Tue, Aug 4, 2015
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   |   
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. Other Voices: Same day reporting and the evolving role of fund administrators[more]

    By: Scott Price, Head of Business Development and Client Management for North America, Maitland Ernst & Young’s latest glob

  2. Activist News - Celgene says patent-fighting hedge fund manager wants to short its shares[more]

    From Reuters.com: Celgene Corp, one of the world's largest biotechnology companies, has accused U.S. hedge fund manager Kyle Bass of attempting to profit from his attempts to wipe out several major drug patents through his Coalition for Affordable Drugs. The company asked the U.S. Patent and T

  3. Einhorn's Greenlight Capital hedge fund slumps 6.1 percent in July[more]

    From Reuters/Thefiscaltimes.com: Hedge fund mogul David Einhorn's Greenlight Capital slumped 6.1 percent in July and is now down 9 percent for the year after gold, one of the fund's top holdings, tumbled to five-year lows last week. Greenlight notified clients of its returns late on Friday, ac

  4. Cowen Group, Inc. to acquire Conifer Securities[more]

    Cowen Group, Inc. and Conifer Securities, LLC had announced the signing of a definitive agreement under which Cowen will acquire Conifer Securities, the prime services division of Conifer Financial Services LLC. The transaction, the terms of which have not yet been disclosed, was approved by the boa

  5. Cargill’s Black River Asset to shut down four hedge funds[more]

    Komfie Manalo, Opalesque Asia: Cargill Inc.’s $7.4 billion Black River Asset Management said it was closing four hedge funds with a combined $ 1 billion in assets and start returning investors money over the next several months, various media said. The hedge funds represent 15% of Black River’

 

banner