By Hilary Till (J.P. Morgan Center for Commodities, University of Colorado Denver Business School)
In the fall of 2011, futures market participants were caught off-guard when MF Global filed for bankruptcy. Essentially, this episode educated industry participants that customer protections in the U.S. commodity futures markets had been more ambiguous than expected. That said, there are a number of reforms that have been undertaken to help prevent future MF Globals. This article takes the position that a number of red flags existed as far back as 2007, regarding the firm’s financial weakness, which could have served as a warning to those investors relying on MF Global as a fiduciary.
In discussing the MF Global debacle, this article will cover the following seven areas:
(1) a brief background on the firm will be outlined;
(2) warning signs will be identified;
(3) the firm’s final week will be recalled;
(4) the response of regulators and bankruptcy trustees will be noted;
(5) the shortfall in customer segregated funds will be described;
(6) the CFTC’s charges and settlement will be mentioned; and
(7) later reforms will be summarized.
The article concludes that while MF Global’s business model appears not to have been viable after 2007, this observation does not excuse unlawful practices. In particular, the firm effectively (and arguably unlawfully) used customer funds in large-scale proprietary trades that the firm ultimately could not fund, leading to its chaotic bankruptcy.