”

European Bets

MF Global, which placed $6.3 billion in wrong-way bets on European sovereign debt, is the first Wall Street firm to fail since the 2010 Dodd-Frank regulatory overhaul. With Democrats and Republicans in Congress gridlocked over whether the law is too strict or too weak, the bankruptcy’s immediate impact may be confined to the CFTC’s rulemaking.

“It is critical that the CFTC finish a rule that will enhance customer protections regarding where clearinghouses and futures commission merchants can invest customer funds,” Gensler said in today’s speech.

Bart Chilton, part of Gensler’s Democratic majority on the five-member commission, dubbed the customer funds measure “the MF rule” and said Nov. 4 that it should be considered “at the very earliest opportunity.”

Commissioner Scott O’Malia, a Republican, sounded a more cautious note in a statement today.


“Somewhat prematurely, this proposal is being hailed as the solution to the MF Global problem,” O’Malia said. “At this time, we have not identified the cause of the segregation shortfall, and any action that we take obviously cannot be the solution until we have greater clarification on what caused the problem.”

MF Global, which reported earning $287 million in net interest income in fiscal 2011 from investments and transactions involving client collateral, had argued in a Dec. 2 letter that the CFTC’s rule aimed to “fix something that isn’t broken.” The letter was signed by Laurie R. Ferber, executive vice president and general counsel at MF Global, who reported to regulators on the day the company filed for bankruptcy that the firm had a “significant shortfall” in funds that were supposed to be segregated.

It’s not known if MF Global’s missing funds are related to practices that would have been prohibited by the rule. Along with the CFTC, the Justice Department, Securities and Exchange Commission and the bankruptcy trustee’s staff are probing the firm’s cash movement, James W. Giddens, the trustee, said on his website.


Corzine personally lobbied against the CFTC’s rule on client funds. “It will be costly,” he said in a June speech at a New York conference.

Gensler recused himself from the probe because of his ties to Corzine. Gensler worked at Goldman Sachs Group Inc. when Corzine was co-chairman, and was a Senate aide while the Democrat served as a U.S. senator from New Jersey.

MF Global wasn’t the only firm arguing against the measure. “We believe that in-house transactions have been targeted for elimination without due consideration of how such facilities enhance not just capital efficiency, but also liquidity,” William McCoy, managing director and counsel of Morgan Stanley, said in a Dec. 3 letter to the CFTC.

Gensler said last week that his delay of the rule wasn’t due to preferential treatment of Corzine or MF Global. ‘I thought it needed more time for deliberation amongst the professionals,” he told reporters in Chicago today.

Public Comment

The agency had planned to repropose at least part of the rule to seek further public comment before a final vote, according to the people familiar with the matter, who spoke on condition of anonymity because the process is private.

Before MF Global’s failure, “I used to think that the existing safeguards were probably sufficient,” said Craig Pirrong, a finance professor at the University of Houston. “In light of this it’s reasonable to conclude that the system does need some strengthening.”

The collapse of MF Global has prompted some Democrats to call for even further restrictions on non-bank financial firms, which aren’t subject to the same Dodd-Frank limits on leverage and proprietary trading as banks.

“There is nothing in Dodd-Frank that would allow the regulators to do anything about this -- where they got themselves over-leveraged and got themselves in this predicament,” said Representative Collin Peterson, the top Democrat on the House Agriculture Committee, which oversees regulation of the futures and derivatives markets.

‘Regulator Grab’

Republicans who have argued that Dodd-Frank reaches too far and is restricting economic growth said they had no appetite for adding more rules to the mix.

“It’s an amazing regulator grab that has occurred since Dodd-Frank,” Senator Bob Corker, a Republican from Tennessee, said in an interview Nov. 10 with Bloomberg Television. “You know, they had the abilities already to deal with their old regulatory powers with MF, and it didn’t happen.”

The partisan stalemate means regulators will focus most closely on the question of protecting customer accounts “because it’s most directly linked to the MF Global situation,” said Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods.

News on financial regulation: NI FINREG <GO> News on government and derivatives: TNI GOV DRV <GO> News on CFTC: NI CFT <GO> Bloomberg credit crunch scorecard: WDCI CHART <GO> Financial company news: FTOP <GO> Top Washington News: WDC <GO>

--With assistance from Donal Griffin, Laura Marcinek and Tiffany Kary in New York and Elizabeth Campbell in Chicago. Editors: Lawrence Roberts, Gregory Mott.

To contact the reporter on this story: Silla Brush in Washington at

To contact the editors responsible for this story: Lawrence Roberts at Rick Green in New York at

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