MF Global bankruptcy files a "disgraceful disconnect"

December 18, 2011 06:00 PM

An unintentional loss of connection to the CME Globex trading engine is called an "ungraceful disconnect." Your working orders are canceled and your position essentially is frozen. What happened on Monday, Oct. 31, 2011 had a similar result, but the cause was a total disgrace — the MF Global bankruptcy filing a "disgraceful disconnect."

The scene on CME Group's trading floor morning of Oct. 31 was utter chaos. Every employee and trader from MF Global who hadn't passed through the turnstiles by 7:30 a.m. found that their key cards were turned off. In addition, their electronic access to the CME's Globex trading engine had been severed. Every MF Global customer also had been cut off from the Exchange. Bryan Durkin, COO of CME Group, was present on the fourth floor talking to the scores of traders milling around who could not gain entrance to the exchange. The bankruptcy petition of MF Global, filed that morning, came as a shock to everyone and the consequences were devastating.

It is not unheard of for a futures commission merchant (FCM) to fail. It happened in 2008 with Lehman and before that it happened to Sentinel and to Refco. But in every case prior to MF Global, the CME was able to arrange an orderly transition of business to one or more FCMs. During those transitions, customers were not barred from the market, employees were not locked out of the building and the integrity of the futures industry was maintained. The entire business of MF Global was to be transferred intact to Interactive Brokers, but they backed out when a shortfall in customer segregated funds was discovered. That left the entire matter in the hands of the bankruptcy court and CME Group was powerless to step in.

Through its principals, MF Global has blazed a trail into new and uncharted territory. While there have been instances in the past where FCMs have entered bankruptcy with shortfalls in customer segregated funds, never before has the sanctity of customer segregated funds been violated so blatantly and in such unprecedented amounts. The first few days after the filing, we thought that we were looking at sloppy bookkeeping. But as days dragged into weeks and the shortfall continued to grow, it appeared that a concerted effort was made to loot the customer segregated funds to support the proprietary positions of MF global.

We in the futures industry are guilty in repeating the phrase that no one has ever lost money because of the failure of an FCM. Apparently that is no longer true. The Securities Investor Protection Corporation (SIPC) bankruptcy trustee still contends that there is $1.2 billion missing from customer segregated funds. This is extremely discouraging.

The failure of MF Global has devastated some 38,000 customers, thousands of employees and hundreds of creditors. It also is a black eye for the futures industry as a whole. Ours is an industry built on honesty and trust. Your FCM guarantees that your trades will be made good — win, lose or draw. CME Clearing guarantees that all the trades submitted by your FCM will be made good — win, lose or draw. MF Global has broken the faith and taken customer funds. I am not certain that the futures industry ever can recover fully.

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About the Author

Independent compliance consultant and expert witness with 35 years experience in the Futures industry. Most recently Marc served as COO and chief compliance officer for Dorman Trading in Chicago, where he still serves as General Counsel. Marc is a licensed attorney and CPA and serves on the Futures Commission Merchant Advisory Committee of the National Futures Association. He can be reached at or on the website