Fri, Apr 25, 2014
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

MF Global liquidation presents unprecedented test of US bankruptcy regime for dually registered brokers

Tuesday, November 22, 2011

Lauren Teigland-Hunt
Opalesque Industry Update - The collapse of MF Global is proving significant for reasons other than its being one of the ten largest bankruptcies in U.S. history, according to attorneys at Teigland-Hunt LLP. In a client alert (attached) the law firm says liquidation of MF Global will require the unprecedented application of two vastly different bankruptcy and customer asset protection regimes that lack harmonization.

“The insolvency regimes for U.S. broker-dealers and commodity brokers protect customer assets in very different ways and have never been harmonized despite calls to do so in the wake of Lehman’s collapse,” says Lauren Teigland-Hunt, managing partner. “MF Global represents the first significant liquidation of a brokerage firm that was jointly registered as a broker-dealer with the SEC and a commodity broker with the CFTC.”

The distinctions between the insolvency regimes for broker-dealers and commodity brokers can be summarized as follows:

  • U.S. securities laws create an insurance system that requires an SEC-registered broker-dealer to join the Securities Investor Protection Corporation (“SIPC”). SIPC collects fees from its members to create a reserve fund that can be used to reimburse customer losses (up to a maximum of $500,000 per customer) in the event of a broker-dealer insolvency. Broker-dealers are therefore typically liquidated in accordance with the provisions of the Securities Investor Protection Act (“SIPA”), and a SIPC-appointed trustee oversees the liquidation.
  • In contrast SIPA does not apply to commodities brokers, which are instead liquidated in accordance with the provisions of Subchapter IV of Chapter 7 of the U.S. Bankruptcy Code. The regulatory regime applicable to commodities brokers does not provide for SIPC-type insurance protection but instead requires CFTC-registered commodity brokers, or futures commission merchants (“FCMs”), to segregate customer funds from the funds of the commodity broker in a separate bank account that is clearly designated as belonging to customers. Segregation in this manner is intended to ensure that, in the event of an FCM bankruptcy, customer funds would be identified as such and would not be available to other creditors of the FCM. A trustee overseeing the liquidation of an FCM is required to apply the CFTC’s “Part 190” rules for FCM insolvencies, which call for the determination of various account classes that govern the manner in which the trustee calculates the amount of each customer’s claim against an insolvent FCM.

The conflicts between the securities and futures regimes for insolvent brokers were nearly put to the test when Lehman Brothers Inc. (“LBI”)—also a dually registered BD/FCM—failed in 2008. Teigland-Hunt says a potential crisis was avoided, however, because the sale of LBI’s futures business to Barclays Capital was arranged shortly before LBI’s liquidation proceeding was commenced by SIPC on September 19, 2008. As a result, the trustee for the LBI liquidation (who happens to be the same trustee for MF Global) applied only the SIPC regime when unwinding LBI and did not contend with applying the CFTC insolvency regime for FCMs simultaneously.

“The potential impact of malfeasance on customer recovery from a BD/FCM is just one of the issues that these conflicting regimes fail to address with clarity,” says Ms. Teigland-Hunt. “For example, if customer funds were inappropriately diverted from an insolvent broker’s futures customer accounts but not the securities customer accounts, should futures customers bear the resulting losses alone and spare securities customers the consequences of such behavior?

Or should customers of a failed BD/FCM share ratably in losses induced by fraud?”

With over 40 of the 50 largest FCMs also registered as broker-dealers, the failures of MF Global and LBI underscore the importance of revisiting the potential benefits of developing a more consistent customer asset protection regime that balances the interests of protecting customer assets as well as the integrity of the financial markets in the event of the failure of a major brokerage firm.

Source

Press Release

bc

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Banner
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing
  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Opalesque Exclusive: Rainwater and Blue Sky - an Australian water fund emerges[more]

    Bailey McCann, Opalesque New York: Financial reporters often tout new funds and investments as uncorrelated investments, but few can say they are uncorrelated to everything but weather. Enter Blue Sky Alternative's water fund which invests in the permanent rights to Australia's water. Sev

  2. Regulatory – Expect greater SEC scrutiny of hedge funds that share information or collaborate in advance of their trades, Alternative funds to get SEC test for leverage, liquidity[more]

    Expect greater SEC scrutiny of hedge funds that share information or collaborate in advance of their trades From Thelawyer.com: A recent Wall Street Journal article — ‘Activist investors often leak their plans to a favoured few’ — focused attention on ‘activist’ investors and stock analy

  3. …And Finally – This week's least competent criminal is Austrian[more]

    From ABCnews.go.com: A German sought by authorities for alleged fraud has been arrested in Austria — after dropping into a police station to ask officers whether he was under investigation. Police in Salzburg said the 59-year-old man walked into a police station in the city on Friday night. Sp

  4. Investing – Hedge funds find pitfalls along with profits in real estate ventures, Marcato Capital Management makes new bet on Dillard’s[more]

    Hedge funds find pitfalls along with profits in real estate ventures From Law360.com: Hedge funds have joined the rush to real estate deals and development in recent months to close the financing gap left by tightening bank standards, but attorneys say many aren't prepared for the disclo

  5. Agecroft Partners estimates 90% of hedge funds using social media[more]

    The use of social media has increased significantly within the hedge fund industry over the past couple of years. Social media is broadly used by investors as part of their due diligence process on hedge funds, by service providers in their sales efforts to hedge funds, and by hedge funds to enhance