Financial History Issue 118 (Summer 2016) | Page 40
When All Else Fails
the senior-most officer of that FCM must
approve that transfer. This is commonly
referred to as the “Jon Corzine Rule.”
Corzine was the CEO of MF Global at the
time of its bankruptcy, and a large amount
of funds had been transferred out of the
segregated account.
There are some key legal distinctions
involving the failure of an FCM versus that
of a stock brokerage firm. The insolvency
of a stock brokerage firm is governed by
the Securities Investor Protection Act and
Section III of the US Bankruptcy Code.
These laws provide the special SIPC insurance coverage noted above. An FCM’s
bankruptcy is governed by Section IV of
the US Bankruptcy Code and Part 190
of the CFTC regulations. Together, they
deal with the pro rata treatment of the
non-defaulting customers of the failed
FCM. They also do not treat property of a
customer that can be specifically identified
as belonging to that customer.
This is not the case for stock brokerage
firms that fail. If a customer owns 100
shares of ABC, then he will receive back
those 100 shares. On the other hand, if
a customer deposits US Treasury bills
to satisfy his margin requirements in a
futures account, those government securities will be sold and converted to cash,
with the customer receiving his pro rata
share if a shortfall occurs
Customer Protection in Global Markets
The industry has learned quite a bit in
recent years given these large FCM bankruptcies, but there is more to be done given
that today’s markets are clearly global in
nature. People living in the United States
can now easily trade financial products on
more than 35 non-US exchanges. Yet, the
bankruptcy laws in those countries vary
greatly from the US Bankruptcy Code,
which has specific provisions dealing with
the failure of a stock brokerage firm (Section III) and the failure of an FCM (Section IV). Outside the United States, many
countries do not have laws protecting
customers of failed financial firms.
What is now urgently needed is for the
G-20 countries to devise a plan to harmonize the bankruptcy laws of these countries so that customers of failed financial
Bloomberg / Andrew Harrer
continued from page 34
Jon S. Corzine, former chairman and CEO of MF Global, testifies before the House Financial Services
Committee on December 15, 2011. US authorities were investigating whether MF Global intentionally tapped
customer funds to cover the bankrupt firm’s margin payments on European government bond trades.
firms are treated fairly, hopefully with
similar, or approximately similar, results.
Most of the focus since the financial crisis
in 2008 has dealt with how OTC derivatives should be regulated. The G-20 countries are gaining ground on the promise
they all made in Pittsburgh in September
2009 to have a more harmonized global
regulatory system in place that regulates
OTC derivatives. Now, they need to focus
on protecting customers of failed financial
firms in a more harmonized way.
Ronald H. Filler is a Professor of Law
and the Director of the Financial Services
Institute at New York Law School. He is a
Public Director and Member of the Executive Committee of the National Futures
Association, a Public Director and Chair
of the Regulatory Oversight Committee
(ROC) of SWAP-EX and a Board Member of Global Clearing & Settlement.
Sources
Commodity Exchange Act, 7 USC 1 ET SEQ.
Filler, Ronald H. “The 7th Circuit and Sentinel — Five Times a Charm.” Futures &
Derivatives Law Report. April 2016.
Filler, Ronald H. “Are Customer Segregated/
Secured Amount Funds Properly Protected
38 FINANCIAL HISTORY | Summer 2016 | www.MoAF.org
After Lehman?” Futures & Derivatives Law
Report. November 2008.
Filler, Ronald H. “Ask the Professor: What Is
the Impact on MF Global From the Recent
UK Supreme Court Decision Involving
Lehman Brothers International (Europe)?”
Futures & Derivatives Law Report. April
2012.
Filler, Ronald H. “Energy Derivatives: Which
Country (U.S. or U.K.) Provides the Best
Customer Asset Protections to an Energy
Trading Firm If Its Brokerage Firm/Counterparty Files for Bankruptcy?” The Energy
Law Journal. Fall 2016.
Filler, Ronald H. and Jerry W. Markham.
Regulation of Derivative Financial Instruments (Swaps, Options and Futures). West
Academic. 2014.
Federal Deposit Insurance Corporation, at
www.fdic.gov.
Securities Investor Protection Corporation, at
www.sipc.org.
US Bankruptcy Code, 11 USC 701–784.
US Commodity Futures Trading Commission
(CFTC) Rules 1.20–1.29, Part 22, Part 30 and
Part 190, 17 CFR 1.20–1.29, Part 22, Part 30
and Part 190.