U.S. Bankruptcy Court Approves MF Global/Bank Settlement
Commentary by Bob Zwirb
The U.S. Bankruptcy Court overseeing the liquidation of failed futures commission merchant MF Global Inc. ("MFGI") has approved a settlement between MFGI and a class of former customers of MFGI for the return of $100 million of customer money to the class. The agreement resolves claims against JP Morgan, and all outstanding matters between JP Morgan and the MF Global estate, its customers and creditors, which arise from transfers of customer property during the days before MF Global entered into bankruptcy.
See:Deangelis v. Corzine Settlement Agreement (03-19-2013); Deangelis v. Corzine Proposed Settlement Order (03-28-2013); Deangelis v. Corzine Order(7-3-2013).
See also: CFTC Final Rule: Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions(77 FR 6336).
Commentary
When an FCM goes under, or is rumored to go under, banks and other financial firms that deal with it understandably try to protect their funds from loss or misuse. However, this can increase the illiquidity from which the FCM is already suffering. The Bankruptcy Code and CFTC rules prohibit the Trustee from rescinding or avoiding pre-petition margin payments made by or to an FCM except where such payments are made "[w]ith actual intent to hinder, delay, or defraud" the FCM's creditors. Here, the settlement agreement notes that the Bankruptcy Trustee "identified certain transfers from MFGI customer segregated accounts that the . . . Trustee has asserted he believes may be voidable or otherwise recoverable from JPMorgan, although subject to various defenses that might be asserted by JPMorgan." The settlement avoids litigating the difficult issues that often arise as a result of the flow of transfers of funds between customers, FCMs, prime brokers and clearing organizations immediately prior to the filing of a Chapter 11 petition.
Following the collapse of MF Global, the CFTC adopted a new model of segregation to protect customer funds called the Legal Segregation with Operational Commingling Model (or "LSOC") model of segregation. However, this model only protects segregated funds of cleared swaps customers, not those of futures customers, and by the CFTC's own admission, does not prevent any insolvency resulting from operational or investment irregularities of the kind witnessed during the MF Global collapse.