Mark Lennihan/Associated PressJames W. Giddens, an MF Global trustee, appeared before a Senate panel on Tuesday.The trustee tasked with returning more than $1.6 billion in missing customer money after the demise of MF Global has suggested establishing an insurance fund for commodities customers to safeguard assets in the event of a future collapse, according to a statement he read at a Congressional hearing on Tuesday.
“With such a fund in existence, three-quarters of MF Global’s commodities customers would not have been subject to any loss and could have been made whole within days of the bankruptcy filing,” James W. Giddens told members of the Senate Banking Committee. “A protective fund of this nature could be modestly funded and maintained at a minimal cost until such time as necessary to advance funds to customers, thereby allowing them to resume trading with little or no delay.”
Mr. Giddens is one of the first authorities to speak out about a need for a fund to ensure customers do not lose their money.
Since MF Global collapsed on Oct. 31, farmers, ranchers and retirees have been without roughly a third of the funds they held at the firm. Currently, commodities customers do not have a safety net should their money go missing, unlike bank customers whose deposits are insured by the Federal Deposit Insurance Corporation.
Mr. Giddens remarks echo those of Bart Chilton, a commissioner of the Commodity Futures Trading Commission, who has been advocating for an insurance fund for months.
In addition to raising the issue of an insurance fund before lawmakers on Tuesday, Mr. Giddens suggested a number of potential fixes to prevent a similar catastrophe from occurring. While some of the potential solutions have been suggested at different times over the last six months by a disparate network of customers and others, Mr. Giddens is the first official to raise them all at once.
Mr. Giddens raised the notion of holding directors and senior officers of the company liable for ensuring that proper controls are in place to keep client money safeguarded. Such a move would prevent top officials from claiming, as they have during the previous hearings examining the collapse of MF Global, that they delegated critical duties to others.
Mr. Giddens, who has been on the front line with customers since the firm’s collapse, also urged the committee to consider suitability requirements for customers. Through the course of the claims process, Mr. Giddens encountered numerous traders who invested their life savings or retirements in commodity futures with MF Global that they may not have understood, according to his testimony.
While customers have on the whole received about 70 percent of their funds, those who traded on overseas exchanges have received almost none of their money, owing to bankruptcy codes in the United Kingdom that trapped about $700 million there.
Both the collapse of Lehman Brothers and MF Global have highlighted “significant gaps between protections afforded customers in U.S. and foreign countries, such as the United Kingdom, arising largely from differences in insolvency laws and the absence of clear legal precedent,” Mr Giddens, who also served as the trustee overseeing the Lehman Brothers bankruptcy, is expected to say.
“When a company like MF Global or Lehman Brothers fails, it is important that property segregated in one country for customers in another country is returned to the trustee or administrator in the country where the customer resides,” he is expected to testify. “In my experience, however, these tend to be the last issues to be resolved, which often require protracted litigation.”
In addition, Mr. Giddens flagged another crucial difference between the treatment of customer money traded on overseas exchanges and money traded domestically. A commodities brokerage does not have to calculate secured overseas funds in the same manner it calculates those domestically traded, a disparity that allowed MF Global to legally use customer money in the days before it collapsed.
Mr. Giddens suggested lawmakers close that loophole, a move which “could help ensure that all customer funds are properly segregated at all times and eliminate a difference in treatment among customers of which most customers are unaware.”