Thursday, December 01, 2011

House Oversight Chair Seeks Information on How CFTC, SEC and FINRA Coordinated About MF Global

In a letter to the CFTC, Rep. Randy Neugebauer (R-TX) posed a series of questions designed to determine the effectiveness of coordination among MF Global’s regulators and the SROs of which it is a member. The SEC, CFTC, FINRA, National Futures Association, CBOE and CME are responsible for MF Global’s core business and the NY Fed is responsible for the firm’s designation as a primary dealer. Rep. Neugebauer is Chairman of the House Subcommittee on Oversight and Investigations, which expects to hold hearings on the MF Global collapse on December 15.

On October 31, 2011, MF Global, a commodities broker and securities broker-dealer, filed for bankruptcy. This led to thousands of frozen customer accounts, some of who are small business owners now unable to hedge their positions against price fluctuations. The MF Global bankruptcy Trustee also reports that as much as $1.2 billion in customer funds is missing.
According to the Chairman, different information was known by multiple regulators and SROs that might have, if aggregated and shared, been used to identify the risk at MF Global earlier or might have mitigated the consequences of the collapse. For example, the most recent 10-K filed by MF Global indicated problems with internal controls, noted the Chairman, and it has been reported that FINRA required MF Global to increase its net capital pursuant to SEC Rule 15c3-1 because of the firm’s repo-to-maturity transactions..

In order to aid the subcommittee in understanding the coordination among regulators, Chairman Neugebauer asked the CFTC to respond by Dec. 7, 2011 and provide all communications and documents related to the CFTC’s oversight of MF Global with the SEC, FINRA and the other SROs or the NY Fed.
In June 2011, noted the Chairman, SEC and FINRA officials began discussing whether MF Global should set aside more capital for a growing number of repo-to-maturity trades tied to European sovereign debt. In particular, SEC officials were concerned that the firm may have been engaging in window dressing, which is a practice designed to disguise its debt levels to investors by temporarily reducing the debt it was carrying before publicly reporting quarterly financials. Rep. Neugebauer wants to know if SEC officials raised either of these concerns with Chairman Gensler or any other CFTC official.

In that context, the House oversight Chair wants to see all communications and documents transmitted between persons at the SEC and CFTC or FINRA relating to whether MF Global’s capital reserves were adequate in light of the risk posed by the repo-to-maturity trades or whether the firm may have attempted to disguise its debt level or make that level less apparent. More specifically, the Chairman asks if any questions or issues related to MF Global were raised at four separate meetings of the Financial Stability Oversight Council, of which the SEC and CFTC are members.

The apparent loss of segregated client funds at MF Global is extremely troubling to Congressman Neugebauer. The CFTC is the firm’s futures commission merchant business regulator, he noted, charged with ensuring its segregation of client funds. Thus, in his view, the CFTC should have significant insight into the internal operations of MF Global. In that context, the oversight Chair asks, in the period leading up to the firm’s bankruptcy, if the Commission came to believe that the firm’s books were not in order and, if so, how and when did the agency come to this belief and what specific information caused the agency to reach this conclusion.

The Chair seeks all communications between CFTC officials and representatives and employees of MF Global from March 1, 2010 to October 31, 2011. Similarly, all documents and communications concerning the firm generated by or transmitted between CFTC officials should be provided.

He also wants to know when the CFTC became aware of the firm’s large European sovereign debt positions and when the Commission became concerned that these positions could negatively impact the firm’s financial health. Further, he wants to know if anyone at the CFTC was concerned that the firm’s financial and liquidity problems could directly impact its customers and, if someone was concerned, all records related to those concerns.