FMX|Connect- WWW.FMXConnect.com (Reported on 11/1/2011)
Are the Clients of MF Global Insured Against Fraud?
A question has been raised as to if the clients of MF Global are insured on their losses as a client of a bank or securities firm would be under FDIC or SIPC? The answer is maybe.
While there is no regulatory insurance agency to cover the losses of MF Global clients, the CME itself has a guarantee fund for losses. This fund is financed by the other Primary Clearing members. So all FCMs bear some burden of MF Global’s indiscretions. We believe it amounts to a $4BB Clearing Member “error Account”
The answer depends on legal questions and accounting details: For example, are the segregated funds of a Clearing member’s clients guaranteed if those funds were lost due to fraudulent actions by that clearing member? In other words, do the other Clearing Members at CME have to pony up the lost money if MF Global lost it fraudulently as opposed to though market events and poor in-house risk management. If MF Global is found to be in violation of some CME rules, fraud, delinquency or otherwise, we believe CME’s other Clearing Members will put their collective political collateral into finding a way to not pay the money lost.
In essence, is the Exchange a donut hole? Furthermore, do the Clearing Members who surround and thus define the CME decide if clients are made whole?
We’d expect an FDIC or SIPC type vehicle to be soon announced, as confidence in markets must be kept whole.
What we worry about is the CME Clearing Members Guarantee fund not being liable due to fraud, and the government having to step in once again as a final back stop.
Note: As of 9/30 MF Global was required to segregate $862,233,4333 on behalf of customers who are trading on designated contracts markets (DCMs) and derivatives transaction execution facilities (DTEFs) and an additional $551,777,871 for customers who trade on commodity exchanges located outside of the United States. It is our understanding that approximately 100 million dollar are missing from these funds.
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