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EXAMINING THE FUTURES MARKETS: 

RESPONDING TO THE FAILURES 

OF MF GLOBAL AND PEREGRINE 

FINANCIAL GROUP 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE, 

NUTRITION AND FORESTRY 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

AUGUST 1, 2012 

Printed for the use of the 

Committee on Agriculture, Nutrition and Forestry 

( 

Available via the World Wide Web: http://www.fdsys.gov/ 

AGRIC-48812 with DISTILLER

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

DEBBIE STABENOW, Michigan, Chairwoman 

PATRICK J. LEAHY, Vermont 

TOM HARKIN, Iowa 

KENT CONRAD, North Dakota 

MAX BAUCUS, Montana 

E. BENJAMIN NELSON, Nebraska 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Jr., Pennsylvania 

AMY KLOBUCHAR, Minnesota 

MICHAEL BENNET, Colorado 

KIRSTEN GILLIBRAND, New York 

PAT ROBERTS, Kansas 

RICHARD G. LUGAR, Indiana 

THAD COCHRAN, Mississippi 

MITCH MCCONNELL, Kentucky 

SAXBY CHAMBLISS, Georgia 

MIKE JOHANNS, Nebraska 

JOHN BOOZMAN, Arkansas 

CHARLES E. GRASSLEY, Iowa 

JOHN THUNE, South Dakota 

JOHN HOEVEN, North Dakota 

CHRISTOPHER J. ADAMO, Majority Staff Director 

JONATHAN W. COPPESS, Majority Chief Counsel 

JESSICA L. WILLIAMS, Chief Clerk 

MICHAEL J. SEYFERT, Minority Staff Director 

ANNE C. HAZLETT, Minority Chief Counsel 

(II) 

AGRIC-48812 with DISTILLER

(III) 

C O N T E N T S 

Page 

HEARING(S): 

Examining the Futures Markets: Responding to the Failures of MF Global 

and Peregrine Financial Group ........................................................................... 1 

Wednesday, August 1, 2012 

STATEMENTS PRESENTED BY SENATORS 

Stabenow, Hon. Debbie, U.S. Senator from the State of Michigan, Chairwoman, Committee on Agriculture, Nutrition and Forestry ............................ 1 

Roberts, Hon. Pat, U.S. Senator from the State of Kansas .................................. 2 

Panel I 

Gensler, Hon. Gary, Chairman, Commodity Futures Trading Commission, 

Washington, DC ................................................................................................... 4 

Sommers, Hon. Jill, Commissioner, Commodity Futures Trading Commission, 

Washington, DC ................................................................................................... 6 

Giddens, James, Trustee for the Securities Investment Protection Act Liquidation of MF Global, Inc., Hughes Hubbard & Reed, New York, NY .......... 7 

Bodenstein, Ira, Chapter 7 Trustee for Peregrine Financial Group, Inc., Shaw 

Gussis, Chicago, IL .............................................................................................. 9 

Panel II 

Lukken, Hon. Walter, President and Chief Executive Officer, Futures Industry Association, Washington, DC ........................................................................ 31 

Duffy, Terrence, President and Executive Chairman, CME Group, Chicago, 

IL ........................................................................................................................... 33 

Roth, Dan, President and Chief Executive Officer, National Futures Association, Chicago, IL ................................................................................................... 34 

Klemme, Diana, Vice President and Director-Grain Division, Grain Service 

Corporation, Atlanta, GA on behalf of the National Grain and Feed Association ........................................................................................................................ 36

Roe, John, Co-Founder, Commodity Customer Coalition, Chicago, IL ............... 38 

APPENDIX 

PREPARED STATEMENTS: 

Bodenstein, Ira ................................................................................................. 50 

Duffy, Terrence ................................................................................................. 64 

Freeh, Hon. Louis ............................................................................................. 69 

Gensler, Hon. Gary ........................................................................................... 75 

Giddens, James ................................................................................................. 86 

Klemme, Diana ................................................................................................. 91 

Lukken, Hon. Walter ........................................................................................ 96 

Roe, John ........................................................................................................... 10 

Roth, Dan .......................................................................................................... 105 

Sommers, Hon. Jill ........................................................................................... 109 

DOCUMENT(S) SUBMITTED FOR THE RECORD: 

Baucus, Hon. Max: 

Atlas Ratings FCM, 2012 report ..................................................................... 116 

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IV 

Freeh, Hon. Louis: 

Letter to Hon. Debbie Stabenow ..................................................................... 122 

First Report of Louis J. Freeh, Chapter 11 Trustee of MF Global Holdings 

LTD., et al., for the period October 31, 2011 through June 4, 2012 ......... 123 

Klemme, Diana 

National Grain and Feed Association, prepared statement .......................... 242 

Lukken, Hon. Walter: 

Futures Industry Association, prepared statement ....................................... 244 

QUESTION AND ANSWER: 

Roberts, Hon. Pat: 

Written questions to Hon. Gary Gensler ........................................................ 252 

Written questions to Hon. Jill Sommers ........................................................ 258 

Written questions to James Giddens .............................................................. 257 

Gillibrand, Hon. Kirsten: 

Written questions to Hon. Gary Gensler ........................................................ 254 

Written questions to Dan Roth ....................................................................... 259 

Grassley, Hon. Charles: 

Written questions to Dan Roth ....................................................................... 264 

Gensler, Hon. Gary: 

Written response to questions from Hon. Pat Roberts .................................. 252 

Written response to questions from Hon. Kirsten Gillibrand ....................... 254 

Giddens, James: 

Written response to questions from Hon. Pat Roberts .................................. 257 

Roth, Dan: 

Written response to questions from Hon. Kirsten Gillibrand ....................... 259 

Written response to questions from Hon. Charles Grassley ......................... 264 

Sommers, Hon. Jill: 

Written response to questions from Hon. Pat Roberts .................................. 258 

AGRIC-48812 with DISTILLER

(1) 

EXAMINING THE FUTURES MARKETS: 

RESPONDING TO THE FAILURES 

OF MF GLOBAL AND PEREGRINE 

FINANCIAL GROUP 

Wednesday, August 1, 2012 

UNITED STATES SENATE, 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY, 

Washington, DC 

The Committee met, pursuant to notice, at 9:07 a.m., in room 

328A, Russell Senate Office Building, Hon. Debbie Stabenow, 

Chairwoman of the Committee, presiding. 

Present: Senators Stabenow, Harkin, Baucus, Klobuchar, 

Gillibrand, Roberts, Lugar, Johanns, Boozman, Grassley, Thune, 

and Hoeven. 

STATEMENT OF HON. DEBBIE STABENOW, U.S. SENATOR 

FROM THE STATE OF MICHIGAN, CHAIRWOMAN, COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

Chairwoman STABENOW. Well, good morning. The Committee on 

Agriculture, Nutrition and Forestry will be called to order. We appreciate very much our witnesses this morning on a very, very important topic and appreciate members’ attendance this morning. 

About 8 months ago, farmers and ranchers all across America 

woke up to some shocking news: MF Global, one of the Nation’s 

largest futures commission merchants, had filed for bankruptcy, 

and at minimum, hundreds of millions of dollars of customer 

money had gone missing. 

A loss of customer money of this magnitude had never happened 

before. It was something that should not have been able to happen. 

It has been an article of faith since the early days of the futures 

markets that customer money is to be kept separate and safe. But 

on October 31, 2011, that faith was broken. 

Questions were raised about how these segregated funds were 

being used or if the system worked. Questions were raised about 

how repeated audits and reviews had missed problems that contributed to the failure. We were assured that MF Global was an 

outlier. 

Then, on July 10, 2012, it happened again. The circumstances 

were certainly different and in some ways more dramatic. For the 

second time in 8 months, customers were left holding the bag when 

their segregated money was misused. Our farmers and ranchers 

and other businesses need these markets to work. They need to 

have faith that they can use these markets to manage their risk. 

AGRIC-48812 with DISTILLER

2 

We have certainly seen this year that their risks are many, but 

one of those risks should not be that their futures broker firm will 

go out of business and their money will disappear. 

We have heard from farmers and businesses who, after MF Global collapsed, opened accounts at Peregrine. For these folks, lightning really does strike twice, and they rightfully want to know 

why. I want to know why. The members of this Committee want 

to know why. And millions of farmers, ranchers, and business owners across the country who need these markets to function properly 

are demanding to know why. 

I have three goals for this hearing, the same goals that we had 

last December when we brought the MF Global executives before 

the Committee. First of all, our charge is to make sure customers 

get their money back. It is critical for the integrity of these markets that customers are first in line to get their money. We also 

want to make sure that individuals who engage in wrongdoing are 

held accountable. And we want to determine what change need to 

be made to prevent something like this from happening again. 

What that change will look like is a question that we need to resolve. I have asked for recommendations after MF Global. The 

Ranking Member and I have asked for input, and the Committee 

today will hear from some of those who have given us their input. 

We also asked where the investigations were after MF Global, 

and all these months later, they are still ongoing. I am eager to 

hear an update on where things stand with the investigations now. 

We need to know answers and hold people accountable. If customers do not have faith in the markets, the markets fail. It is as 

simple as that. 

I hope today’s hearing can start to rebuild that faith for the millions of people that need these markets to work. 

I would now turn to my friend and Ranking Member, Senator 

Roberts. 

STATEMENT OF HON. PAT ROBERTS, U.S. SENATOR FROM THE 

STATE OF KANSAS 

Senator ROBERTS. Well, thank you, Madam Chairwoman, for that 

excellent statement, and thank you for scheduling this hearing on 

an important issue regarding our oversight responsibilities for the 

CFTC. 

While today’s hearing is certainly of concern to our constituents, 

we must also work with you and the rest of our colleagues to consider how we can help farmers and ranchers who are suffering 

from the most serious drought in memory, but we cannot ignore 

our responsibilities to oversee an equally important part of the 

American economy. That is the commodity futures and derivatives 

industry. 

So today we have a two-part hearing. First, we will hear from 

the CFTC and the bankruptcy trustees who continue to investigate 

the details of the MF Global situation and now Peregrine’s collapse 

and bankruptcy. Second, we will hear from industry groups with 

regard to their recommendations to strengthen and secure the futures and derivatives industry. 

MF Global and Peregrine are no ordinary bankruptcies. For the 

first time in history, last fall the customers of a futures commission 

AGRIC-48812 with DISTILLER

3 

merchant’s segregated funds were absconded. Then what was unthinkable actually happened again with the news from Iowa regarding the Peregrine Financial Group. 

I would like to hear in as much detail as possible from the trustees of both of these bankruptcies about the efforts to return all of 

the segregated account funds to the customers of these two firms. 

I appreciate the MF Global Inc. trustee and the new Peregrine 

trustee being here today to update us on their efforts. The trustee 

for MF Global Holdings, Judge Louis Freeh, could not be here 

today, but I thank him for his submitted testimony. 

I am also looking forward to hearing from key stakeholders and 

the futures industry on our second panel here today. You have put 

a tremendous amount of thought and effort into your recommendations to make the system stronger. I am eager to hear those recommendations. 

This input is critically important to this Committee as we consider the fundamental question of whether the self-regulatory 

structure that has existed for decades is capable of regulating the 

industry or whether it has outgrown its time and needs to be replaced by a massive transfer of authority—and money, for that 

matter—to Washington and the CFTC. It should be noted that 

while Chairman Gensler does not advocate this approach, why, 

some do. 

I also thank Commissioner Sommers, who is leading the investigation of the MF Global failure, for being here this morning. 

Now, today’s topics are serious matters. I know there are folks 

out there that believe the CFTC is moving too slowly. They are 

asking why are not certain people in Federal court already. I understand those frustrations. 

I also know that investigations are ongoing, and we must be sensitive of how much information is actually disclosed. We want to 

allow law enforcement to do their job so that we do not jeopardize 

an arrest or a conviction. 

Hopefully today we will learn as much as possible about what 

took place during the final chaotic days at MF Global. I also look 

forward to hearing the recommendations put forward in today’s 

second panel, again, to see if we could work with the futures industry to prevent anything like this from happening again. 

Our futures markets are an absolutely critical part of what allows this Nation to provide its citizens with the least expensive and 

most reliable food supply in the world. For decades, our regulatory 

model has assured us that our futures markets have functioned 

properly, but in light of recent events, it certainly can and should 

be improved. 

Madam Chairwoman, I look forward to hearing the recommendations being brought forward this morning regarding any possible 

improvements, and thank you again for holding this hearing. 

Chairwoman STABENOW. Thank you very much, and certainly we 

want—any member that would like to submit an opening statement for the record, we would welcome that. 

We will turn to our panelists now. We have an excellent group 

of panelists. We appreciate your joining us today. One of our witnesses today, Judge Louis Freeh, who is serving as the bankruptcy 

trustee for the parent company, MF Global Holdings, was unable 

AGRIC-48812 with DISTILLER

4 

to attend. Judge Freeh has submitted written testimony and will 

be responding to members’ questions for the official record. 

[The prepared statement of Mr. Freeh can be found on page 69 

in the appendix.] 

Chairwoman STABENOW. I am pleased to introduce our first panelist, Chairman Gary Gensler, certainly no stranger to the Committee, and we welcome you back. Prior to his service on the CFTC, 

Chairman Gensler served in several positions in the Treasury Department and before that had a very successful career in the private sector. So we appreciate your being here. 

Our second panelist is Jill Sommers, who is a member of the 

Commodity Futures Trading Commission, as well no stranger to 

the Committee, and has been selected by her colleagues to serve as 

the senior Commissioner in charge of MF Global-related matters. 

She previously served as head of Government Affairs for the International Swaps and Derivatives Association and worked in governmental affairs for the Chicago Mercantile Exchange. We welcome 

you back and look forward to hearing about the progress of your 

efforts. 

Certainly, James Giddens, again, we welcome you back to the 

Committee. We appreciate your efforts serving as the trustee for 

the Securities Investor Protection Act Liquidation of MF Global. In 

that role, Mr. Giddens is charged in part with the task of retrieving 

lost funds for customers, and we know Mr. Giddens as well is a 

partner at the law firm of Hughes, Hubbard & Reed, and a nationally recognized leading expert on brokerage firm liquidation. So 

welcome back to the Committee. 

Our final panelist is Ira Bodenstein. Mr. Bodenstein is serving 

as the Chapter 7 trustee for Peregrine Financial Group. We welcome you to the Committee and to your position. Mr. Bodenstein 

is also a member of the law firm of Shaw Gussis, based in Chicago, 

and previously U.S. Attorney General Janet Reno selected Mr. 

Bodenstein to serve as the United States trustee for the Northern 

District of Illinois and the State of Wisconsin. So we appreciate you 

joining us on short notice, and we look forward to working with 

you. 

We will now turn and ask Chairman Gensler for his opening remarks, and I know that you all understand we are asking for 5 

minutes of verbal testimony. We certainly welcome any written testimony as well, and then we will open it to questions. 

Chairman Gensler? 

STATEMENT OF HON. GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, DC 

Mr. GENSLER. Good morning, Chairwoman Stabenow, Ranking 

Member Roberts, and members of the Committee. I am pleased to 

be with you. I am particularly honored to be here with Commissioner Sommers on these important matters. 

The Commission and I take very seriously the losses of customer 

funds that should have been segregated at all times. Customers 

should have been able to rely on a system of protection that protects them at all times, and it is not just about the customers that 

lost money. It is about farmers and ranchers and other end users 

that need to have confidence in these markets. It is these critical 

AGRIC-48812 with DISTILLER

5 

markets—futures markets and ultimately in the swaps market as 

well—that customers need to be able to hedge their risk, lock in 

the price of corn or wheat or an interest rate and hedge their risk 

so as to focus on what they do best—producing food and fiber and 

other essential products. 

Now, the recent events at Peregrine remind me of a saying my 

grandfather had, and it was handed down in my family and repeated quite often. This immigrant from Russia used to say, ‘‘Figures do not lie, but liars sure can figure.’’ And simply put, the evidence points to the owner, Russ Wasendorf, taking the funds of 

customers right out of the bank and lying about it for years. 

The National Futures Association, the self-regulatory organization responsible for front-line oversight of Peregrine, is required to 

conduct periodic audits of Peregrine’s customer funds and, in addition, an independent CPA audited Peregrine’s annual financial 

statements, including all the way to December 31, 2011. 

Just like the local police cannot prevent against all bank robberies, market regulators cannot prevent against all financial 

fraud. But having said that, I believe the system failed to protect 

Peregrine’s customers here and that we all must do better, including the CFTC. 

The Commission has been actively working to improve protections of customer funds. We have finalized four separate rules 

strengthening protections for investment of customer funds, something called gross margining; segregation of customer funds in the 

new world of swaps; and also working that the self-regulatory organizations have specific requirements for their financial surveillance. 

We have also worked very closely with the Futures Industry Association, the NFA, the CME, and others on new rules finalized 

just last month concerning new controls over customer segregated 

accounts, and I think that those working relationships served well, 

but they will be tested further as we think through changes postPeregrine. 

The CFTC also has implemented a significant restructuring of 

our oversight of SROs and intermediaries, actually hiring new leadership over the last 9 months, both a full partner of an accounting 

firm and a full partner from a law firm, to help us guide this effort. 

Looking forward, though, I do believe it is critical that we further 

update our rules, giving regulators direct electronic access to all 

bank and custodial accounts holding customer funds. 

In addition, I believe we should incorporate the NFA rules, those 

that were just finalized, put them in our rule book. I think there 

is a consensus to do that. But also I think that we should give futures customers access to information about how their assets are 

held. Where is their money held? I think we have to enhance internal controls of these futures commission merchants regarding how 

customers’ accounts are handled, and I also think we need to carefully consider additional rules laying out how SROs’ requirements 

for conducting their exams and audits, and as the Ranking Member 

said, I think it has been embedded in our system for decades. 

There is self-regulation, and then we examine the examiners, but 

I think we need to look at how we examine the examiners and set 

those rules in place. 

AGRIC-48812 with DISTILLER

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We will conduct a full rule of the CFTC and SRO examination 

and audit oversight, looking openly for improvements including getting advice from the Public Company Accounting Oversight Board 

that has been gracious enough to tell us how do they do what they 

do and how can we learn from what they do, and based on those 

conducts and oversight. 

I think we must do everything within our authorities and resources to strengthen our oversight programs and the protection of 

customer funds, and as I think back to my grandfather’s saying, 

keep his values and wise admonition in mind. 

I thank you. 

[The prepared statement of Mr. Gensler can be found on page 75 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Commissioner Sommers. 

STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, 

COMMODITY FUTURES TRADING COMMISSION, WASHINGTON, DC 

Ms. SOMMERS. Good morning, Chairwoman Stabenow, Ranking 

Member Roberts, and members of the Committee. Thank you for 

inviting me here today to testify about MF Global. 

Over the past 9 months, the Commodity Futures Trading Commission has conducted a thorough analysis of the books and records 

of MF Global and continues to work closely with Mr. Giddens in 

the SIPA bankruptcy proceeding to recover customer funds. We are 

also engaging in a comprehensive and ongoing enforcement investigation. It is imperative that the Commission, the industry, and 

the Congress identify and assess the causes for the shortfall in customer funds and take corrective action where possible. At Chairman Gensler’s request, Commission staff has developed recommendations for enhancing Commission and designated self-regulatory organization programs related to the protection of customer 

funds, which includes changes to Commission rules governing futures commission merchants, enhanced Commission oversight of 

DSROs, and possible statutory changes, among other things. We 

must do everything in our power to restore confidence in the futures markets so that producers, processors, and other end users 

of commodities can once again hedge their price risks without fear 

of their funds being frozen or lost. 

On November 9, 2011, the Commission voted to make me the 

Senior Commissioner with respect to MF Global Matters. This authorizes me to exercise the executive and administrative functions 

of the Commission solely with respect to the pending enforcement 

investigation, the bankruptcy proceedings, and other actions to locate or recover customer funds or determine the reasons for the 

shortfall. While I am unable to discuss the specifics of our ongoing 

enforcement investigation, I will provide a brief overview. 

Our Division of Enforcement is actively engaged in the investigation concerning the shortfall of customer funds. We have a dedicated team working every day on this case. They are interviewing 

witnesses and reviewing documents as well as other information 

and are proceeding as expeditiously as we can. 

AGRIC-48812 with DISTILLER

7 

As the Committee will understand, I cannot disclose any specific 

details of the investigation because they are nonpublic and because 

I do not want to prejudice any potential enforcement action. In general, however, depending on the specific facts and circumstances, a 

shortfall in customer segregated funds could amount to a violation 

of the CEA and Commission regulations including those that govern segregated funds, prevent theft of customer money, require our 

registrants to properly supervise accounts, prevent making false 

statements, and prohibit deceptive schemes. Depending on the specific facts and circumstances, the Commission could file an enforcement action against corporate entities and/or individuals who have 

violated the CEA or regulations. In addition, depending on the specific facts and circumstances, individuals could also be liable if they 

are control persons of a company that has violated the law. A control person generally refers to management. Depending on the specific facts and circumstances, an enforcement action could be filed 

against individuals who aid and abet violations by companies. Finally, Commission regulations impose obligations on accountants 

who audit FCMs and on the banks that hold customer segregated 

funds. 

Generally, the Commission has the authority to, among other 

things, seek and impose civil monetary penalties, require a defendant to disgorge ill-gotten gains, obtain restitution for customers, 

and obtain other injunctive relief. In terms of civil monetary penalties, the Commission can seek the greater of three times the defendant’s gain or a set amount, which is currently at $140,000 per 

violation. Civil monetary penalties are, of course, paid to the U.S. 

Treasury while restitution would be paid to the victims who suffered losses. 

The Commission is a civil enforcement agency, so we cannot seek 

imprisonment as a sanction in an enforcement action. However, a 

willful violation of the CEA or our regulations is a Federal crime, 

which can be prosecuted by a U.S. Attorney. We do not have any 

say in whether or not the criminal authorities prosecute, and I understand that they have a higher burden of proof. 

There is no doubt that MF Global’s bankruptcy has caused severe hardship for thousands of customers who trusted the system 

and trusted their FCM. I believe the Commission can make improvements to our regulatory oversight of FCMs and DSROs to 

help restore confidence in the futures markets, and I will work 

with the Commission and Congress to implement the rules necessary to enhance our ability to protect market users. 

Thank you. 

[The prepared statement of Hon. Jill Sommers can be found on 

page 109 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Trustee Giddens, welcome. 

STATEMENT OF JAMES W. GIDDENS, TRUSTEE FOR SECURITIES INVESTOR PROTECTION ACT LIQUIDATION OF MF 

GLOBAL, INC., HUGHES HUBBARD & REED, NEW YORK, NEW 

YORK 

Mr. GIDDENS. Thank you. Chairwoman Stabenow, Ranking Member Roberts, and Committee members—— 

AGRIC-48812 with DISTILLER

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Chairwoman STABENOW. I think you need to push a button there. 

Mr. GIDDENS. Yes. 

Chairwoman STABENOW. All right. 

Mr. GIDDENS. Thank you. Chairwoman Stabenow, Ranking Member Roberts, and Committee members, it has been 9 months since 

the bankruptcy of MF Global where irresponsible actions of company management caused an unprecedented invasion of customer 

funds. I know this has been a long, frustrating period for former 

customers waiting for the return of property rightfully belonging to 

them. However, significant progress has been made for the benefit 

of customers, including returning 80 percent of customer property 

to commodities customers who traded on U.S. exchanges, completing an extensive investigation and issuing a public report on its 

findings, and identifying and pursuing recoveries of additional assets for customers, I, and more importantly the customers, have appreciated this Committee’s support for these efforts. 

My consistent goal remains to return as much customer property 

as possible, as quickly as possible, in a fair, lawful manner, and 

that is what I have done. 

It is important to understand that I have no role in the bankruptcy of MF Global Holdings, which was the holding company of 

the broker-dealer and is now represented by a separate trustee. As 

a liquidation trustee, I do not have law enforcement or regulatory 

authority, though I continue to cooperate with and have shared my 

report and its findings with all the relevant agencies. 

Currently my office is completing a fourth distribution to former commodities customers, bringing total distributions to $4.7 billion, 

80 percent of their property for the U.S. exchange trades and 5 percent for foreign exchange trades. For securities customers, substantially all non-affiliate accounts were transferred and approximately 

80 percent received nearly all of their account balances because of 

the Securities Investor Protection Corporation advances. 

I have also conducted a claims process that involves more than 

34,000 claims. Determinations for virtually all commodities claims 

have been made, and most have been agreed to by the claimants. 

We are working hard to resolve claims disputes absent litigation. 

The approximately $1.6 billion shortfall in segregated property 

available for the return to customers remains. I am urgently working to eliminate the shortfall by determining the size of customer 

claim pools and recovering funds through negotiation and litigation, if necessary. I may also request the bankruptcy court approval 

for the allocation of non-segregated property to customers. 

Significant agreements have been reached pending court approvals with the CME Group and with MF Global Canada, which will 

also support my ability to distribute additional funds to customers. 

There are very substantial disputed claims from MF Global affiliates, including the holding company, which require me under law 

to hold appropriate reserves until those disputes are resolved. And 

until those disputes are resolved by the bankruptcy court, they 

stand as a very significant impediment to further distributions to 

customers. 

In the United Kingdom, litigation continues to resolve my claim 

against the U.K. Joint Special Administrators for $700 million in 

customer property. Our extensive and thorough investigation into 

AGRIC-48812 with DISTILLER

9 

the failure of MF Global led to my conclusion that there may be 

valid claims against directors and officers, including Jon Corzine. 

I am prosecuting these claims with plaintiffs in pending lawsuits 

against those parties. 

Active discussions continue with JPMorgan Chase concerning 

transfers that I believe may be voidable or otherwise recoverable. 

I have made recommendations about how to avert a similar future catastrophe and protect customers, and I support reforms recently approved by regulators. 

Thank you very much for the opportunity to testify here today. 

[The prepared statement of Mr. Giddens can be found on page 86 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Bodenstein, welcome. 

STATEMENT OF IRA BODENSTEIN, CHAPTER 7 TRUSTEE FOR 

PEREGRINE FINANCIAL GROUP, INC., SHAW GUSSIS, CHICAGO, ILLINOIS 

Mr. BODENSTEIN. Thank you. Good morning, Chairwoman 

Stabenow, Ranking Member Roberts, and members of the Committee. Thank you for this opportunity to appear before you today. 

I have submitted my full written testimony. My name is Ira 

Bodenstein, and I am the appointed interim Chapter 7 trustee of 

Peregrine Financial Group, Inc. I was appointed as the successor 

trustee by the Office of the United States Trustee, which is a component of the Department of Justice, on July 11, 2012. My appointment was preceded by the filing of a complaint by the U.S. Commodity Futures Trading Commission which sought injunctive relief 

against Peregrine and Russell R. Wasendorf, Sr., on July 10, 2012, 

and the filing of a voluntary Chapter 7 bankruptcy petition by Peregrine within hours after the entry of a temporary restraining 

order and the appointment of a receiver in the CFTC proceeding. 

Since the date of my appointment as the Peregrine trustee, I 

have been working diligently to comply with my fiduciary duties 

under the Bankruptcy Code. To that end, I have taken steps to secure Peregrine’s assets and to protect customer accounts and information. To prevent the loss of institutional knowledge and to assist 

in the taking control of the assets and information, I have obtained 

a bankruptcy court order allowing me to operate the business of 

Peregrine on a limited basis through September 13, 2012. That authority includes the retention of certain key employees at Peregrine. I have also selected a group of professionals which I feel are 

necessary to assist me in this liquidation effort. 

I have been working cooperatively with the CFTC, the NFA, the 

FBI, and the U.S. Attorney’s Office in coordinating the liquidation 

of Peregrine and providing access to all information under my control for use in the pending civil and criminal investigations. On the 

other hand, I have been getting cooperation from the other side in 

getting information that they already have control of and allowing 

me to see that information. 

I have also been working cooperatively with the receiver who was 

appointed in the CFTC action. Initially there was some concern 

over competing orders and who had jurisdiction over what. That 

has been straightened out in the receivership matter, and an 

AGRIC-48812 with DISTILLER

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amended receivership order and an amended statutory restraining 

order have been entered, making it clear that all assets of Peregrine are under the control of the bankruptcy trusteeship. 

In conclusion, with the assistance of the team I have put in 

place, I intend to confirm the validity of the information on the 

books and records at Peregrine and disseminate such information 

to account holders with all deliberate speed. Once customer balances are calculated, I intend to seek court authority to make an 

initial distribution to the customers as soon as I can. 

I thank you for the opportunity to appear before this Committee. 

[The prepared statement of Mr. Bodenstein can be found on page 

50 in the appendix.] 

Chairwoman STABENOW. Well, thank you very much, and we realize you are new to the position you are in, and we appreciate 

your willingness to come before the Committee as you begin this 

very, very important process. 

For the Committee members, we will do two rounds of 5-minute 

questions this morning, and let me start with Chairman Gensler. 

How quickly can the CFTC move to improve the protection of customer accounts? You have talked about various things you are looking at. How quickly can you do that? Do you need more legal authority to protect futures markets, or do you feel you have the authority right now that you need to be able to move? 

Mr. GENSLER. I think that we have strong legal authority, 

though I keep an open mind to work with this Committee and others if there are suggestions for changes, whether it is about the 

civil money penalties that we can impose on people or maybe possibly with regard to the Bankruptcy Code itself. But in terms of our 

legal authority, it is quite strong. 

In terms of timing, we have moved I think very effectively with 

the National Futures Association and the industry on those 

changes. We would like to incorporate those into our rule book as 

well. But I would be hopeful that with what is in front of Commissioners now in draft form—and it is only in draft form—that we 

could try to get it out to public comment in the month of September, is my hope. But, again, a lot of feedback will come. 

We have a public roundtable as well, I think towards the end of 

next week. We are going to hear more from the public on these 

matters. 

Chairwoman STABENOW. Okay. Thank you. Well, obviously the 

public is watching here, and, again, certainly from my perspective, 

I am asked way too many times now whether or not people should 

be investing and using the futures markets, and that is not a good 

thing. So we do need to make the right decisions, but we do need 

to move. 

Let me ask you, Commissioner Sommers, how much time on average has the CFTC needed to bring charges in a case like this? 

I know you cannot speak of this particular case, but when we look 

at the kinds of cases that the CFTC has brought, what would be, 

given the size and complexity, the normal time frame? 

Ms. SOMMERS. Well, I think in my time at the CFTC the past 5 

years, we have not had a case like this. This is unprecedented for 

the Commission to have a case of this complexity, of this size, 

38,000 commodity customers, and with customer money missing, 

AGRIC-48812 with DISTILLER

11 

which is in a bankruptcy case. This has never happened before, 

this is unprecedented for us, and I want to assure the Committee 

that we are moving as expeditiously as we can. 

Chairwoman STABENOW. Do you believe you have the resources 

to be able to do this in the quickest way possible? 

Ms. SOMMERS. We have a dedicated team on MF Global with a 

number of different people from our Division of Enforcement in our 

New York office as well as assistants from Chicago and here in 

Washington working on this. 

Chairwoman STABENOW. Is that a yes? 

Ms. SOMMERS. Yes. 

Chairwoman STABENOW. Okay. Thank you. Will any funds collected as a result of successful cases that you would bring go directly to make customers whole? 

Ms. SOMMERS. Seeking restitution would allow us to give that 

money back to customers. Civil monetary penalties would, of 

course, go back to the U.S. Treasury. 

Chairwoman STABENOW. Okay. Thank you very much. 

Trustee Giddens, we have heard from Judge Freeh in his written 

testimony that he believes there is enough money to make customers whole and there should be ‘‘significant excess funds’’—his 

words—for creditors. How would you respond to that? 

Mr. GIDDENS. Based on our claims analysis, we estimate that U.S. customers have valid claims for approximately $6 billion and 

the 4d estate has approximately $5.2 billion in assets. Customers 

who traded on foreign exchanges, the so-called 30.7 funds, have 

pending claims of approximately $1 billion. The 30.7 estate at 

present has assets of $90 million. That is a shortfall. 

As I indicated, we very much would like to pay every customer 

100 percent; however, it will be a time-consuming, difficult, and uphill battle to be successful in marshaling substantial additional assets needed to pay commodities customers 100 percent. We appreciate Mr. Freeh’s apparent support and confidence in our ability to 

collect and allocate additional substantial assets, and certainly that 

remains our singular focus. But, for example, $700 million of what 

should have been segregated funds are at issue in litigation in the 

United Kingdom. We are very hopeful about our success in that 

litigation, but by no means is that assured. That is a matter that 

will be decided by English courts under English law. 

Chairwoman STABENOW. Well, obviously a top priority for our 

Committee—and I believe I can speak for everyone—is to make 

sure that people are made whole, and we appreciate your aggressiveness in doing that and support you in doing whatever is necessary to do that. 

Given that my time has expired, I would now turn to our Ranking Member, the distinguished Senator from Kansas, Senator Roberts. 

Senator ROBERTS. Well, thank you, Madam Chairwoman. 

Mr. Giddens, you report indicates that MF Global Assistant 

Treasurer Edith O’Brien knew on October 26th that the firm was 

out of seg or compliance on October 26th, yet on October 28th, she 

was still wiring out another $175 million to the United Kingdom 

per Mr. Corzine’s instructions. Is this correct? 

Mr. GIDDENS. Yes, sir. 

AGRIC-48812 with DISTILLER

12 

Senator ROBERTS. Well, the obvious question: Didn’t MF Global 

have internal controls regarding how and where money could be 

moved that would prevent this from happening? 

Mr. GIDDENS. They purportedly had such internal controls, but 

they were obviously ineffective or ignored. 

Senator ROBERTS. So is Mr. Corzine simply overruling the internal controls? Was this sheer incompetence? Or did someone somewhere within MF Global know exactly what they were doing and, 

if so, willfully moved the money out of the segregated accounts? 

Mr. GIDDENS. I believe our report, which deals with these subjects in the 275 pages, makes clear our conclusion that there was 

knowledge that segregated customer funds were being improperly 

moved. 

Senator ROBERTS. Did the CFTC changes after the fact to its 

Rule 1.25 regarding the international rule or 30.7 investments really matter in terms of what MF Global was doing with its customer 

segregated funds? 

Mr. GIDDENS. The subsequent change in terms of how much 

should be segregated we think would have been—had the rule been 

changed—would have been very important. I think we indicated it 

is something like $1 billion that would have been required to be 

segregated for the 30.7 customers was not segregated. So that certainly would have been material. 

Senator ROBERTS. At the end of the day, what is your best estimate of the percentage of customers’ money they will finally get 

back out of this bankruptcy? 

Mr. GIDDENS. Again, certainly it is my goal that they recover 100 

percent. We are up to 80 percent on the 4d; we are up to only 5 

percent on the 30.7. We have had other collections of non-segregated funds as to which we have to go to the bankruptcy court 

and have the bankruptcy court finally allocate. 

It will be our position that a substantial part of those funds 

should be allocated to customers, and with the amount of funds 

that we have under control and if we are successful in pending litigations, I think we are comfortable saying that additional distributions should certainly be in the 90-percent range. It is going to be 

an uphill fight, as I indicated, to get to 100 percent. 

Senator ROBERTS. I appreciate your dedication. 

Chairman Gensler, welcome back. Today right now can the 

CFTC tell if an FCM is shuffling its customers’ money intraday in 

and out of a segregated account? 

Mr. GENSLER. I think that we would be hard pressed to be able 

to do that. I think that our rules forbid it, that somebody even 

intraday has to be fully segregated, but we do not have online access and we are not in those accounts. But it is absolutely against 

our rules to take money intraday even. It has to be in segregation 

all day long. 

Senator ROBERTS. Well, following that, have you done anything 

to more quickly resolve a situation where somebody is out of seg 

or compliance at the end of the day? If we cannot do it intraday, 

can we do it at the end of the day? 

Mr. GENSLER. Yes, and I think even these recent rules that were 

adopted by the NFA that I am sure Dan Roth will mention more 

about—— 

AGRIC-48812 with DISTILLER

13 

Senator ROBERTS. Right. 

Mr. GENSLER. —were a very positive step, as you say, for each 

day. And then if management wants to tap into what is called the 

excess funds—sometimes they put their own funds, the company’s 

funds in. They cannot take that out more than a limited amount, 

25 percent, without having senior management signing it, notifying 

the regulators as well. We are recommending that also regulators 

get direct view only online access to see the bank accounts and custodial accounts, but that will take some further rule changes and 

technology changes. 

Senator ROBERTS. So if the rating agency had not downgraded 

MF Global, how much longer would this intraday use of customer 

funds have gone on by MF Global before any regulator would have 

caught it? 

Mr. GENSLER. As to the specifics of this one institution, I might 

leave it to those who know more about the company now than I do, 

but I think that the obligation of the self-regulatory organizations 

and the CFTC is to ensure that all institutions comply with the 

law, even if there are not ratings downgrades. 

Senator ROBERTS. I appreciate that, and I will have further questions in the second round, Madam Chairwoman. Thank you. 

Chairwoman STABENOW. Thank you very much. 

Senator Harkin? 

Senator HARKIN. Thank you, Madam Chair. 

Mr. Gensler, according to information I received from the National Futures Association, the NFA has taken five enforcement actions against Peregrine: in 1996, 2004, 2008, 2012, and again on 

July 9, 2012. In fact, in 2004, according to a story that was in the 

New York Times, a Peregrine client sent a letter to the National 

Futures Association and the CFTC asking it to intervene to prevent 

the firm from misusing its customers’ money. A copy of the letter 

was obtained by the New York Times. Five years later, in 2009, 

again a tipster wrote to the NFA asking it to review Peregrine’s 

bank account information for accuracy. 

In 1996, the action involved two separate incidents in which Peregrine failed to maintain adequate significant funds. Again, in 

2011, in the course of an audit, NFA was informed that Peregrine 

was undersegregated by over $200 million. There were two letters—one on Friday, one on Monday—that sort of changed those 

figures. 

My questions are: Was CFTC aware of the 2011 incident, the one 

in which there were two letters—one on Friday and one on Monday? If so, what did you do? And if not, should the CFTC have been 

made aware of it? 

Mr. GENSLER. To the best of my knowledge, we were not, but we 

are going to learn more facts even in looking at our own files at 

the CFTC. But the audit work papers of the NFA may have that, 

but we do not necessarily review NFA’s audits. There is an outside 

auditor and then the self-regulatory organization. What we have 

moved to in the last 2–1/2 years is we quarterly now look at NFA 

and CME’s reviews but just on a sample basis. We sample some, 

and it happens to be Peregrine was not part of our small sample 

in these last 2 years. 

AGRIC-48812 with DISTILLER

14 

Senator HARKIN. Is it typical for a firm like Peregrine to have 

that many enforcement actions taken against it during a similar 

time period? That is one, two, three, four, five, six going back to 

1996. Is that typical? 

Mr. GENSLER. I would have to get back to you because there are, 

especially in large financial institutions—and this was smaller— 

often disciplinary actions or sales practice issues. But I would say 

in looking back at the record and even looking at a 2000 action 

that the CFTC brought—and there was a settlement in 2000 that 

the CFTC had about accounting records at Peregrine. I think that 

the system failed to protect the public on this when you look at the 

various incidents over the years. Now, that was 12 years ago at the 

CFTC, but—— 

Senator HARKIN. Well, I guess I just basically—my question is 

that one red flag ought to be enough, but if you get two red flags, 

then three red flags, pretty soon somebody ought to start paying 

attention. 

Mr. GENSLER. Right. And that is why we are looking very closely 

at how we can enhance the standards of the audit itself. That is 

why we have reached out, and the Public Company Accounting 

Oversight Board does something similar. It is not identical, but 

they look at auditors, and we have this responsibility to sort of look 

at how the auditors at NFA and CME do their job. We want to 

learn from that and see how we can be better examiners of the examiners embedded in this self-regulatory function. 

Senator HARKIN. Well, then that raises the question. Does the 

CFTC have enough power and authority and personnel to ensure 

that industry self-regulatory organizations fulfill their responsibilities? 

Mr. GENSLER. We will continue to look at the statute, but my initial thought is we probably do have the authorities. I think we do 

need to upgrade some of our rules and how they have to comply 

with generally accepted auditing standards, what outside auditors 

have to do, the direct electronic confirmation, direct electronic access. 

On funding, no, I have said before in front of this Committee I 

think we are underfunded to oversee the futures industry that has 

grown five-fold since the 1990s, and then we have the swaps industry as well. 

Senator HARKIN. It is my understanding that a futures commission merchant does not have to carry a bond or insurance to protect 

its customers against losses such as from fraud or malfeasance. 

Again, I question whether or not there should not be. There has 

been some who have suggested there should be an insurance fund. 

There is for securities, there is for Federal deposit insurance, but 

there is not for futures commission merchants. Do you have anything thoughts on that? 

Mr. GENSLER. The Commission is currently focused on doing everything we can under current law to protect customers, and I 

think there is more that we need to do. I certainly have an open 

mind as to this dialogue, and I think it is really a weighing of costs 

and benefits. And it is an age-old issue of insurance does take a 

cost. I think we need to focus in on our rules and ensure customers 

do better and the self-regulatory function works better. 

AGRIC-48812 with DISTILLER

15 

Senator HARKIN. My time is up. I would just say that you do it 

for securities, you do it for deposits, but not for futures. I just wonder if we should not be looking at something like that. 

Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

Senator Lugar? 

Senator LUGAR. Thank you, Madam Chairman. 

Let me follow up Senator Harkin’s line of questioning. Chairman 

Gensler, in your last testimony you mentioned the struggle of getting to the rulemaking. You were through 30-some rules and heading toward 50. And you mentioned in September there may be 

more adequate hearings with other parties, other businesses, and 

what have you. I am just curious in terms of the dynamics of the 

CFTC, your own members of the Commission, quite apart from the 

testimony of those you are regulating. Is there such tension with 

the private community or within the board that brings about this 

delay? It will be about 2 years from the time the Dodd-Frank bill 

was passed, and earlier on I know you gave more optimistic predictions about the rulemaking. What delays the rulemaking? What 

is the dilemma you have there? 

Mr. GENSLER. Thank you for saying that. I think the complexity 

of the topic and the task that Congress gave us; two is we want 

to get this right and balanced. This is a true paradigm shift to this 

swaps market. We are in a sense now in the back half or the back 

nine, if I can use—I am not a golfer, but we have completed 36 

final rules with all the foundational rules. I think the Commission 

serves the public well. Commissioner Sommers can speak to it. We 

have largely done this with consensus, but occasionally we break 

ranks, but we really do want to find consensus where we can 

amongst the five of us to get this done. I think it is more sustainable for the public if we do. And then, as you rightly say, we have 

35,000 comment letters, so we have to deal with every one of those 

and do cost/benefit analyses and the like. 

Senator LUGAR. Well, what sort of comment letters come in? How 

would you characterize the 35,000? Who are writing all these letters? 

Mr. GENSLER. Market participants. I mean, they are weighted towards the financial community. I think we have adequately and 

appropriately addressed many of the end-user issues around what 

is the definition of a swap dealer and the like and the end-user exception. But we are going to continue to get comments from end 

users who do not want to get caught up in this, and we are going 

to try to work with that. 

Senator LUGAR. Is there a sense with the industry involved of the 

degree of crisis in terms of public understanding of this? We have 

had these two incidents, but there may be lurking out there somewhere some more. This is not quite parallel to the cybersecurity 

thing we are debating on the floor right now, but the thought here 

is that we may have sort of a 9/11 situation at some point where 

our telephone system, our market system, and everything else is 

shut down. 

Now, that may not be as dire with regard to what we are talking 

about today, but, nevertheless, the lack of confidence in the markets. But the resistance obviously by private companies, investors, 

AGRIC-48812 with DISTILLER

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and others to do their thing in their way, I am just curious about 

this tension and what our role ought to be legislatively quite apart 

from this oversight. 

Mr. GENSLER. Well, I think we have made tremendous progress, 

but 4 years since the crisis and 8 million people losing their jobs, 

I do think we need to get on and try to complete the swaps market 

reform. 

As it relates more directly to the customer protection issues, 

there has been, I think, tremendous interaction and support from 

the futures industry and thee self-regulatory organization to enhance the system, because the system did fail to protect the public 

in these matters in these last 9 months. 

Senator LUGAR. Have you made any recommendations for legislative reform, amendments that we ought to be offering here as legislators that would be helpful to you? 

Mr. GENSLER. We have not but remain open to it. I do think that, 

whether it is in the area of civil money penalties and maybe some 

possible issues in the Bankruptcy Code, we have pretty strong legislative authorities to enhance our rules for this customer protection area and enhance our rules for the auditing of futures commission merchants. 

Senator LUGAR. Thank you very much. 

Thank you, Madam Chairman. 

Chairwoman STABENOW. Thank you very much. 

Senator Klobuchar is next. 

Senator KLOBUCHAR. Thank you very much, Madam Chair. 

Thank you to our witnesses and thanks for holding this hearing. 

I know when it was originally scheduled, it was to focus on MF 

Global and the steps that have been taken since then. Yet today 

we find ourselves here trying to understand how something like 

this happened again, this time with Peregrine Financial Group, 

where something went undetected for many years. 

I actually have one farmer who had invested in MF Global, then 

the disaster happened, puts his money in Peregrine, and loses out 

twice. So clearly the system has not protected the people that it 

should, and there have been people left holding the bag that should 

not be holding the bag. 

I would like to give credit for the important steps that have been 

taken so far to strengthen consumer protections, but as we all 

know, rules are only as good to the extent that they are enforced. 

That is something I certainly used as a prosecutor. You can have 

all the books with all the laws in them, but if you do not enforce 

them, sometimes it is worse than not having them at all. 

So I wanted to first ask about some of the major revelations in 

the report released by Trustee Giddens, Chairman Gensler, and 

that was that there was this incredible mismatch between the increasingly complex liquidity needs of MF Global and the treasury 

unit that managed the company’s cash flows and compliance with 

account segregation. The report found that in an electronic age MF 

Global was still managing its liquidity using manual entries on 

spread sheets and oral reports. 

I guess, first, to you, Chairman Gensler, is this finding as concerning to you as it is to me? And going forward, what is being 

done to ensure that firms not only have adequate capital but also 

AGRIC-48812 with DISTILLER

17 

the systems, procedures, and technology is in place to monitor their 

risk? 

Mr. GENSLER. I am concerned about the internal controls of futures commission merchants and ultimately of swap dealers as 

well, and we are looking at and have in draft form in front of our 

Commissioners rules to ensure that these futures commission merchants have policies and procedures for better internal controls. 

And staff has built those recommendations on the full public 

record, including Trustee Giddens’ report. 

Senator KLOBUCHAR. Okay. Then how about the staffing and expertise of the NFA. You stated in your testimony that as part of 

your oversight you review their training. You went on to say that 

recent examinations of the NFA included recommendations for enhanced training and supervisory review procedures. How do you 

think that is going? And what is the experience level of front-line 

audit staff and what should change? 

Mr. GENSLER. I think it still needs to be enhanced. I think that 

there is a great deal not just out of the Peregrine situation but just 

in the growth of the futures model and these two circumstances in 

the last 9 months, and I know that they are committed to doing 

that. But we are also looking to put in some rules about how they 

follow generally accepted auditing standards, how the joint audit 

program works be the SROs, which I think inevitably will raise 

some of the standards of the self-regulatory organizations. 

Senator KLOBUCHAR. One of the things that struck me—I know 

Senator Harkin asked about this, but according to a Wall Street 

Journal article, one NFA employee actually called and found out 

that the bank showed that the account was dramatically underfunded, and then even though they had that information over the 

phone, then believed a fax that said everything was fine. 

My question is: Why wasn’t verbal contact taken more seriously? 

And is that something that should be considered as you go forward 

in your process? 

Mr. GENSLER. I think it is very concerning, and I share the 

public’s view and Senator Harkin’s and your view that that should 

have been looked at and pursued with a phone call to the bank directly or other matters. I think that is what a risk-based auditor 

would do. 

Senator KLOBUCHAR. Okay. Trustee Giddens, I will just end with 

this. What has been the greatest frustration in your efforts to recover customer funds? I know some of my colleagues asked about 

the money, but what was your greatest frustration in getting the 

money from MF Global? And what is the one lesson you think 

should be taken from your investigation in terms of how we move 

forward with a better system? 

Mr. GIDDENS. Among the recommendations that we made on the 

basis of our experience for a study was really—which would have 

been very beneficial and eliminated a lot of the problems there, 

would be the study of an insurance fund for commodities customers 

that was comparable to the protection provided to securities customers by SIPC and also by the FDIC for bank depositors. Most of 

the accounts in MF Global, and as I understand in many other futures commission merchants, are really under $100,000, so they are 

small farmers, ranchers, and others, so that the amount of protecAGRIC-48812 with DISTILLER

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tion to provide $100,000 if there were a deficiency in an account, 

if something like that had existed, that would have permitted us 

to have paid, I think—and I am talking off the top of my head— 

something like 78 percent of all the claimants almost immediately. 

That would have been sufficient to cover costs. And how feasible 

that would be, how it would be funded by the industry, is a subject 

for study. But that limited amount of coverage, as I say, in our case 

would have permitted us to quickly move and cover substansial deficiencies in the case. 

We were able to do that with the securities customers because 

of the existence of SIPA and the SIPA protections. In terms of the 

collection of assets, even though monies were at banks and other 

depositories throughout the world, it is not an automatic process of 

simply saying I assert that these are segregated funds, because 

these institutions in many cases all were reluctant to release funds 

and in some cases said, well, we have counterclaims and setoffs 

and so it is a cumbersome process even to try to collect funds that 

I think demonstrably belong to customers because they are held at 

third parties. 

There were some exceptions to that, and some of the institutions 

showed some concern for the public interest and also for the concerns of customers. But nothing works quite as it is prescribed 

when you are actually in a bankruptcy. 

Chairwoman STABENOW. Thank you very much. 

Senator KLOBUCHAR. Thank you very much. 

Chairwoman STABENOW. Senator Johanns. 

Senator JOHANNS. Thank you, Madam Chair. 

Mr. Giddens, if I could start with you, as you were looking 

through the facts surrounding MF Global, I would like to know if 

the facts illustrate that Mr. Corzine knew that segregated funds 

were being moved. 

Mr. GIDDENS. I think we deal with that very important $64,000 

question in the report with the nuances and the like, and as I say, 

I think that issue is also being looked at by those who have regulatory and legal enforcement. 

My own view is I think the preponderance of the evidence indicates that management, senior management at MF Global, was 

aware of the liquidity crisis and was aware that customer funds toward the end were being utilized to cover other costs in the firm. 

As I say, the principal purpose of my report under SIPA is to explain why the firm failed with the point of view of coming up with 

causes of action that we can pursue to try to bring in additional 

assets. 

Senator JOHANNS. And I appreciate that, but you must also appreciate that we have constituents who are not only interested in 

getting the money back that they lost, but they are interested in 

making sure that if something was done wrong, those who did it 

are brought to account in some form or fashion. 

Mr. GIDDENS. We agree with that totally. There have been lawsuits already instituted against, in particular, Mr. Corzine and 

against other of the senior officers. We are plaintiffs’ counsel, and 

we are working together. All those cases are consolidated before 

Federal District Judge Marrero in the Southern District of New 

York. Those are civil actions. The amounts that are sought are in 

AGRIC-48812 with DISTILLER

19 

the hundreds of millions, and those are part of the efforts we are 

making and the plaintiffs’ lawyers are making in concert to hold 

those people that we think were responsible for some of the losses 

accountable. 

Senator JOHANNS. Now, when you refer to—when you answered 

my question, you referred to senior management, and I guess it 

cannot get more senior than being the top guy. So I am taking your 

answer to mean you are also referencing Mr. Corzine. 

Mr. GIDDENS. Yes, sir. Yes, sir. 

Senator JOHANNS. Again, going back to your report, do the facts 

indicate that Mr. Corzine, in fact, authorized the movement of customer segregated funds? 

Mr. GIDDENS. I cannot say that the total analysis of that proves 

that point unequivocally. 

Senator JOHANNS. Is part of your responsibility, does it also involve cooperation with the U.S. Attorney’s Office? 

Mr. GIDDENS. Yes. 

Senator JOHANNS. And that investigation is ongoing? 

Mr. GIDDENS. Yes, sir, as well as the CFTC regulatory investigation. 

Senator JOHANNS. Okay. Commissioner Sommers or Chairman 

Gensler, either one of you can attempt to address this. Let me express a concern I have, and I would like your reaction to it. I am 

becoming even more of a skeptic than I was at the time of the passage of Dodd-Frank that, we fill books with rules and regulations 

and statutes and on and on, but the reality of the world is that you 

can write and write and write and write and pass laws, but at the 

end of the day there are two things very difficult to protect yourself 

from: number one, stupidity, and we see plenty of that in the financial crisis amongst some very powerful people; and, number two, 

thievery. And I just worry that what we have ended up with here 

is a very hugely complex system. It is hammering the little guy out 

there. We struggle to even tell them whether they are going to be 

caught up in end-user rules or not. And at the end of the day, the 

big get bigger because they have the capital and the wherewithal 

to hire the accountants and the lawyers and everything else that 

is required these days. And I think we are just hurting the system. 

Commissioner Sommers, I would like your reaction to that, and 

you get—I am out of time already, so if you could just answer very 

briefly. 

Ms. SOMMERS. Senator, I would say that I wholeheartedly agree 

with your assessment. I think that as we write these new rules implementing Dodd-Frank, we need to keep the goals of that legislation in mind and to make sure that it works for market participants. 

Senator JOHANNS. Thank you. 

Thank you, Madam Chair. 

Chairwoman STABENOW. Thank you very much. 

Yes, Senator Baucus. 

Senator BAUCUS. Thank you, Madam Chairman. 

I have two questions, basically, for the CFTC. First, Chairman 

Gensler and Commissioner Sommers, are you familiar with a private firm called Atlas Ratings? 

Mr. GENSLER. No, I do not believe so. 

AGRIC-48812 with DISTILLER

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Senator BAUCUS. Well, Atlas Ratings is a company that puts together information with respect to FCMs subsequent to the MF 

Global collapse, and they take the information that the CFTC requires and others require, they take it all, then they compile it. 

And they put together a composite score of various FCMs. And this 

is a copy of it here, and they go through all—the top score is 83, 

then they go all the way down through all the others, and they rate 

according to all kinds of data: transparency, net clearing or nonclearing FCMs, net capital ratios, capital trend, customer flow, 

funds flow, market valuation, lots of factors. And they concluded in 

May of this year that Peregrine is third or fourth from the bottom, 

one of the worst scores. It was right here. It is—well, it is fourth 

from the bottom. They have not counted all the FCMs, but there 

is a bunch of them. 

My question is: If this outfit can get all this data and reach a 

conclusion that Peregrine is in real rough shape here, why can’t the 

CFTC, why can’t your agency know that this company, Peregrine, 

is doing so poorly and ready to probably collapse based upon the 

data at least this one company put together? Do either of you know 

about Atlas? I do not know what other system, what other outfits 

are that give information with respect to the status, financial status, of the FCMs. But here is one outfit, in May, down the bottom, 

and nobody—your agency did nothing about it, as far as I can tell. 

Mr. GENSLER. There may be others at the agency, but I think we 

hugely benefit from the public input, and whether it is analysts, as 

this is, this research, I would like to know who the other three or 

four at the bottom are, but—— 

Senator BAUCUS. I will tell you who they are right now. Maybe 

it will give you a little—— 

Mr. GENSLER. But I think we need to—— 

Senator BAUCUS. —protect some account holders. I will tell you 

if they are. Down at the bottom, the very bottom, is Pioneer Futures. Second from the bottom is Rosenthal Collins Group. Third 

from the bottom is Crossland. And the fourth from the bottom is 

Peregrine. And there is a bunch here, I would say 70, 80, 90 different FCMs. 

Mr. GENSLER. I think that we need to move the self-regulatory 

organizations and the CFTC a bit more to risk-based approach and 

not just what auditors might call ticking and flicking, just, checking the boxes off the page, whether it is the risk of getting a fax 

on a Friday that is different than the fax on a Monday or the risk 

that this Atlas group that you have mentioned have looked at. So 

I think it is part of why Congress ultimately also put a whistleblower piece into our statute that now even whistleblowers can 

come forward, and if there have been penalties paid, they can get 

part of that. I think we are helped out by that because we are ultimately reliant on the public, the self-regulatory organizations and 

the like, as well as our own work. 

Senator BAUCUS. Well, anyway, I ask, Madam Chairman, that 

this be included in the record, this report. 

Chairwoman STABENOW. Without objection. 

Senator BAUCUS. It is just disturbing data. Here is a report 

which ranks Peregrine down at the bottom, near the bottom, fourth 

from the bottom, and that is the first information that seems to be 

AGRIC-48812 with DISTILLER

21 

public, and your agency, which is supposed to be the regulator, did 

not do much about it. There is something wrong here. 

[The report can be found on page 116 in the appendix.] 

Senator BAUCUS. Second, and a little disturbing, this question I 

think has been touched on, basically I met you, Ms. Sommers, and 

asked the degree to which, subsequent to the MF Global collapse, 

you are following up and looking to other FCMs and to make sure 

we do not have another MF Global, you said, ‘‘We are doing that, 

we are doing that, we are doing that.’’ But it seems to me that the 

Commission’s information about Peregrine is just based upon this 

self-certification, and Peregrine just asked, ‘‘How are you doing?’’ 

‘‘Oh, we are doing fine,’’ and without an audit, without digging in 

behind the veil, finding out exactly what is the status of some of 

these outfits. I am just concerned you are just asking, ‘‘Oh, we are 

doing fine.’’ And, of course, that is insufficient. You have got to get 

down deeper and find out whether or not that is true, and it just 

seems to me that your follow-up subsequent to my request, verbal 

plus written, is pretty superficial, not very direct, I mean not deep. 

My impression is you just do not dig deep enough to find out what 

is happening because you are just—you allow self-certification. Is 

that correct or incorrect? And why not? 

Ms. SOMMERS. The follow-up, Senator, that I believe that you are 

referring to is the spot seg audits that we did after MF Global, and 

you are correct that those were not full, complete audits of the 

FCMs. Those were done by not only the CFTC for the top 10 or 12 

firms, but they were also done by the CME for the clearing firms 

and the NFA for the remainder of the FCMs, and those were just 

spot seg audits. 

Senator BAUCUS. Well, my time is up. You are the responsible 

agency. You have got to find a solution. And if you do not have the 

power, you have got to ask for the power. You are the cop on the 

beat. You have got to do your job. I do not think you have been. 

Thank you. 

Chairwoman STABENOW. Thank you very much. 

Senator Grassley. 

Senator GRASSLEY. Thank you. 

Mr. Gensler, it has been reported that the CFTC conducted examinations of Peregrine in 2006 and 2007. Did the CFTC actually 

conduct these examinations? And if so, why didn’t CFTC examiners 

figure out that bank statements were not matching up with what 

was actually in the bank account? And did the examiners independently verify account balances with Peregrine’s bank? 

Mr. GENSLER. Senator, we have looked back. We had done a 

number of reviews, some in the late 1990s and the two that you 

mentioned in the past decade as well. These are not audits. We 

rely on the front-line regulators, the NFA, and also the outside 

CPA. So it is correct that we did not verify bank statements. 

What we are looking at, sometimes we look at anti-money-laundering things, like in 2010 there was another review. Sometimes 

we end with an enforcement action, like in 2000. We actually ended 

up with an enforcement action against Peregrine that was settled 

back then 12 years ago. 

Looking back now at some of those work papers, I do wonder 

about the red flags of what we might better have caught in 1999 

AGRIC-48812 with DISTILLER

22 

and 2000 and so forth. So I have the same question that you have 

about our own work, and we are looking to see how we can do better as well. 

Senator GRASSLEY. Okay. Another question for you. The National 

Futures Association is an organization that serves as these frontline regulators, and that would apply to Peregrine. It has been reported in the Wall Street Journal that the CEO of NFA, Mr. Roth, 

expressed his opinion at a congressional staff briefing that ‘‘auditors are not looking for fraud’’ when conducting their regular audits 

of firms like Peregrine. 

Would you agree with Mr. Roth that our auditors who are auditing these brokerage firms are supposed to be looking for signs of 

fraud or not? 

Mr. GENSLER. Though I am not myself an auditor, I have heard 

there is something—there is a distinction between a fraud audit 

and a financial audit, and it may be that that Mr. Roth was referring to. They do not do full-scale fraud audits. 

Having said that, the records are supposed to be confirmed, the 

balance is validated with the banks and custodials, and Mr. 

Wasendorf has admitted in a statement left when he tried to take 

his life that he had been falsifying these. I mean, this was somebody that for year was dishonest to a broad group of people, his 

outside auditors, including the NFA. 

Senator GRASSLEY. Okay. I do not know whether a statement 

that Senator Klobuchar made about a phone call was made would 

fall into the whistleblower category, but you know my interest in 

protecting whistleblowers, so I have this question for you, Chairman Gensler. Since the collapse of MF Global and now Peregrine, 

there is a lingering question on a lot of people’s minds that is something like this: Are there any other firms out there that are going 

to go bust? The Dodd-Frank legislation required the Commodity 

Futures Trading Commission to establish a whistleblower office, 

and I understand that this office was officially put in place last 

January. 

So my question: Since the opening of the whistleblowers office at 

CFTC, have complaints been made about inappropriate activity 

going on at any futures firms? If so, how many active cases does 

the whistleblower office have that are looking into claims of impropriety? And do you think that the CFTC has done enough to raise 

awareness in the futures industry that the whistleblower office exists and what the function of the office is supposed to be to encourage people to come forth? 

Mr. GENSLER. I thank you for your support because it is an important office. It has been set up. There is a fund set aside with 

money. In fact, with this settlement in this LIBOR case with 

Barclays, the fund will be up to the full maximum Congress made 

of $100 million. 

I think that we could do more to educate the public. We do have 

a consumer office that is now set up, but it is, I think, just two people because, realistically, we are a small agency. And, yes, we have 

had whistleblowers come forward. If you wanted a fuller report, I 

would have to work to get you the details of how many. I cannot 

remember the inventory of claims, but there are a number of whisAGRIC-48812 with DISTILLER

23 

tleblowers that have come forward in general matters. I do not 

know if they have been about customer funds, though. 

Senator GRASSLEY. In the 11 seconds I have left—because I have 

to go Madam Chairwoman—I wanted to raise an issue that I was 

going to raise with Mr. Roth, and it will take 30 seconds to read 

this, and then he can answer for the record. And it is similar to 

what Senator Harkin asked of Mr. Gensler. 

One of the things that continues to trouble me are reports of the 

red flags that were raised about Peregrine Financial, and those red 

flags were ignored. For instance, it has been reported that in 

March 2011, a confirmation form was faxed directly from US Bank 

to the National Futures Association showing that there was about 

$7 million in the bank account designated for segregated customer 

money. Then shortly thereafter, either that day or the following 

business day after finding out US Bank had send the confirmation, 

Mr. Wasendorf, Sr., sent another confirmation showing that there 

was approximately $220 million in the account for customers. 

Question: Is this factual account accurate? Did US Bank send a 

confirmation showing only $7 million of customer money? And then 

what did the NFA do in following up on the contrasting confirmation reports? And did anyone from NFA call the US Bank to verify 

how much was in the account? And if not, why not? 

Thank you. 

Chairwoman STABENOW. Senator Grassley, that is a question for 

the record, I understand? 

Senator GRASSLEY. Yes. 

Chairwoman STABENOW. Yes. Thank you very much. 

[The following information can be found on page 264 in the appendix.] 

Chairwoman STABENOW. Senator Boozman, No? Senator Hoeven. 

Senator HOEVEN. Thank you, Madam Chairman. 

Chairman Gensler, In the simplest, most straightforward way, if 

you would explain to me, how do you ensure that funds from customer segregated accounts are not used by commodity firms? Just 

lay it out. Given what has happened, given Peregrine failing after 

MF Global, how do you protect customers? 

Mr. GENSLER. I think that we will never protect that there will 

not be somebody trying to steal or lie or cheat, as my grandfather 

sort of laid out. But I do think that getting rules in place that the 

regulators can directly on a daily basis see the account balances, 

now with technology’s help, is a big plus. 

I think also filling the hole that Trustee Giddens and the industry and we have all focused on these foreign accountable—I mean, 

it was a gap in our regulations that, just listening to the numbers, 

is nearly $1 billion—or maybe I misunderstood the numbers that 

he said from the public record. 

So I think that there are always going to be folks—most people 

are good people, but some people are going to be bad, and we have 

to close out the avenues where they can defraud the public. But we 

bring 100 enforcement actions a year, and, unfortunately, there are 

going to be some folks that are trying to defraud the public. 

Senator HOEVEN. So you feel you have a better track of the segregated accounts. Do you agree with Trustee Giddens that there 

should be some type of insurance fund like FDI insurance for deAGRIC-48812 with DISTILLER

24 

positors and banks for smaller customers? If so, at what threshold? 

And how should it be funded? 

Mr. GENSLER. I am certainly open to it, but I think it is an issue 

of costs and benefits, and I think that certainly I stand ready at 

the Commission to hear more from the public, from farmers and 

ranchers and others that use these products, as to how to move forward on that, and it certainly would be Congress to take up. But 

I think we have to focus on everything within the laws, within the 

rules that we have now, to ensure that they best protect the public 

and not necessarily sort of just rely or wait for that very important 

policy debate. 

Senator HOEVEN. Commissioner Sommers, your response to the 

same two questions—protecting customer segregated accounts, and 

then should there be some type of fund to protect small customers? 

Ms. SOMMERS. Senator, I believe that there have been a number 

of enhancements that have been identified, not only by the NFA 

but by industry, by the CFTC staff, by the trustee, and we are 

moving forward to implement all of those enhancements. 

With regard to the insurance fund, I think that the issue—as we 

always say the devil is in the details. Who is going to be paying 

these premiums? Is this going to be the FCM? Is it going to be the 

farmer and rancher? I have had a number of conversations with 

producers with regard to whether they would be willing to pay additional costs for premiums if they knew that their accounts were 

protected. Some are, and some are skeptical. So it is something 

that we need to continue to review and study to understand whether it is something the industry would want. 

Senator HOEVEN. Trustee Giddens, customers are concerned 

about how much they are going to get paid back of their segregated 

funds, their account, and when; also, as Senator Johanns said, that 

the senior executives who did wrong are held to account. Give me 

your timeline on both. So with customers, how much are they going 

to get back, in what time frame, your best guesstimate, simple 

terms? And why haven’t charges been fully brought in MF Global 

given that that occurred longer ago than the Peregrine case? 

Mr. GIDDENS. To take the second question first, the timing on 

when any criminal or enforcement actions will come is really up to 

the U.S. Attorney and to the CFTC enforcement actions. As I say, 

we have, as indicated, already commenced working with the plaintiffs’ counsel to bring litigation action against senior management 

of MF Global in order to collect additional funds for customers if 

we are successful in those litigations. So we are moving ahead on 

that. 

The second question is we are and I am determined to return 

money to customers as quickly as I can. I cannot now return money 

until disputes over large claims are resolved by the bankruptcy 

court. We are moving quickly to resolve those disputes. As soon as 

those disputes are resolved, that frees up additional money for distributions. 

How long that process may take, it may take 3 months, it may 

take 6 months, or it may take longer, depending on the complexities of the claims. 

The holding company itself has filed claims against us of $2.2 billion in which it asserts—some of them they assert are securities 

AGRIC-48812 with DISTILLER

25 

claims, some of them they assert are commodities claims. And 

those kind of issues have to be resolved, and I have to keep reserves so that I do not discriminate if it turns out those claims are 

allowed we have sufficient money to do that. So that is the biggest 

problem at present. 

As we collect additional funds from segregated funds or whatever, we move as quickly as we can with the court. We will be distributing additional funds we have collected from the CME, and we 

will make those distributions as quickly as we can. 

So I see this as going on as a sort of serial process. The litigation with the U.K. administrator is over $700 million. That case is 

being pushed before the courts. They have put in their initial position on that. The U.K.’s administrator’s position is that these funds 

are not segregated under U.K. law, and they are going to be unsecured general assets for his administration. My position is these 

were 30.7 funds that the firm, the U.K.—part of the firm agreed 

and said should be segregated. Our position on—our responding position on that case will be filed in September. There will be discovery depositions, and the case should go to trial early in 2013. 

But that is an issue involving $700 million, which, literally I cannot control the timetable. The U.K. courts do. 

But, again, all I am trying to point out is we are doing everything we can as quickly as possible to get funds back to customers. 

Chairwoman STABENOW. Thank you very much. 

Mr. GIDDENS. Thank you. 

Chairwoman STABENOW. Senator Thune. 

Senator THUNE. Thank you, Madam Chair. 

Let me just say, to try to kind of personalize this to the people 

that I represent, I think the biggest question that we are faced 

with is: What needs to be done to ensure that farmers, ranchers, 

and investors and others who utilize commodities and futures can 

be protected from losing their money through misuse of customer 

funds, as has occurred with MF Global and now with Peregrine Financial Group, even though there are laws and regulations that 

have been in place to prevent these types of losses from occurring? 

I think anytime that we talk about making changes to any regulatory structure, we as lawmakers need to ensure that we emerge 

from these bankruptcies with what we have learned and able to 

provide adequate legislative and regulatory modifications to ensure 

that those types of scenarios do not occur again. And we also need 

to make certain that what we do does not create overly cumbersome compliance requirements and overtake normal oversight 

operations. 

So, that said, the Peregrine Financial Group bankruptcy and the 

misuse of customer funds that occurred there, given the fact that 

MF Global occurred just 9 months earlier, is really troubling. And 

the CFTC has made some changes since that time, including implementing some reforms, Rule 1.25, which is known as the ‘‘MF Global Rule,’’ but it is not clear that these rules have enabled the CFTC 

to more effectively oversee their self-regulatory system of the futures industry. 

That point aside, and I would ask this question I guess to Chairman Gensler and to Commissioner Sommers, would you agree that 

the self-regulatory structure of the futures industry along with 

AGRIC-48812 with DISTILLER

26 

some proposed reforms that various self-regulatory agencies have 

been discussing is capable of regulating the modern futures industry? 

Mr. GENSLER. I think that the system can work. I think it does 

need some enhancements, and I do think given that we are also 

going to ask the NFA to register swap dealers—we actually had 

our first swap dealer register with them last Friday. But as they 

start to take on those examination functions, they will have to step 

up their resources, which they plan to do, but they will be challenged. And firms will fail in the future. Firms should be allowed 

to fail in our system, I believe in our system, and not have taxpayers back it either. But when they fail, the customer money has 

to be fully protected, and that is what we—as you say, lessons 

learned from here in this system. But I think it can work with enhancements. 

Senator THUNE. Commissioner Sommers. 

Ms. SOMMERS. Senator, I agree. I think the self-regulatory system has worked for the history of the futures industry, and with 

the enhancements that have been identified, unfortunately, Peregrine happened before we were able at the Commission to implement any further enhancements to our own rules. But we plan to 

do that, and I am hopeful that we will get to that as soon as we 

can. 

Senator THUNE. Let me ask, since the passage of Dodd-Frank, do 

you think the CFTC is spending so much time writing new rules 

and regulations that it has not had time to adequately enforce the 

existing ones like the segregation of customer accounts? 

Mr. GENSLER. I think that we are stretched, but we are very 

much focused on the futures market, and we have restructured our 

group that oversees intermediaries. We were working on, you referred to, Rule 1.25 well before some of the swaps rules, and even 

this LIBOR case is an example. I think hopefully I can speak for 

both of us, so proud of the Division of Enforcement to bring this 

case that they started working on in April of 2008 on something 

that is 70 percent of the futures industry is related to LIBOR. So 

we are very much focused on the futures market and farmers and 

ranchers, but we are stretched thin because the futures market has 

grown so much and now we have these new obligations in the 

swaps market as well. 

Senator THUNE. Commissioner Sommers, what do you think? 

Spending too much time on Dodd-Frank to keep up with the stuff 

you have to do already? 

Ms. SOMMERS. Well, I do believe that we identified many of the 

enhancements that we could have made to the futures industry 6 

months ago, so the changes that are before us now are changes 

that we could have implemented months ago. 

Senator THUNE. Thank you. Let me ask you, Trustee, Giddens, 

in your testimony you provided recommendations for legislative, 

regulatory, and other reforms that might help avert similar liquidations in the future, and I guess the question is: What would 

you say is the single most important and effective legislative 

change that should take place based upon your experience with MF 

Global? 

AGRIC-48812 with DISTILLER

27 

Mr. GIDDENS. I think the one that would have had the most material effect would have been the consideration of the creation of a 

modest investor protection fund. As I say, the number of customers 

we discovered, unlike securities customers, the average account 

here was less than $100,000. So it is a modest amount of money, 

up to $100,000 would have—and the shortfalls might have been 

$20,000 per account or something, would have permitted sort of 

seamless restitution to these customers early on. Now, whether the 

cost of that is practical and so on, but I think that recommendation 

or something like that would be the most important. 

Senator THUNE. Okay. Thank you. I see my time has expired, 

Madam Chairman. Thanks. 

Chairwoman STABENOW. Thank you very much. 

Chairman Gensler, you mentioned a saying that your grandfather used, and I am reminded of another Russian saying used by 

President Reagan: ‘‘Trust, but verify.’’ How often are filings by 

FCMs received but not verified? 

Mr. GENSLER. Well, in fact, they make a filing every month, and 

under the new rules, they will make filings every day. But the 

verifications to outside third parties have historically been done by 

paper and only done annually by the outside auditors or the NFA 

every 9 to 15 months. We want to change our rules to say daily 

that you can see those account balances directly from the bank. 

And if you see it directly from the bank electronically, I think that 

is a form of verification that will significantly enhance this audit 

function. 

Chairwoman STABENOW. Thank you. 

We have heard from many on the buy side who would like to see 

the option of being able to fully segregate their assets for both futures and swaps. Would you or the Commission support customers’ 

having the option of complete segregation? What are the costs and 

benefits to that approach from your perspective? 

Mr. GENSLER. We adopted earlier this year for swaps something 

that walked in that direction, something called ‘‘legal segregation 

but operation commingling.’’ Some pension funds have asked to 

move a step further. We had roundtables on it. I think there is 

something very interesting to pursue, but as I understand it, it 

might need some changes to the bankruptcy law as well to fully facilitate what some of these accounts would like to do. But we can 

encourage the dialogue because I think it is very helpful dialogue. 

Chairwoman STABENOW. Well, speaking of the Bankruptcy Code, 

Trustee Bodenstein, the Code and other relevant laws have different views on the priority of commodity customers over creditors. 

Would you agree that customers should have a special status in 

these proceedings ahead of general creditors? 

Mr. BODENSTEIN. Madam Senator, I believe that one of the provisions of—— 

Chairwoman STABENOW. If you might speak a little bit more in 

the mic, I am not sure you have the—— 

Mr. BODENSTEIN. I am sorry. I believe that under the special provisions for commodity broker liquidations in the Bankruptcy Code, 

there is a separate customer property pool that would have priority 

over the pool of general creditors. 

AGRIC-48812 with DISTILLER

28 

Chairwoman STABENOW. And would you support clarifying that, 

making it very clear that customers go ahead of general creditors? 

Mr. BODENSTEIN. Excuse me? 

Chairwoman STABENOW. Right now bankruptcy law conflicts 

with other laws as to who comes first—— 

Mr. BODENSTEIN. Well, my understanding—— 

Chairwoman STABENOW. —and so as we look at—— 

Mr. BODENSTEIN. I am sorry. My understanding of the Bankruptcy Code—and we will see how these special provisions for commodity broker liquidations play out in this case. My understanding 

at present is that, in fact, the customers do have a priority over 

the claims of the general creditors. 

Chairwoman STABENOW. That is correct. There are other laws 

like the bankruptcy provisions in the Commodity Exchange Act 

that have a different view, so that is I guess what I was asking. 

You support having the status in proceedings for general creditors. 

So we will leave it at that. Let me ask you—— 

Mr. BODENSTEIN. Well, I guess the answer is—I am not an advocate for any one particular group as the trustee, but I will study 

the different provisions and ensure that I apply them with the consent of the court on all the actions as appropriately as possible. 

Chairwoman STABENOW. Sure. Let me ask you, when will Peregrine customers start to get their money back? Do you estimate 

a timeline? 

Mr. BODENSTEIN. I do not have an estimate at this point in time. 

We are working diligently right now to verify customer balances 

and customer segregated funds so that that sort of calculation and 

determination can be made in the near future. 

Chairwoman STABENOW. And along that line, Trustee Giddens, 

how many MF Global accounts were transferred to Peregrine Financial? 

Mr. GIDDENS. Of 27,000 accounts, approximately 590 accounts 

and something like $197 million of associated cash collateral was 

transferred. It was not transferred to PFGBest directly, but it was 

transferred within CME and other exchanges. 

Chairwoman STABENOW. Okay. 

Mr. BODENSTEIN. I have a slightly different take on that. 

Chairwoman STABENOW. Yes, Mr. Bodenstein? 

Mr. BODENSTEIN. I believe that approximately 627 accounts were 

transferred and approximately $197 million. But of that amount, 

only $3.7 million stayed at Peregrine Financial, and the account 

value now of those accounts is slightly in excess of the $3.7 million. 

So, by and large, within days or months after the accounts were 

transferred from MF Global to Peregrine, those customers removed 

the funds, transferred their accounts out of Peregrine. 

Chairwoman STABENOW. Okay. Just to be clear then for the 

record, Mr. Bodenstein, could you give the number again of accounts that you believe—600? What was the number? 

Mr. BODENSTEIN. Based on the preliminary information I requested from the employees at MF Global—at Peregrine, they tell 

me that approximately 627 accounts were transferred. 

Chairwoman STABENOW. Trustee Giddens, you were giving some 

different numbers here. Could you repeat those? 

AGRIC-48812 with DISTILLER

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Mr. GIDDENS. The number we had from our records is not significantly different. We said 590 accounts. And I do not know what the 

accounts did when they were transferred, but I am pleased to hear 

that large numbers of them transferred to another firm. But we 

agree on the figure. I had 590 and approximately $197 million of 

assets that were transferred, and as I say, I think we are glad to 

hear that a significant number of those moved on, and as I understand it, only claims in excess of $3 million remain at Peregrine. 

Chairwoman STABENOW. Okay. Thank you very much. 

Senator Roberts. 

Senator ROBERTS. Well, Madam Chairman, I do not want to beat 

up on a horse that is already out of the barn and in another pasture. But there is a lot of angst, a lot of frustration, and a lot of 

anger in farm country about this. And when I asked Mr. Giddens 

this question, did someone somewhere within MF Global know exactly what they were doing and, if so, willfully move the money out 

of these segregated accounts, the answer was yes. A later question 

by one of the other Senators indicated that that also obviously involved a person at the top, i.e., Mr. Corzine. 

Senator Johanns followed up and indicated, does that mean that 

he is guilty of that willful movement of the money, you were hesitant to say that. I understand that. But certainly I do not want to 

parse words, but it seems to me that he was at least complicit and 

culpable, which leads me to the question of Ms. Sommers. I know 

that you cannot answer the question that farmers and ranchers are 

asking me—and probably asking you as well—why isn’t he in 

court? But my question to you is: Is the Department of Justice 

working with you on this investigation to your satisfaction to bring 

forward criminal charges against those who should be held accountable? 

Ms. SOMMERS. Senator, we have been working with other authorities since the beginning, and just to point out again that a 

willful violation of the Commodity Exchange Act is a Federal crime. 

So if there is evidence to indicate that, that would be something 

that a U.S. Attorney would be able to pursue. 

From our side of this investigation, I think we would never want 

to risk a successful outcome until we are able to review all of the 

facts and circumstances of this case to be able to bring a possible 

case against an entity or a person who may have violated the Commodity Exchange Act. 

Senator ROBERTS. But are you satisfied with the cooperation to 

date with the Department of Justice? 

Ms. SOMMERS. Yes, sir. 

Senator ROBERTS. Well, there is one instance. 

Mr. Bodenstein, can you explain the difference between SIPC 

bankruptcy in the case of MF Global and your Peregrine Chapter 

7 bankruptcy? 

Mr. BODENSTEIN. Senator, I am not an expert on SIPC bankruptcy. I would certainly defer to Mr. Giddens with respect to that. 

With respect to the Bankruptcy Code as it exists, my duties are 

set forth in Section 704 as a general trustee, and now we have this 

overlay of the commodity broker liquidation provisions beginning in 

Section 761 through 767. And I have not had previous experience 

working with those particular provisions, and very few people have 

AGRIC-48812 with DISTILLER

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had that honor or that daunting task of deciphering the meaning 

of those provisions of the Bankruptcy Code, but I look forward to 

that challenge, and I will faithfully—I expect to learn quite a bit 

and form opinions about how those provisions work in tandem with 

the other provisions of the Bankruptcy Code and what recommendations I might have as we go through this liquidation of 

Peregrine on how those can be improved. On future dates, I am 

sure I will be happy to share my thoughts on that with you. 

Senator ROBERTS. A final question for everybody. What do you 

think of CME’s new proposal regarding where segregated funds 

should be held? We can start with the Chairman. 

Mr. GENSLER. We have had very fruitful discussions with the 

CME, with Terry Duffy, who I think might be on your next panel. 

I do think that it, as I understand it, might raise some issues back 

to the Bankruptcy Code again if the funds are not specifically at 

the futures commission merchant, just how it goes into these various provisions that Trustee Bodenstein referred to. 

Senator ROBERTS. Ms. Sommers? 

Ms. SOMMERS. Senator, I think I would applaud all of the market 

participants’ efforts through the last 9 months and the different options that are on the table, and we need to continue to review all 

of these because I think that they could offer some good alternatives to what we currently have. 

Senator ROBERTS. Trustee Giddens? 

Mr. GIDDENS. I think it is a promising proposal. 

Senator ROBERTS. Thank you for your brevity. 

Mr. Bodenstein? 

Mr. BODENSTEIN. I am not familiar with that proposal, Senator. 

Senator ROBERTS. Well, get familiar. I appreciate that very 

much. My time is up. 

Chairwoman STABENOW. Well, thank you very much. And let me 

just say as we dismiss you that there really are three goals that 

we have, as I said in the beginning: Making sure people get their 

money back in the unfortunate 500 or 600 accounts which have 

been hit twice, certainly I do not blame them for being very angry 

and very concerned about the system, as well as everybody else. 

We also want to make sure that people are held accountable for 

wrongdoing. And we want to make sure that the system improves, 

because the first time we heard it was an outlier, and it happened 

again, and I can assure you, if this is happening again, people are 

going to be extremely upset if we are not able to make changes. 

And we certainly support you doing that. 

So you represent all three of those goals sitting before us, and 

we look forward to working with you, and we want to be able to 

answer the question yes when somebody asks us whether or not 

they can trust the futures markets and participate and not put 

their money under their mattress. 

So thank you very much, and we look forward to working with 

you. 

[Recess.] 

Chairwoman STABENOW. Well, good morning, and we welcome 

you to a very, very important second panel. We appreciate your 

participation and input today, and let me introduce each of our witnesses. And as you are aware, we would ask for 5 minutes of openAGRIC-48812 with DISTILLER

31 

ing comments, and anything further for the record we certainly 

would welcome. 

I am pleased to introduce our first panelist: Walt Lukken. Mr. 

Lukken is currently the president and CEO of the Futures Industry Association. Mr. Lukken formerly served as a Commissioner 

and Acting Chairman of the CFTC but, more importantly, Mr. 

Lukken is also an alumnus of the Committee, having served as 

counsel under then-Chairman Richard Lugar. And we welcome you 

back to the Committee. 

Our next panelist is Terry Duffy, certainly no stranger to the 

Committee. Mr. Duffy is the executive chairman and president of 

CME Group. Prior to his work with CME Group, Mr. Duffy was 

president of TDA Trading. He was appointed by 

President Bush and confirmed by the U.S. Senate in 2003 as a 

member of the Federal Retirement Thrift Investment Board. Welcome back. 

Mr. Roth, Dan Roth, is the president and CEO of the National 

Futures Association. It is good to see you. Since joining NFA in 

1983, Mr. Roth has served that organization as its chief operating 

officer, executive vice president, and assistant general counsel. 

Welcome. 

Our next panelist is Diana Klemme. Ms. Klemme is here on behalf of the National Grain and Feed Association and is vice president and director of the Grain Division at the Grain Service Corporation. Ms. Klemme leads a staff that develops merchandising 

and risk management programs and is a well-known author of a 

number of articles on agricultural risk management, and we look 

forward to hearing your perspective this morning. 

Our final panelist is John Roe. Welcome. Mr. Roe is the co-founder of the Commodity Customer Coalition, serves as its vide president, also president of Roe Capital Management. In addition to 

these roles, Mr. Roe is a principal and co-founder of BTR Trading 

Group, and prior to that ran the division of MF Global, which they 

left in June of 2010. We welcome you as well this morning. 

Let us start first with Mr. Lukken. 

STATEMENT OF HON. WALT LUKKEN, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, FUTURES INDUSTRY ASSOCIATION, 

WASHINGTON, DC 

Mr. LUKKEN. Good morning. Chairwoman Stabenow, Ranking 

Member Roberts, FIA is the leading U.S. trade organization for the 

futures industry. While we are not a regulatory authority like the 

NFA or the CFTC, FIA’s mission since its inception has been to 

protect the public interest through adherence to high standards of 

professional conduct and financial integrity. With that in mind, I 

would like to address the recent failures of MF Global and Peregrine Financial Group. Three weeks ago, we learned that more than $200 million in customer funds was missing from Peregrine and that the fraud appears to date back 20 years. This is appalling and absolutely devastating news, especially for our customers, many of them farmers 

and ranchers. Members of the futures industry remain outraged, 

and we strongly encourage the PFG trustee as well as the MF 

AGRIC-48812 with DISTILLER

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Global trustee to quickly return as much money as possible to customers. 

The futures industry took considerable pride that the regulated 

futures markets had come through the financial crisis with relatively few problems. Tragically, we can no longer make that claim. 

These events are a stark reminder that we must never lose sight 

of the most fundamental and basic purpose of our regulatory system: protecting customer funds. 

FIA is pleased that the regulators have adopted and implemented many of our MF Global recommendations. Post-MF Global, 

FIA formed a special expert committee to evaluate necessary 

changes to the customer protection framework. 

In February, we released our initial report, which called on 

FCMs to ensure that they meet the highest industry standards for 

protecting customer funds. For example, we recommended that 

FCMs: one, report daily customer segregated balances and twicemonthly how customer funds are invested under permitted CFTC 

rules; two, annually certify that there are no material weaknesses 

in their internal controls and policies; three, that they maintain appropriate separations of duties among individuals responsible for 

customer funds protections; and, four, that we develop a certified 

training program for chief financial officers and other relevant employees. 

In addition to our support of the NFA and CME’s recent changes 

to improve customer protections, the FIA also generally supports 

the MF Global trustee’s recommendations, which are consistent 

with many of these industry proposals and include studying the 

feasibility of a targeted insurance fund. Even with all that has 

been done, more is needed, and FIA is actively working on such improvements. 

First, FIA strongly supports immediately authorizing regulators 

with the ability to independently review and confirm customer segregated balances electronically across every FCM at any time. 

Second, FIA supports the creation of an automated confirmation 

system for customer segregated funds that will provide regulators 

with timely information that customer funds are secure. FIA participated in last week’s CFTC Technology Advisory Committee 

meeting that discussed such technology solutions, and there are 

several viable technology systems worthy of near-term consideration. 

Third, FIA supports the creation of an FCM Information Portal 

that will centrally house firm-specific financial information regarding FCMs so customers can more readily access material information when evaluating FCMs. 

Fourth, FIA recommends that FCMs publicly certify as soon as 

practicable that they are in compliance with FIA’s initial recommendations and that these controls are independently reviewed 

and audited. 

I was also encouraged by Chairman Gensler’s remarks that the 

Commission is adopting many of these sensible industry recommendations that I have discussed today. The basic blocking and 

tackling of regulation depends on ensuring that firms have proper 

risk controls and systems in place with independent auditing and 

AGRIC-48812 with DISTILLER

33 

verification by regulators. At a time of great regulatory change, we 

cannot lose sight of these oversight fundamentals. 

In conclusion, the embezzlement at Peregrine Financial appears 

to have been missed by a generation of regulators at both the Federal and self-regulatory levels. This, along with MF Global, is unacceptable by any measure. There is no easy solution, no magic bullet 

that will bring back the lost trust from these incidents. Instead, it 

is going to take time and hard work across the industry to implement these improvements to earn back the public’s trust. Customers deserve better, and FIA is wholly committed to winning 

back their confidence by ensuring they have the highest degrees of 

protections going forward. 

Thank you, Madam Chairman. 

[The prepared statement of Mr. Lukken can be found on page 96 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Duffy. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN 

AND PRESIDENT, CME GROUP, INC., CHICAGO, ILLINOIS 

Mr. DUFFY. Chairwoman Stabenow, Ranking Member Roberts, 

we at CME Group are appalled by PFG’s theft of customer segregated funds. This fraud, following MF Global, has shaken the 

very core of our industry. Any breach of trust relating to customer 

funds is absolutely unacceptable—whether at PFG, MFG, or any 

other firm. 

Since the failure of MF Global, CME Group and others in our industry have been committed to strengthening the protections that 

guard customer property. The industry has recently implemented 

new regulatory measures, one of which was the new electronic confirm tool that uncovered Mr. Wasendorf’s misreporting, forgery, 

and theft. But more needs to be done. 

CME and the National Futures Association have adopted four 

measures to deter, detect, and prevent misuse of customer funds. 

Three have been implemented, and the fourth will be made effective in coordination with the NFA next month. We have been conducting surprise reviews of customer segregated accounts since last 

December. We have implemented mandatory daily reporting of segregation statements by all FCMs. And we now require bimonthly 

reporting to ensure that segregated funds are properly invested 

and held at the approved depositories. 

Also, in mid-July CME began using Confirmation.com, an electronic method of receiving statements directly from third-party depositories to verify investment reports. We also began using Confirmation.com as a tool in our regulatory audits and plan to require 

banks to confirm segregated funds using this tool. 

In direct response to the MF Global disaster, we will be implementing the Corzine Rule on September 1st. The rule requires that 

the FCM’s CEO or CFO sign off on any withdrawal of consumer 

segregated funds that exceeds 25 percent of the excess segregated 

funds. They must also inform the CME at the same time. 

As I said, more can be done. At the same time, CME believes 

that the regulators and industry must be careful in weighing the 

AGRIC-48812 with DISTILLER

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costs and benefits of all proposals that may enhance protections for 

the segregated funds of our clients. 

Some have suggested the creation of an industry-funded insurance program covering fraud and failure losses, possibly supplemented by private-arranged insurance. Such a fund would certainly 

boost confidence, but needs to be balanced against known negatives. The negatives are the obvious: it being cost-prohibitive and 

ineffective due to the amount held in U.S. segregation over $150 

billion. 

We need to develop rules, procedures, and systems that give regulators direct, real-time access to customer segregated account balances, and we are working with regulators to do so. In the meantime, today while conducting regular surprise audits, we have the 

ability to call upon our clearing members to access online account 

balances for our on-site review. And while it will be controversial 

and perhaps have disruptive consequences, we should explore 

whether customer property not required as collateral at clearinghouses should, nonetheless, be held by clearinghouses or other 

custodians and whether safeguards should be put in place to limit 

the ability of FCMs to transfer such property except to the authorized recipients. 

In addition, CME Group proposes that Congress amend the 

Bankruptcy Code to permit clearinghouses that hold sufficient collateral to support customer positions of a failed clearing member 

transfer those positions of all non-defaulting customers with the 

supporting collateral to another stable clearing member. 

While we expect that the misconduct of MF Global and PFG will 

renew calls to eliminate the role of exchanges and clearinghouses 

in auditing and enforcement of their members, we do not believe 

that a legitimate case can be made to transfer these responsibilities 

to a Government agency. 

CME Group is committed to working with the Congress, the 

CFTC, NFA, FIA, and market participants to re-evaluate the current system to find solutions to further protect customer funds at 

the FCM level. We are also committed to restoring confidence in 

the markets that so many rely on for their risk management needs. 

I thank you for the opportunity to testify before you today, and 

I look forward to any questions you may have. 

[The prepared statement of Mr. Duffy can be found on page 64 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Roth. 

STATEMENT OF DANIEL J. ROTH, PRESIDENT AND CHIEF EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, ILLINOIS 

Mr. ROTH. Thank you, Madam Chair. As you noted in your opening comments, this is the second time in just 8 months that we are 

here discussing a misuse of customer seg funds, a theft of customer 

seg funds by an FCM. 

This time involving Peregrine, there is a shortfall of approxi- mately $200 million. This fraud was perpetrated through a sea of 

forged bank documents. Peregrine was required to report on a daily 

basis to NFA the amount of customer funds it was holding and 

AGRIC-48812 with DISTILLER

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where those funds were being held. Those reports were false, and 

they were supported by forged daily bank activity statements, 

forged monthly statements, forged acknowledgement letters, forged 

deposit slips, forged certified checks, and forged bank confirmation 

notices. 

We began our most recent exam of Peregrine in mid-June, and 

as part of that process, we very early on in the examination informed the firm that we were switching our bank confirmation 

process, that in the past we had used a traditional bank confirmation process. In which Peregrine would sign a document authorizing its banks, all of its banks, to release certain information to 

NFA. We would then take those documents, mail them to the bank; 

the bank would mail the response directly to NFA; and we would 

compare what the bank was telling us with what the firm was telling us. 

We told Peregrine that we were switching from that to this econfirmation process that we began using in January. It is a Webbased e-confirmation process. We told the firm that the firm would 

have to authorize its participation in that e-confirmation process. 

Mr. Wasendorf, Sr., executed that authorization on Sunday, July 

8th, and the following day he attempted suicide, leaving a note describing the bank forgeries. As soon as we were notified of that 

event, there was an immediate phone call, a teleconference between 

the CFTC, NFA, and Peregrine personnel. 

As of the previous Friday, Peregrine had reported to us that they were holding approximately $380 million in customer funds with 

over half of that, about $200 million, being held at US Bank, the 

office in Cedar Falls. During the teleconference on that Monday 

morning, we immediately instructed the firm personnel to go to the 

bank and get the bank manager on the phone, and when we had 

him on the phone, he told us that the actual balance in the account 

as of the previous Friday was approximately $5 million. 

We then told him that we had written confirmations from the 

bank from our two previous audits and would he please confirm 

balances for those dates, the audit dates for those two previous 

years, 2011 and 2010. For each of those two dates, he again told 

us that the confirmations that we had were false and that they had 

been similarly inflated. 

What we draw from all of this are the same painful lessons that 

we learned in MF Global. The facts that are undeniable are that, 

number one, customers have to know that their funds are safe. 

Number two, it is up to the regulators, both at a governmental 

level and a self-regulatory level, to provide the highest level of assurance of that that we can. 

Number three, we followed standard audit procedures in our examinations of Peregrine, including the bank confirmation process, 

and those standard audit procedures just were not good enough. He 

beat us. He fooled us. He fooled us for too long. We have to do better. We have to find a better way of monitoring members for compliance with all the requirements, but especially customer segregated funds. 

We began that process immediately after MF Global. We formed 

both a special committee of our public directors at NFA and a committee of self-regulatory organizations with the CME, and we 

AGRIC-48812 with DISTILLER

36 

began developing sets of rules—Mr. Duffy described some of them, 

Mr. Gensler described some of them—that have already gone to our 

board of directors. But we also began working on rules to make better use of technology to monitor seg compliance. And at our August 

board meeting, our board will consider a rule that will require all 

FCMs to provide the regulators with direct, view-only, online access to all customer seg bank accounts so that we can go in and 

check a balance at the bank anytime we want, for any bank we 

want, for any FCM we want, without contacting either the firm or 

the bank. 

Beyond that, we hope to build a system, we will build a system 

that takes the e-confirmation process that uncovered this fraud and 

essentially turn it into a daily event. We need to get reports on a 

daily basis from all the depositories holding customer segregated 

funds—banks, FCMs, money market funds. Whatever the permissible investments are, wherever those depositories are, they have 

to file daily reports with regulators which the regulators can then 

on an automated basis compare with the reports we receive from 

the firms to generate alerts regarding any suspicious discrepancies. 

We look forward to working with Congress, with the Commission, 

with the industry, and with all the stakeholders to ensure that we 

tighten these systems. We know we cannot eliminate fraud, but we 

will continue to strive to do that. 

Senator, if I could ask your indulgence for one second, on the 

first panel Senator Grassley raised a question about a comment, a 

quote, a story in the Wall Street Journal that said that I had said 

that it was not NFA’s role to detect fraud. Senator, I have been at 

NFA for 29 years, and I will guarantee you that I have not only 

never said that, I have never thought that. Detection of fraud, combating fraud in the futures industry, has been central to our mission for the last 30 years, and it remains so today. 

Secondly, with respect to the red flags that Senator Harkin and 

others have asked, if it would be helpful, I could just submit a written statement outlining our responses to each of the instances that 

were noted in the press or here today. 

Chairwoman STABENOW. That would be helpful. We would appreciate that. 

Mr. ROTH. Thank you. And I apologize for going over my time. 

[The prepared statement of Mr. Roth can be found on page 105 

in the appendix.] 

Chairwoman STABENOW. That would be helpful. Any information 

or responses that you would like to share would be helpful. 

[The following information can be found on page 264 in the appendix.] 

Chairwoman STABENOW. Ms. Klemme, welcome. 

STATEMENT OF DIANA KLEMME, VICE PRESIDENT AND DIRECTOR, GRAIN DIVISION, GRAIN SERVICE CORPORATION, 

ATLANTA, GEORGIA, ON BEHALF OF THE NATIONAL GRAND 

AND FEED ASSOCIATION 

Ms. KLEMME. Good morning, Chairwoman Stabenow, Ranking 

Member Roberts, other members of the Committee. As you mentioned, I am Diana Klemme. We are an introducing Broker based 

in Atlanta, Georgia. We provide brokerage and advisory services to 

AGRIC-48812 with DISTILLER

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country grain elevators, farmers, and end users of commodities, 

and I am testifying on behalf of the National Grain and Feed Association. 

Many NGFA member firms have been deeply touched by the failure of MF Global, including the firm that I work for. We cleared 

MF Global. I have seen it firsthand. These were the toughest 9 

months of my career. It is as if a bank failed and the customers 

discovered that the contents of their safety deposit boxes had been 

raided and taken in the bankruptcy. 

The unprecedented loss of customer funds in the MF Global debacle has led obviously to a loss of customer confidence in the futures markets and in the system itself. I hear this all the time from 

our own customers. And so as NGFA has considered what changes 

might be workable in the aftermath of MF Global, we asked whether these failures justify systemic change. Then with the discovery 

of long-term fraud and misappropriation in the PFG debacle, it 

does drive home the need not just for regulatory oversight and 

change, but rapid change to fully protect customer funds. In the 

meantime, the customers are still waiting. 

Two such failures in 9 months, especially the failure of PFG 

when regulators presumably were on heightened alert, is just incomprehensible and unconscionable to customers. I get these questions all the time. 

Let me illustrate why by taking one customer from my own client 

base. This is a typical grain elevator. I will not even tell you the 

State. It does not matter. 

Country elevators buy grain from farmers and provide a vital 

service to agriculture. They buy when farmers want to sell. They 

sell grain to end users when a buyer needs a commodity. Elevators 

also provide the service of buying from farmers who may want to 

sell a future crop, which then gives the farmer confidence to go out 

and buy land or rent land or buy inputs. 

But this elevator then has to hold and maintain short futures 

hedges for a year or more and be financially able to meet any margin calls that might occur. And with the drought this year, we 

know what that is involving. 

This one particular customer that I am speaking of currently was 

holding 4.2 million bushels worth of short futures across corn, 

beans, and wheat on July 20th. The combined margin requirements 

for those positions on that day were $9.4 million that this fairly 

small business had to send to Chicago. They have met every margin call immediately, which is a huge act of faith given they just 

went through MF Global and they are still waiting for 20 percent 

of their funds. And, importantly, all hedgers—my customers and 

others—rely on lenders to provide much of the financing for these 

margin calls. So this is not just about farmers, ranchers, elevators, 

et cetera. It is about the ag lenders at the backbone of this. 

This is just one example. It is not even a large company, just a 

typical elevator. Multiply it by the aggregate size of U.S. agriculture, and you can envision the scope of the financial demands 

and exposure that these businesses are participating in right now 

on faith. 

The CFTC’s own Commitment of Traders Report from last Friday 

showed that the hedger/producer/merchant category is holding comAGRIC-48812 with DISTILLER

38 

bined long and short futures in just corn, beans, and wheat of 9.7 

billion bushels that is having to be margined every day with lenders providing these funds. Hedgers have to know these funds are 

safe. Lenders have to know these funds are safe. And brokers want 

to know those funds are safe. 

You might ask why lenders are continuing to fund this system. 

Well, partly because we have all assured customers, NGFA members, and lenders that, after MF Global, change is coming. I have 

been assuring people of that. But they keep asking when. Filing reports is not the answer. It is not enough. Audits are an important 

part of the process, but they are backward-looking, and they do not 

restore confidence. An audit is a piece of paper. It is going to take 

real change with protection of funds in one way or another, much 

like protecting safety deposit box contents. And to get this done, 

not after endless regulatory debate, finger pointing and meetings, 

we have to get it done quickly, especially in the face of the markets 

that we face right now. 

Our full recommendations are outlined in my written testimony, 

which includes a pilot program to test a full segregation system 

with customer funds held separately and includes a number of 

changes to the way bankruptcy laws and the Bankruptcy Code 

handles failures. We recognize that a full segregation structure 

would include additional costs, may not be workable or preferable 

for all customers, but neither is losing their money. For that reason, NGFA also recommends insurance protection for customers. 

Such a fund does not need to be large enough, certainly in the beginning, to fund the entire futures industry. If that ever occurs, we 

have bigger issues to worry about. But we do need something that 

is large enough to protect customers caught in the occasional failure while perhaps longer-term systems are being evaluated and implemented. 

I thank you for the opportunity to share the views and policies 

of the National Grain and Feed Association. 

[The prepared statement of Ms. Klemme can be found on page 

91 in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Roe. 

STATEMENT OF JOHN L. ROE, CO–FOUNDER, COMMODITY 

CUSTOMER COALITION, CHICAGO, ILLINOIS 

Mr. ROE. Good morning, Chairwoman Stabenow, Ranking Member Roberts. Thank you for the invitation to appear before you 

today to discuss the Commodity Customer Coalition’s recommendations for the policy response to the MF Global and PFGBest insolvencies. 

It seems it has become a very risky proposition to tender your 

property to a commodity broker. An industry which just a year ago 

prided itself that no customer had ever lost a penny as the result 

of a clearing member default now hopes that losses due to broker 

insolvencies will be limited to hundreds of millions of dollars, instead of billions of dollars. 

The system of commodity regulation is clearly broken. In fact, 

part of that system is so broken that the regulator in charge of auditing PFGBest’s financials could not tell that the fines they levied 

AGRIC-48812 with DISTILLER

39 

against PFGBest were being paid to them with money that belonged to customers—$700,000 this year alone. 

Before this Committee, Chairman Gensler of the CFTC testified 

that just as it is unreasonable to expect police to stop all bank robbers, it is unreasonable to expect commodity regulators to stop all 

fraud. Yet bank customers do not live in fear that their deposits 

will be robbed by the bank. Moreover, in the event that a bank 

theft is so large that it causes the bank to become insolvent, those 

customers have insurance to protect those deposits. If Chairman 

Gensler’s robbers were to rob a securities broker, they, too, have 

customer account insurance. Commodity customers are only protected by the regulators. 

There is no mechanism in place outside of the bankruptcy process to deal with shortfalls in customer property. Once customer accounts are attached to an FCM bankruptcy, the losses to customers 

have only just begun. In addition to whatever assets with which 

the broker has absconded, customers face losses stemming from 

their inability to manage frozen trading positions and collateral. 

Customers then endure an arduous bankruptcy process with fees 

far in excess of the market price for comparable legal services. 

These bankruptcies will drag on for years, and the administrative 

fees, which may be paid from customer property, will run into the 

hundreds of millions of dollars. 

Participants in American financial markets deserve better. They 

deserve the strongest, most efficient legal protections available. 

They deserve a safety net when the regulators fail. We have to stop 

expecting the regulators to do their jobs and start offering customers protections when they do not. If Mr. Gensler’s robbers cannot be stopped, then at a minimum they must be insured against. 

Among the policy recommendations that we tendered to this 

Committee, the most important is an account insurance mechanism. We propose that Congress authorize an industry-funded liquidity facility, which focuses on providing liquidity to plug shortfalls in customer property and ensure customer accounts are quickly transferred to new brokers with their positions intact. This fund 

would then step into the shoes of customers who would have been 

in the bankruptcy. It would pursue recoveries for the fund’s distributions and reserve property against claims made against customer property. 

This liquidity facility would not be Government funded or managed. Assets for the fund could be raised transactionally as well as 

through member firm assessments. 

There is a working model of this type of fund known as the Canadian Investment Protection Fund in Canada. At MF Global’s Canadian subsidiary, some 7,800 customer accounts were transferred 

with 100 percent of their property to a new broker within 2 weeks. 

In fact, the only reason that it took 2 weeks is accidentally the 

SIPA trustee moved Canadian property that belongs to Canadian 

customers inadvertently and it had to be moved back to be transferred. They were able to make customers whole with the facilitation of a guarantee from that protection fund covering a 20-percent 

shortfall in assets. As a result, Canada’s customers can now say, 

as we used to, that no customers ever lost a penny as a result of 

a clearing member default. 

AGRIC-48812 with DISTILLER

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Like all types of insurance, any such insurance would have to have coverage limits. But if the FDIC can ensure $4.3 trillion in 

bank deposits, surely we can ensure $190 billion in customer segregations cost effectively. 

Congress must also consider enacting new criminal penalties for 

the misuse of commodity customer property. While the PFGBest 

case will likely result in criminal convictions, the probability for a 

criminal conviction in the MF Global case is less certain. The lesson of MF Global should not be that there are no criminal consequences for swiping customer funds. 

Congress must consider measures to counteract the risks to customers resulting from the combination of broker-dealers and FCMs 

in a single corporate entity. Over 80 percent of customer segregated 

property in the United States resides in just 10 of these firms. 

Broker-dealers and FCMs and single entities have exposed over 

$35 billion in commodity customer property to insolvency since the 

financial crisis. We urge Congress to consider forcing broker-dealer 

FCMs to split their operations into separate legal entities. At a 

minimum, the unencumbered collateral of commodity customers 

with accounts at those firms should have SIPC insurance coverage. 

Lastly, Congress must consider making reforms to the Bankruptcy Code, and I know that that is outside the purview of this 

Committee, but it is an important part of an appropriate and complete policy response. A complete overview of our recommendations 

for bankruptcy reform can be found in the recommendations that 

we tendered to the Committee. 

Some in the industry will argue that substantive changes have 

already been made to commodity regulations. They will argue that 

these changes are sufficient to diminish the likelihood of future 

shortfalls. They will say that we just need to enforce what is on the 

books. However, this logic assumes that thieves lack ingenuity. It 

assumes that the same technological advances adopted by the regulators will not also aid the thieves themselves. History demonstrates that regulators are the last to adopt new technologies. No 

more poignant evidence of this is that, in 2012, regulators were 

still relying on paper statements requested from a P.O. box in 

Cedar Rapids, Iowa. If we are to protect ourselves from Chairman 

Gensler’s thieves, we are going to have to do a little bit better than 

that. 

We urge Congress to act to protect commodity customers when 

and where the industry does not. 

[The prepared statement of Mr. Roe can be found on page 101 

in the appendix.] 

Chairwoman STABENOW. Thank you very much. 

Mr. Lukken, first of all, we have all heard from Peregrine customers, and I have heard from one person who is facing the possibility of losing his life savings and literally said he would rather 

put his money under a pillow at the moment rather than invest in 

the futures markets. I am sure that is shared by many people. 

Should futures commission merchants be allowed to hold customer money, or do we need to serious look at an alternative custodial arrangement? And would you support the CME’s recent call for 

funds to be held outside of firms but to have any interest earned 

returned to the firm? 

AGRIC-48812 with DISTILLER

41 

Mr. LUKKEN. Well, we are certainly looking at all ideas to help 

restore customer confidence in this area. As you note, in the futures model, customers give money to their FCM, their brokerage; 

but along with that, there is also a guarantee. The FCM is guaranteeing those customers, and so the FCM has skin in the game as 

well to make sure that the customers’ funds are properly invested 

and that there is due diligence there as well. 

So if we take the FCM and move the customer money up to the 

clearinghouse and do not allow the FCMs to do their own risk management, because of this guarantee they simply become insurance 

companies, passing that money through. 

I think if you look at the totality of the system, where we are 

strengthening FCMs and the segregation, the internal controls that 

we have recommended, the things that have been recommended 

and implemented by the CFTC, the NFA, and the CME, those are 

all strengthening things that are going to help the system. 

I do think we have to look at more things. We have to look at 

this idea of a targeted insurance fund, as we mentioned—— 

Chairwoman STABENOW. Could you speak more about that? Because Mr. Roe talked about having an insurance-type mechanism. 

How do you feel about that? 

Mr. LUKKEN. Well, this is something I think we are actively con- sidering. Mr. Giddens in his report said, that a $100,000 insurance 

fund may have covered 78 percent of MF Global’s customers. So 

that is, I think, something that we have to look at. But as has been 

noted, there are serious costs that may go with these insurance 

programs that we have to consider: coverage, actuarial soundness, 

and also potentially a lot of these insurance programs have a Government guarantee behind them, such as SIPC. So at a time when 

people are nervous about too big to fail, putting in Government 

guarantees is something we have to seriously consider. 

So certainly we are going to be looking in the coming weeks at 

insurance options. We think it may be something we can look at, 

but we will come back to this Committee with our findings. 

Chairwoman STABENOW. Thank you very much. 

Mr. Duffy, on the same note, when you were before us in December, you testified that the costs of an insurance fund would be costprohibitive, but then you, in fact, have put I place something on a 

limited basis for farmers and ranchers and co-ops. So do you believe that this kind of fund is feasible on a larger scale? Wouldn’t 

this sort of an expanded fund help restore the faith in the systems? 

Mr. DUFFY. As I said to you, Madam Chairwoman, when I testified right after MF Global to your Committee, if our family farmer/ 

rancher fund was in place during MF Global, all of the people who 

put food on the tables of the people in America would have been 

made whole. That $100 million fund would have paid $33 million 

out to those farmers. That is exactly what they would have been 

out, and we backed out the accounts of pure bona fide hedgers— 

not speculators, not people doing other things, just people that are 

processing and growing food. 

As far as an insurance fund goes, I think it is really important 

to note in order to get to a billion dollars of insurance, you need 

to charge 5 cents a side a trade for 3 years to get to $1 billion. We 

are charging clients 7 to 10 cents to trade a day, so now we are 

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going to double their cost to add to this fund. When you look at 

something like the Securities—everybody wants to refer to SIPC, 

how it is a great bailout. Well, ask the folks that were invested 

with Mr. Madoff when he took $50 billion and SIPC gave him $2.5 

billion in return. They were basically getting nothing in return. 

Also, in SIPC, the clients do not pay for that insurance. The dealers pay for that insurance. Why? Because there is a payment for 

order flow in the securities world, a completely different structural 

model. We do not have a payment for order flow model in the futures industry. We have a central limit, open, transparent book for 

all to see. And I think that is a completely big, huge difference 

when you talk about who is going to fund these types of insurance 

programs. 

I am not opposed to insurance. I am all for if people want to pay 

for it, they should have the ability to do it, and we will be happy 

to try to facilitate some forms of them to do so. But I think you 

need to understand there are huge differences when people are trying to draw the line between SIPC and what happens in our industry today. Completely different models, who pays for it and why 

they pay for it. 

Chairwoman STABENOW. Okay. Thank you very much. And I 

think, Senator Roberts, with the two of us here, I am going to take 

an extra question on the time and let you do the same. 

Mr. Roth, I want to ask you, with MF Global and Peregrine, 

there were certainly red flags. And with Peregrine there was a long 

history of violations and enforcement actions. Were they receiving 

additional scrutiny compared to other firms because of the violations? 

Mr. ROTH. Senator, Peregrine’s customer base was overwhelmingly retail speculator type customers, and they did receive a good 

deal of regulatory scrutiny, and there were a number of enforcement actions. But, frankly, firms that do retail speculator type 

business tend to encounter more regulatory problems, particularly 

in the area of sales practices, promotional material, the way they 

trade customer accounts in some cases. So Peregrine was subject, 

I think in both the CFTC and NFA, to more regular examinations 

and repeated enforcement actions. None of those examinations and 

none of those enforcement actions, however, involved allegations of 

fraud regarding customer segregated funds. There was not an indication of that. 

Chairwoman STABENOW. Well, but reportedly Mr. Wasendorf, Sr., 

was the sole person in the company officially receiving the bank 

statements, and other individuals in the company, including the 

chief compliance officer, took his word for the fact that the documents were real, at least according to reports. So when we look at 

this, would this consolidation of functions have violated any standard of internal controls that would have been identified in audits 

or other reviews, or should they have? 

Mr. ROTH. Our examinations certainly would have covered internal controls, as would the examinations by the outside CPA. We 

tried to make sure that there was a segregation of duties and that 

the people preparing the segregation computations on a daily basis 

had the expertise to do that function. 

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So, obviously, there was a failure of internal controls in this case, 

and I am not suggesting otherwise, and I think we do need to develop more stringent standards for internal controls. But there 

was—during our examinations we covered that, and we looked to 

make sure that there was—that the people preparing the segregation computations that were reported to us had the ability to do so. 

Chairwoman STABENOW. You talked about the e-confirmation 

process that you are now using. Do you think that is enough? One 

of the concerns, of course, is that, on the one hand, we can say you 

can never totally stop fraud if someone wants to have an elaborate 

scheme. On the other hand, that is not much confidence to people 

who want to use the futures markets. And so going forward, again, 

the trust, but verify position in terms of from a customer’s standpoint. What is the verification, what is the independent verification 

beyond having e-confirmation? 

Mr. ROTH. And, clearly, the e-confirmation process was very 

helpful in this case, but it is equally clearly not enough. And that 

is why we are taking a two-step process on this. At our August 

board meeting, we will require all FCMs to give their regulators 

view-only online access to customers’ segregated bank accounts so 

that the regulators can go in and check a balance anytime we 

want, any day we want, for any bank we want, without the involvement of the firm or the bank. But even that is not enough. As I 

mentioned in my testimony, we need to develop—we need to 

change the e-confirmation process essentially and make it a daily 

event so that we get daily reports from all the depositories of customer segregated funds, not just banks but FCMs and money market funds. Wherever those funds are invested, we need to get daily 

reports from all those seg depositories and then be able to compare 

those daily reports on an automated basis with the reports we are 

receiving from the firm. So we want to take the e-confirmation 

process and basically make it a daily event. 

Chairwoman STABENOW. Thank you. 

Senator Roberts. 

Senator ROBERTS. Well, thank you, Madam Chair. This has been 

an excellent panel. I wish the other members had stayed. 

Mr. Roth, it looks like our standard audit practices obviously 

need to be updated in order to catch somebody like Mr. Wasendorf 

at Peregrine. And you indicate that you have, like Moses sort of 

coming down with a tablet, recommendations that you will give to 

the Committee. Are you sharing those with the rest of the panel 

here? 

Mr. ROTH. Well, actually, our testimony I think was shared with 

the other panel, so I hope so. 

Senator ROBERTS. Right. 

Mr. ROTH. If not, we can certainly provide it. The recommendations that we are talking about were developed in large part 

through an SRO committee in which the CME is an active participant. And we have also conferred very closely with FIA in developing all of the proposals, including—— 

Senator ROBERTS. Well, I am just asking a stovepipe question 

with the exception of Mr. Roe, who is a sheriff of a new posse. 

Mr. ROTH. Right. 

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Senator ROBERTS. And riding point, pretty hard. But at any rate, 

know, do you all ever get together and talk this over? Because it 

seems to me that you all have some very good suggestions, either 

with some kind of insurance electronic transparency, et cetera, et 

cetera. Maybe that is the wrong question to ask you, but at any 

rate, Mr. Lukken, once your recommendations or any of the recommendations are in place, could an MF Global or a Peregrine-type 

event still occur? 

Mr. LUKKEN. I think anybody who is bent on fraud or misappropriation of funds can, try to confound the most sophisticated compliance systems. However, I think what we have recommended is 

going to make that significantly more difficult after the MF Global 

situation, including separation of duties, as I mentioned. This idea 

of going to risk-based audits I think is an important one, this modernizing of how we audit away from a check-the-box system to 

more of an automated daily confirmation directly from the banks, 

that is independently verified. Those are really important steps, 

and the good news is it will also free up auditors to ask the more 

difficult questions, to see the red flags, to go forward with their audits in a more risk-based fashion than check the box. 

So these are important improvements, and I will mention—you 

talk about discussion between the groups. We independently 

huddled with our experts, and we all came to roughly the same improvements, including the idea of studying an insurance fund, 

which some on the panel have looked at as well. So even though 

we have independently studied this, there is significant alignment 

among the recommendations that we have put forward. 

Senator ROBERTS. Well, that is good news. Does the FIA support 

bankruptcy reform? 

Mr. LUKKEN. Certainly we are supportive of some of the recommendations. Obviously it is complex. I think this idea of making 

the Bankruptcy Code easier for people to port away positions so 

that customers at distressed FCMs can move their positions to 

other FCMs, is an important concept. Giving customers more of a 

voice either through the CFTC or through committees on their own 

is an important concept that may need to be addressed. And also, 

I think, when we talk about a broker-dealer FCM going down like 

MF Global. You know, there are differences between the SEC and 

the CFTC rules in this area that for years have not been addressed. I think it is important for those two organizations to sit 

down and make sure there is certainty of rules that when this happens, people know what is going to happen. 

Senator ROBERTS. That is a big issue that the Committee is really interested in, both the Chairwoman and myself. 

This question I asked Chairman Gensler on the first panel. Once 

you have electronic access, won’t you be able to monitor an FCM’s 

account for any unusual intraday activity? 

Mr. LUKKEN. Is that for me? 

Senator ROBERTS. Well, anybody on the panel. Mr. Duffy, you 

have already gone into the insurance question, which I truly appreciate. But I guess that would be for anybody here that wanted to 

talk about it. Mr. Roth, do you want to take that one? 

Mr. ROTH. Sure. I believe the direct, online, view-only access 

could be helpful under those types of circumstances in that when 

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a firm was under financial duress, I think we would be making 

much greater use of that tool, checking perhaps several times during the day to make sure that the seg deposits were as reported 

by the firm, and if there were fluctuations in those balances 

intraday, it could raise a red flag and create suspicions. If the 

funds are going down and then miraculously at the end of the day 

they pop back up, I think that would be something that would 

draw the attention of the regulator. 

Senator ROBERTS. Ms. Klemme, you are certainly a feisty advocate on behalf of your organization that I am fully acquainted with, 

and I thank you for your interest and your leadership. You cannot 

do a rain dance somewhere, can you? 

[Laughter.] 

Ms. KLEMME. I wish I could. 

Senator ROBERTS. All right. What kind insurance would you like 

to see developed? 

Ms. KLEMME. Every form of insurance that has been discussed 

so far has some costs and some drawbacks. To my own point of 

view, and I think on behalf of NGFA, the first thing is urgency. So 

we might start with something that is not the long-run solution but 

the first step. Perhaps it is self-funding, such as Chairman Duffy 

said. Even if it is not a fund of a billion dollars but 20 percent of 

that, 1 cent a side, my customers would pay for it right now. 

Maybe that is not the long-term solution. We want to look at all 

the possibilities, including something that might be SIPC-like, 

could be industry funded, could be totally optional for each individual customer with perhaps CME, perhaps it is through NFA, 

creating the aggregate pool of coverage that customers can take or 

not take. A lot of people might decide not—— 

Senator ROBERTS. And your lenders would support that? I know 

you are quoting your lenders a lot. Your lenders have told you 

something like that? 

Ms. KLEMME. They are concerned about the safety of the money, 

and if there is a very small cost attached to it, I think we would 

find that a lot of lenders would step up to that. 

Mr. ROTH. Senator, could I just make one point? With respect to 

a fee generated through NFA to cover the cost of the insurance, I 

would just point out as a technical matter that would require an 

amendment to the statute because under the existing law, there 

are very strict limits on what we can use our fees and assessments 

for. They can only be used to defray reasonable administrative expenses. So if we wanted to use the NFA fee to be a mechanism to 

fund an insurance program, just so you are aware, that would require a change to the statute. 

Senator ROBERTS. I thank you for that clarification. 

Mr. Roe, you are riding point on this new outfit. You are the cofounder of this group, the Commodity Customer Coalition, following the MF Global situation. Do you think the self-regulatory 

model, all these folks sitting to your right, are still viable given 

these recent events? 

Mr. ROE. I think so in the sense that I do not think it matters 

whether the regulator is paid privately or paid by the Government. 

I think that what both these failures show is that there will be future failures. The system is human, and, therefore, it is going to 

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be able to be breached by other humans. So to our mind, it is not 

to look for ways to make it more difficult in the sense of finding 

new technologies to stop fraud, but it is really to backstop this with 

insurance. It is the only thing that really effectively addresses 

what market participants are seeing, which is, regardless of who 

is in charge, they cannot be assured that their funds are actually 

going to be there when the music stops. 

Senator ROBERTS. Would you be in favor of the proposal by Ms. 

Klemme? We will call it the ‘‘Klemme Plan.’’ 

[Laughter.] 

Mr. ROE. I would have to know a little bit more about it, but—— 

Senator ROBERTS. Step by step. It is called ‘‘Step by Step.’’ Not 

at a full gallop. 

Mr. ROE. On the surface, absolutely. I think that Mr. Duffy is 

right that we cannot try to raise $1 billion in 3 years off an industry that is already hurting. 

Senator ROBERTS. I hope not. 

Mr. ROE. But the NFA just doubled its fee this year, and the 

world did not stop turning. So I think we can raise about $30 million per cent that we assess. We can look at maybe getting some 

assessments from member firms, grow it slowly, and if Congress 

will give the fund the authority to borrow funds at the discount 

window, then based on the cash flow of the fund, you can actually 

insure quite a bit more. And if the fund then goes into bankruptcy 

and pursues recoveries, it can get all its money back just like the 

Canadian Investor Protection Fund did. I think we can do it costeffectively and quickly. 

Senator ROBERTS. I appreciate your answer. I am way over time. 

I am 4 minutes over time, which is not a record for me, by any 

means. 

[Laughter.] 

Senator ROBERTS. But I just want to make a point, Madam 

Chairwoman; I think with all of the questions that were by members, which have been good questions—and the previous panel has 

been a good panel. But these folks here I think are the ones that 

are going to actually come up with the suggestions that turn into 

policy changes that will make a difference. And from that standpoint, I thank you all of you, and I urge you, do not stovepipe this. 

You know, let us work together. Be nice, Mr. Roe. You are going 

to be fine. 

Thank you. 

Chairwoman STABENOW. Well, thank you, Senator Roberts, and 

I am in complete agreement. I appreciate the recommendations we 

have already received, certainly after MF Global, as we put the call 

out. We appreciate that. But clearly there is more to do. This is 

number two now, and we cannot afford number three. Customers 

cannot afford number three. 

So I think it is important. This has been very substantive. I appreciate all of you. As the Ranking Member indicated, this is a very 

important panel, and you have perspectives that are very important for us. And so as we move forward both with the regulators, 

both from the voluntary and the Government regulators, as well as 

the customers who are the most important in this whole process, 

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we look forward to working with you and having integrity in a system that needs to work for people in order for them to do business. 

So thanks very much for your time. 

[Whereupon, at 11:44 a.m., the Committee was adjourned.] 

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A P P E N D I X 

AUGUST 1, 2012 

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WRITTEN STATEMENT OF IRA BODENSTEIN 

TRUSTEE FOR THE CHAPTER 7 BANKRUPTCY ESTATE OF 

PEREGRINE FINANCIAL GROUP, INC., IN CONJUNCTION WITH 

TESTIMONY BEFORE THE SENATE COMMITTEE ON 

AGRICULTURE, NUTRITION AND FORESTRY 

AUGUST 1,2012 

I. INTRODUCTION 

Good morning Chairwoman Stabenow, Ranking Member Roberts, and members of the 

Committee. Thank you for inviting me to appear before you today. I am the newly appointed 

Chapter 7 Trustee of Peregrine Financial Group, Inc. ("Peregrine"), a future commissions 

merchant ("FCM") who filed bankruptcy on July 10,2012. I am here to present the Committee 

with a brief introduction of my background and employment experience, my role as the Chapter 

7 Trustee for the Peregrine estate and events of note in the bankruptcy case in the three weeks 

since the date of its filing. 

I am currently a member of the law firm of Shaw Gussis Fishman Glantz Wolfson & 

Towbin, LLC, a 25 lawyer boutique law firm specializing in corporate insolvency and 

commercial litigation. I am also currently a member of the private panel of trustees in Chicago 

under the supervision of the United States Trustee Program, a component of the Department of 

Justice. Prior to joining Shaw Gussis, I served as the United States Trustee for Region 11, which 

is comprised of the Northern District of Illinois and the State of Wisconsin from May 1998 

through January 2006. I also served as United States Trustee of Region 9, which is comprised of 

the States of Michigan and Ohio from September 2001 through August 2002. In connection with 

my work as United States Trustee I was involved in the supervision of several large cases 

including United Airlines, Kmart, Conseco and LTV Steel. 

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Prior to being appointed United States Trustee, I was a practicing attorney involved in 

various facets of bankruptcy law and commercial litigation. I am licensed to practice law in the 

States of Illinois (1980) and Florida (1982). I am a 1980 graduate of the University of Miami 

School of Law, in Coral Gables, Florida with a JD degree and a 1977 graduate of Franklin and 

Marshall College in Lancaster, Pennsylvania with a BA degree in Government. 

Since joining Shaw Gussis in 2006, I have been appointed a Receiver in Efoora, Inc. 

(SEC Action) and Steven W. Salutric (SEC Action), and served as counsel for the Receiver in 

Lake Shore Asset Management Limited (CFTC Action). In connection with my work in Lake 

Shore, I have also served as a non-voting member of both the Creditors Committee and 

Liquidation Trust Committee in the chapter 11 bankruptcy of Sentinel Management Group, Inc., 

a registered investment advisor and future commissions merchant. 

n. THE TRUSTEE'S ROLE IN THE PEREGRINE CASE 

A. The Role of Chapter 7 Bankruptcy Trustees in General (11 U.S.C. § 704) 

The primary role of any Chapter 7 trustee in bankruptcy is to maximize the net value of 

the estate created by the commencement of the bankruptcy case. When I refer to the net value, I 

mean that a cost benefit analysis must be employed to ensure that the cost of collecting and 

liquidating Peregrine's assets must not exceed their value with respect to any particular asset. 

Another important duty is to provide information concerning the estate and its 

administration to parties in interest. That would include all creditors, customers and 

governmental units. It is my goal to make the process of the estate's administration as 

transparent as possible. As described below, I have already taken steps to that end. 

One of my immediate concerns is the preservation and organization of financial and other 

information relating to Peregrine's assets, liabilities and financial affairs. This is important for 

several reasons, including my need to understand Peregrine's financial affairs in order to 

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properly administer the Peregrine estate, as well as fulfilling the needs of customers, creditors 

and governmental units for such information. 

As Trustee, I am also charged with investigating the financial affairs of Peregrine. I am 

mindful of the pending investigations now being conducted by both law enforcement and 

regulatory agencies. I do no intend to duplicate that effort. It is my intention to fully cooperate 

with those authorities, including making available financial and other records of Peregrine under 

appropriate agreements and safeguards. To the extent I need to investigate Peregrine's financial 

affairs to administer the estate, object to claims or prosecute causes of action, I have retained 

competent and qualified professionals to assist me in those efforts. 

In any case, whenever a trustee comes into possession of property that belongs to a third 

party, the trustee's goal is to return such property to its rightful owner and to pay allowed claims 

as expeditiously as possible. As discussed more fully below, those goals take on special 

significance with respect to customer property in a commodity broker liquidation. 

However, it is important to note that as the Trustee for the Peregrine estate, my duties run 

to the estate and all of its constituents. In other words, it is not my role to advocate for or against 

any particular creditor constituency. My role is to maximize the estate for the benefit of all 

parties. If there is a dispute among competing claimants to particular assets or proceeds, the 

bankruptcy court will resolve those disputes in accordance with applicable law and rules of 

procedure after providing the parties with adeq nate notice and a full and fair opportunity to be 

heard. 

In this case, I have been granted limited authority to operate Peregrine's business in order 

to wind it down in an orderly fashion and maximize the value of Peregrine's remaining assets. 

Consequently, I will also be filing with the bankruptcy court and appropriate governmental units 

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periodic reports and operational summaries. Most, if not all of this information will also be 

contemporaneously available on the website which I have established for this case. 

At the conclusion of the case, after all assets of the estate have been collected and 

liquidated, and all disbursements have been approved, I will file a final report and account of the 

administration of the estate with the United States Trustee and the bankruptcy court. All of the 

reports and summaries of my administration of the Peregrine estate will be public documents, 

available to all interested parties. 

B. Special Bankruptcy Code Provisions Applicable To Commodity Broker 

Liquidations (11 U.S.C. §§ 761-67) 

When the Bankruptcy Code, II U.S.C. §§ 101 et seq., was enacted in 1979, the 

Commodity Futures Trading Commission ("CFTC"), which administers the Commodity 

Enforcement Act, 7 U.S.C. §§ I et seq. ("CEA"), advocated for a set of rules for the systematic 

and uniform treatment of commodity customer accounts in commodity futures merchants 

("CFM") bankruptcies. Subchapter IV of Chapter 7 of the Bankruptcy Code is largely the result 

of the CFTC's efforts. The special commodities provisions of the Bankruptcy Code have been 

amended in material ways five times since 1979, most recently in 2005. Each time the 

Bankruptcy Code's special commodities provisions have been amended, the rules have been 

clarified and strengthened to broaden their application to a variety of transactions. 

The Bankruptcy Code's special commodities provisions relate to three primary types of 

commodity contracts: (1) "commodity futures contracts," (2) "commodity option contracts," and 

(3) "leverage contracts." Other provisions of the Bankruptcy Code relate to "forward contracts." 

The commodities covered by most forward contracts, unlike those covered by commodity futures 

contracts, are generally delivered to the buyer. Buyers under commodity futures contracts 

normally cancel or "hedge" their contracts with offsetting trades. 

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Section 24 of the CEA authorizes the CFTC to adopt rules that: (1) specify what may be 

included in or excluded from the Bankruptcy Code's definition of "customer property"; 

(2) specify what property shall be considered "specifically identifiable" to a particular customer; 

(3) prescribe the method by which the business of a bankrupt commodity broker is to be 

conducted or liquidated; (4) specify the types of commodity firms to which the contracts and 

property of an insolvent commodity firm may be transferred; and (5) prescribe how the "net 

equity" of a customer is to be determined. 

Pursuant to its statutory authority, the CFTC has enacted detailed regulations (17 C.F .R. 

Part 190) relating to, among other things, definitions of relevant terms; operation of the 

bankruptcy estate; making and taking delivery of commodity contracts; transfers of property, 

accounts, and contracts; calculation of allowed net equity; and allocation of property and 

allowance of claims. 

The CFTC's other bankruptcy-related powers are contained in the Bankruptcy Code's 

commodity broker liquidation subchapter. For example, the CFTC may intervene in any 

commodity broker bankruptcy case and can, in effect, immunize transfers of customer accounts 

from avoidance by bankruptcy trustees by approving the transfers, either by rule or order, either 

before or after the transfer occurs. 

In commodity broker bankruptcy proceedings, the trustee's tasks may include, in addition 

to the customary duties of all Chapter 7 trustees, the following: 

1. provide notice to the CFTC; 

2. attempt to estimate any short-fall in customer segregated funds; 

3. attempt to effectuate a "bulk transfer" of customer positions and property to a 

solvent commodity broker, 

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4. determine which open commodity contracts and property are "specifically 

identifiable" to customers; 

5. notifY customers who have "specifically identifiable" property or commodity 

contracts, and request instructions from such customers; 

6. liquidating or offsetting of property which is not "specifically identifiable" or 

which is "specifically identifiable" but for which no instructions are received; 

7. make margin calls and meet timely delivery requirements; 

8. compute estimated and then fully "funded balances" (net equity claims) for each 

customer; and 

9. distribute customer property . 

CFTC regulations set forth an approximate schedule during which trustees should 

perform their duties during the early stages of commodity broker bankruptcy proceedings. 

C. Treatment of Customer Property (11 U.S.c. § 766) 

The Bankruptcy Code gives commodity customers an important priority in the 

distribution of a bankrupt commodity broker's assets, subordinate only to: (a) certain domestic 

support obligations, if applicable; (b) certain administrative claims of the debtor's estate; and 

(c) certain expenses attributable to administering customer property and claims. 

The Bankruptcy Code, in effect, divides the debtor's assets into two distinct estates: 

(1) the "customer property" estate and (2) tbe general estate. Customer property may not be used 

to pay the claims of the broker's general creditors until the commodity customers' claims have 

been fully satisfied. After the trustee's customer specific expenses have been satisfied, the assets 

remaining in the customer-property estate are distributed to customers on a pro rata basis, 

according to the net equity in accounts. If there are insufficient assets in the customer-property 

estate to satisfY customer claims, the customers become general creditors as to the unpaid portion 

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of their claims and share equally with the other general unsecured creditors in the distribution of 

any assets in the general estate. 

The Bankruptcy Code's underlying policy is the equality of distribution among all 

customers within the same creditor class. Therefore, all customer property, whether or not 

separately maintained, is subject to pro rata distribution. "Specifically identifiable" property 

may be transferred or returned, but only upon the payment by the customer to the estate of cash 

equaling the difference between the value of the property and the customer's pro rata share of the 

estate. 

Under prior law, the trustee of a bankrupt commodity customer might have been able to 

recover the margin payments that had been made by a debtor to an FCM within one year of 

bankruptcy. Similarly, the trustee of a bankrupt FCM might have been able to recover the 

margin payments that had been made by the FCM to another FCM or to the clearinghouse of a 

commodity exchange. The Bankruptcy Code, however, prohibits recovery of these payments 

unless the trustee can show that the bankrupt customer or FCM made the payments with "actual 

intent" to hinder, delay, or defraud creditors. Even if the trustee can meet its burden, recovery is 

prohibited from a payee that took the payment in "good faith." 

The Bankruptcy Code also facilitates efforts of exchanges and regulators to transfer 

customer property from failing FCMs to solvent FCMs. If the failing firm declares bankruptcy, 

the Bankruptcy Code prohibits the firm's trustee from recovering the transferred funds if the 

transfers were approved by the CFTC. 

The 2005 Amendments to the Bankruptcy Code introduced additional protections to 

partici pants of certain fmancial contracts by providing that their exercise of rights under 

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applicable provisions of the Bankruptcy Code does not affect the priority of any unsecured claim 

such participant might have after the exercise of those rights. 

Customer property which is "specifically identifiable" receives special treatment under 

the Bankruptcy Code. While other customer property is within the sole control of the trustee to 

transfer or liquidate, Bankruptcy Code § 766 grants customers who own "specifically 

identifiable" property certain rights regarding the property. 

Bankruptcy Code § 766( c) provides that the trustee shall return promptly to a customer 

any specifically identifiable security, property, or commodity contract to which such customer is 

entitled, or shall transfer such security, property, or commodity contract to a solvent commodity 

broker, to the extent that the value of such security, property, or commodity contract does not 

exceed the customer's pro rata share of the estate if such security, property, or commodity 

contract were not returned or transferred under this subsection. Bankruptcy Code § 766( d) 

provides that if the value of a specifically identifiable security, property, or commodity contract 

exceeds the customer's pro rata share of the estate, the customer may deposit cash with the 

trustee equal to the difference between the value of such security, property, or commodity 

contract and such amount; and the trustee shall return the property to the customer or transfer it 

to a solvent broker. Bankruptcy Code § 766(a) requires the trustee to answer all margin calls 

with respect to a customer's specifically identifiable commodity contract until such time as the 

trustee returns or transfers such commodity contract, but the trustee may not make a margin 

payment that has the effect of a distribution to such customer of more than the customer's pro 

rata share of the estate. 

The Bankruptcy Code itself does not define the term "specifically identifiable" property. 

The CFTC has enacted regulations containing such definitions. Securities which margin, 

(10403·001 MSC A0323561DOC 4} 
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guarantee, or secure an open commodity contract and which are held for the account of a 

customer, registered in the customer's name, not transferable by delivery, and not a short-term 

obligation are specifically identifiable property, as are documents of title which are identified as 

held for the account of a particular customer. As to open commodity contracts, only hedge 

positions' identified on the books of the debtor as held for the account of a particular customer in 

a designated hedge account are specifically identifiable property. Certain other property is also 

deemed to be "specifically identifiable." CFTC regulation 17 C.F.R. Part 190.02(b) requires the 

trustee to request customer instructions conceming the transfer or liquidation of specifieally 

identifiable property or contracts within two days following entry of the order for relief. If 

instructions are not timely received, the trustee will liquidate the property or contract. Customers 

requesting the transfer or return of specifically identifiable property must deposit with the trustee 

cash equaling the difference between the value of the property and the customer's pro rata share 

of the estate, together with "adequate security" to protect against overpayment by the trustee. 

Bankruptcy Code § 766( e) provides, inter alia, that the trustee shall liquidate any 

commodity contract that is not specifically identifiable to a particular customer. Therefore, if the 

trustee concludes that it will not be possible to transfer commodity contracts and property to a 

solvent broker, the trustee must begin liquidating nonspecifically identifiable contracts and 

property "promptly and in an orderly manner." The prompt liquidation of such contracts and 

property protects the estate against exposure to the risk of adverse market fluctuations in the 

value ofthose contracts and property. 

III. EVENTS OF SIGNIFICANCE IN PEREGRINE CASE TO DATE 

Upon my appointment as trustee and consistent with my fiduciary duties, I took steps to 

secure Peregrine's assets and to protect customer accounts and information. I immediately went 

to Peregrine's Chicago office to confer with Peregrine's management in connection with my 

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need to operate the business on a limited basis for a limited period of time. I also spoke to 

certain employees about remaining employed for a limited period of time as their services are 

imperative to an orderly liquidation of Peregrine's estate. Those employees are currently 

assisting in my endeavors. 

A. Trustee's Professionals 

To assist me in connection with my duties as trustee, and subject to the approval of the 

bankruptcy court, I have selected various professionals which I am seeking to retain. The 

professionals include: (i) Shaw Gussis Fishman Glantz Wolfson & Towbin, LLC ("Shaw 

Gussis") to represent me as general bankruptcy counsel, (ii) Rust Consulting, Inc. ("Rust Omni") 

to serve as a claims and noticing agent, (iii) PricewaterhouseCoopers ("PWC") to serve as 

financial advisor, and (iv) Foley & Lardner, LLP to serve as special counsel to assist me in 

liquidating Peregrine's estate on technical issues related to the Commodities Enforcement Act 

and customer property issues. I have also selected and will retain Canadian counsel to assist in 

addressing issues related to Peregrine Financial Group Canada, Inc., a wholly owned subsidiary 

of Peregrine. The Investment Industry Regulatory Organization of Canada ("UROC") has 

commenced regulatory hearings on the status of Peregrine's case and with the assistance of 

Canadian counsel, I am working with UROC to ensure that the matter is handled properly. 

B. Significant Actions by the Trustee 

Prior to Peregrine filing a petition for relief in bankruptcy, the United States Commodity 

Futures Trading Commission filed a lawsuit in the United States District Court for the Northern 

District of Illinois ("District Court") alleging that Peregrine and its founder, Russell Wasendorf 

Sr. ("Wasendorf'), committed fraud, customer-funds violations and made false statements (the 

"District Court Case"). In connection with the District Court Case, on July 10, 2012, an Order 

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was entered appointing Michael Eidelman (the "Receiver") as a temporary receiver over the 

assets of Peregrine and Wasendorf(the "Receiver Order"). 

On that same day, Peregrine filed a petition for relief in bankruptcy. Peregrine's 

bankruptcy petition reflects that its assets total approximately $500,000,001 to $1 billion and that 

its liabilities total approximately $100,000,001 to $500 million. 

Immediately following my appointment as Trustee, on July 12, 2012, I filed an 

emergency motion in the Bankruptcy Court for authority to operate Peregrine's business on a 

limited basis to facilitate the liquidation of Peregrine's assets, which included a request for 

authority to retain certain employees and pay their accrued but unpaid pre-petition wages. On 

July 13, 2012, the bankruptcy court granted the motion allowing me to operate the business 

through September 13,2012, without prejudice to my ability to seek further extensions. To that 

end, I have been working on obtaining applicable customer account information and locating 

Peregrine's assets with the assistance of Peregrine's employees. 

I am also working diligently to address employee issues, including those related to an 

investigation that has been initiated by the Department of Labor into Peregrine's employee 

401(k) plan. 

To assist in the management of customer and creditor inquires, Rust Omni is setting up a 

data room whereby the trustee's professionals will be able to view Peregrine's accounts and all 

related financial transactions. Rust Omni has also assisted in creating an informational website, 

which can be accessed at www.pfgchapter7.com and a call center in which customers can access 

automated information by dialing (877) 465-1849. Rust Omni will continue to assist in this case 

by managing creditor information and serving notices to Peregrine's creditors. 

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I have also met with the Receiver and his counsel on several occasions and maintain a 

continuing dialogue with him and his staff in order to ensure the orderly liquidation of 

Peregrine's assets. Both the Receiver Order and a CFTC statutory restraining order have also 

been amended to provide that the Receiver is only the receiver over the assets of Wasendorf, and 

not Peregrine. 

With the assistance of my counsel, I have also spent a significant amount of time at 

Peregrine's offices in Chicago, Illinois as well as Cedar Falls, Iowa. While at Peregrine's 

offices, I have been gathering information and facilitating the wind down of Peregrine's 

business. 

Recently, pursuant to a court order entered on July 25, 2012, I have been given authority 

from the bankruptcy court to prepare schedules and statement of financial affairs ("Schedules") 

on behalf of Peregrine. Schedules list all of a debtor's assets and liabilities, as well as 

information regarding certain of a debtor's activities prior to filing for relief in bankruptcy. It is 

a debtor's duty to file Schedules with the bankruptcy court, but under the unique circumstances 

of this case, I have sought and obtained authority to file the Schedules as they will be imperative 

in this case. The deadline for me to do so is September 6,2012. 

Pursuant to the provisions of II U.S.C. § 341(a), a meeting of creditors has been 

scheduled to take plaee in Chicago on September 10, 2012. The meeting will be held in the 

Dirksen Federal Building, 219 S. Dearborn Street, beginning at 10:00 a.m. At that meeting, I 

will question a representative of the debtor concerning the information contained in the filed 

Schedules. 

Among other items of note, the Trustee consulted with the CTFC regarding the 

appropriate and necessary notice to be sent to holders of specifically identifiable property and 

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prepared and presented a motion to authorize limited notice to those customers, rather than 

notice by publication to all ofPcregrine's customers per CFTC regulations, and approve the form 

of that notice. The relief was granted, and notice was immediately sent to the customers. The 

Trustee is currently in the process of coordinating the return of specifically identifiable property 

consistent with the provisions of 17 C.F.R. Part 190. 

After consultation with the CFTC and (he National Futures Association, the Trustee has 

also filed a motion with the bankruptcy court seeking approval of procedures for fixing pricing 

and claim amounts in cOimection with the termination and liquidation of Peregrine's foreign 

currency ("forex") customer agreements and transactions. Section 766(f) of the Bankruptcy 

Code provides that "as soon as practicable after the commencement of the case," the trustee of a 

commodity broker liquidation "shall reduce to money, consistent with good market practice, all 

securities and other property, other than commodity contracts, held as property of the estate ... 

. " 11 U.S.C. § 766(f). This motion is pending. 

IV. CONCLUSION 

Since the filing of the Peregrine bankruptcy and my appointment as trustee my priorities 

have been to investigate and secure the assets of Peregrine and its customers and to ensure that 

all current information be preserved. To that end I have retained the professionals necessary to 

assist me in securing the assets and taking control of, preserving and consolidating the databases 

and paper records of Peregrine. 

This information is being preserved in order to ensure transparency in the liquidation of 

Peregrine. I have been and will continue to coordinate and work cooperatively with the CFTC, 

the NF A, the FBI and the US Attorneys Oflice in coordinating the liquidation of Peregrine and 

providing access to all information needed in their respective civil and criminal investigations. I 

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have also been contacted by counsel for the Commodity Customer Coalition and expect to have a 

continuing dialogue with that group as the bankruptcy case progresses. 

I can assure you that the determination of accurate customer information for all Peregrine 

account holders is also one of my upmost priorities. With the assistance of the team I have put in 

place, I intend to confirm the validity of the information on the books and records at Peregrine so 

that such information can be disseminated to the account holders with all deliberate speed, 

ultimately allowing me to determine the appropriate distribution(s) to be made to customers and 

allowing for such distributions to be made as soon as practicable. 

Thank you for the opportunity to appear before this Committee. 

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WRlTTEN TESTIMONY 

OF 

TERRENCE A. DUFFY 

EXECUTIVE CHAIRMAN & PRESIDENT 

CME GROUP INC. 

BEFORE THE 

SENATE COMMITTEE ON AGRICULTURE, NUTRITION & FORESTRY HEARING ON 

"Examining the Futures Markets: Responding to the Failures of 

MF Global and Peregrine Financial Group" 

August 1,2012 

Chairwoman Stabenow, Ranking Member Roberts, Members of the Committee, thank you for the 

opportunity to testify regarding the industry's efforts to deter, detect and prevent the misuse of customer 

funds. We, at CME Group, are appalled by the theft by Mr. Wasendorf of Peregrine Financial Group 

("PFG") of customer segregated funds. This fraud, following MF Global Inc. ("MFG"), has shaken the 

very core of our industry. 

Any breach of trust relating to customer funds is absolutely unacceptable, period whether at 

PFG or MFG, or any firm. Since the failure ofMFG, CME Group and others in our industry have been 

committed to strengthening the protections that guard customer property. The industry has recently 

implemented new regulatory measures, one of which was the new electronic confirm tool that uncovered 

Mr. Wasendorf s misreporting, forgery and theft. But more needs to be done. 

Industry Proposals to Protect Customers in the Wake ofMFG's Failure 

On March 12'h, a special committee composed of representatives from the futures industry's 

regulatory organizations, including CME (the "SRO Committee"), offered four recommendations to 

strengthen current safeguards for customer segregated funds held at the firm level. The first three have 

been implemented, and the fourth will be made effective in coordination with the National Futures 

Association (" NFA") in September: 

Requiring all Futures Commission Merchants (FCM) to file daily segregation reports. 

Requiring aU FCMs to file bi-monthly Segregation Investment Detail Reports ("SIDR"), 

reflecting how customer segregated funds are invested and where those funds are held.' 

Performing more frequent periodic spot checks to monitor FCM compliance with segregation 

requirements since last December. 

In direct response to the MFG collapse, the "Corzine Rule" will be implemented on September 

I". The "Corzine Rule" requires the CEO or CFO of the FCM to pre-approve in writing any 

JOaily segregation reporting and bimonthly SIDRs were also recommended by the Futures Industry 

Association in its proposed initial recommendations made on February 29th. 

http://www.futuresindustrv.orgldownloads/lnitial Recommendations for Customer Funds Protec 

tion.pdf 
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disbursement of customer segregated funds not made for the benefit of customers and tbat 

exceeds 25% of the firm's excess segregated funds. The CME (or other SROs) must be 

immediately notified of the pre-approval. 

In addition, to enhance intra-regulator coordination, we have established routine communications with 

FINRA for all of our common firms - the finn coordinators/relationship managers will reach out to each 

other to have these communications. 

The SRO Committee has also implemented, or is in the process of implementing, the following 

initiatives: 

Using Confmnation.com - an electronic method of receiving account statements or balances from 

a third party bank or depository to check information provided by FCMs to regulators. NFA's 

use of Confirmation. com uncovered the initial statement and reporting irregularities at PFG. 

The SRO Committee plans to use the Confimlation.com tool as follows: 

o In regulatory audits now and going forward; 

o To verify bi-monthly SIDRs (investment reports). CME started using the tool for this 

purposed in mid-July; and 

o To periodically review the accuracy of daily segregation statements. 

Also, the SRO Committee agreed to develop rules to require all FCMs to provide them with 

direct online access to their bank or depository accounts to confirm segregated funds balances. 

The Futures Industry Association's internal controls recommendations will be presented to the FCM 

Advisory Committee in August. These include: 

Requiring FCMs to assure the appropriate separation of duties among individuals working at 

FCMs who are responsible for compliance with the rules protecting customer funds; 

• Requiring FCMs to document their policies and procedures in several critical areas, including the 

valuation of securities held in segregated accounts, the selection of banks, custodians and other 

depositories for customer funds, and the maintenance and withdrawal of "residual interest," 

which consists of the excess funds deposited by fmns in the customer segregated accounts. 

NFA's Website Access to FCM capital ratios and investment reports (SIDRs) will be presented to the 

NFA's Board of Directors in August. 

CME Group Initiatives 

Notwithstanding the fact that MFG's misconduct was the cause of the shortfall in customer segregated 

funds, CME Group's efforts in the wake of these events speak to the level of our commitment to ensuring 

our customers' confidence in our markets: 
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Guarantee for SIPC Trustee. We made an unprecedented guarantee of$550 million to the SIPC 

Trustee in order to accelerate the distribution of funds to customers. 

CME Trust Pledge. CME Trust pledged virtually all of its capital - $50 million - to cover CME 

Group customer losses due to MFG's misuse of customer funds. 

CME Group Family Farmer and Rancher Protection Fund. On April 2, 2012, CME Group 

launched the CME Group Family Farmer and Rancher Protection Fund to protect family farmers, 

family ranchers and their cooperatives against losses of up to $25,000 per participant in the event 

of shortfalls in segregated funds. Farming and ranching cooperatives also will be eligible for up 

to $100,000 per cooperative. 

The Protection Fund is available to PFG customers that qualify under Program terms. 

• Agreement with MFG Trustee. On June 14,2012, the agreement between the SIPC Trustee for MFG 

and CME Group was filed in the Bankruptcy Court. It provides for the distribution of approximately 

$130 million ofMFG proprietary assets, on which CME and its members held perfected security 

interests, to MFG customers. The agreement is currently under review by the Bankruptcy Court. 

Bankruptcy Code. The shortfall in customer segregated funds occurred only in regard to funds under 

MFG's control. The customers' funds held in segregation at the clearing level at CME and other U.S. 

clearinghouses were intact. However, the clearinghouses were not able to avoid market disruptions 

by immediately transferring tbose customer positions and any related collateral because of limitations 

under the Bankruptcy Code. We propose that Congress amend the Bankruptcy Code to permit 

clearinghouses that hold sufficient collateral to support customer positions of a failed clearing 

member promptly to transfer all customer positions with supporting collateral, except defaulting 

customer positions, to another stable clearing member. 

More Can Be Done 

However, CME Group believes that more can be done, especially in light of the recent fraud at 

PFG and its impact on public confidence. CME believes that the regulators and industry need to carefully 

weigh the costs and benefits of even the most far-reaching proposals that might enhance protection for the 

segregated funds of our customers. 

Some have suggested creating an industry-funded insurance program covering fraud and failure 

losses, possibly supplemented by privately arranged insurance. Such a program would certainly boost 

confidence but needs to be balanced against known negatives. It is likely to be cost prohibitive and 

ineffective given the size and scope of tbe accounts in our business, and may encourage tbe "moral hazard 

risk" tbat comes into play when customers feel they don't need to worry about their choice or stability of 

their FCMs. 

We need to develop procedures and systems that give regulators direct, real time access to 

customer segregated account balances, and, as stated above, the SRO Committee is working to do so. 

Today, as part of regular or surprise audits, and wbile we are onsite in tbeir offices, we are instructing 

clearing members to access tbeir online bank or depository segregated account balances so our auditors 

can review them real-time. As stated earlier, CME is working to codify this real-time access in our rules. 
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And, while it will be controversial and perhaps have disruptive consequences, we should explore 

whether customer property not required as collateral at clearing houses should, nonetheless be held by 

clearing houses or other custodians (while returning interest earned on that money hack to the FCMs) and 

whether safeguards should be put in place to limit the ability of FCMs to transfer such property except to 

authorized recipients. We believe a look at these proposals in conjunction with our other efforts is 

necessary to restore public confidence in the derivatives markets while preserving the operating model for 

the vast majority of firms who respect and comply with the rules. 

Finally, while we expect that the misconduct ofMFG and PFG will renew calls to eliminate the 

role of exchanges and clearing houses in auditing and enforcement of their members, we do not believe 

that a legitimate case can be made to transfer these responsibilities to a government agency. Our 

regulatory systems are resilient, adaptive to address the challenges and efficient. The next section of my 

testimony focuses on why it is more important than ever to not only retain, but strengthen the self- . 

regulatory structure. 

Current Regulatory Structure Should Not Be Abandoned 

Some critics suggest that the current regulatory framework is somehow to blame for MFG's and 

PFG's misconduct. As further detailed in the discussion below, "self-regulation" in the context of futures 

markets regulation is a misnomer, because the regulatory structure of the modern U.S. futures industry is 

in fact a comprehensive network of regulatory organizations that work together to ensure the effective 

regulation of all industry patticipants. 

The CEA estahlishes the federal statutory framework that regulates the trading and clearing of 

futures and futures options in the United States, and following the recent passage of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, its scope has been expanded to include the over-the-counter 

swaps market as well. The CEA is administered by the CFTC, which establishes regulations governing 

the conduct and responsibilities of market participants, exchanges and clearing houses. 

With respect to MF Global, CME was the designated self-regulatory organization ("DSRO"). As 

MFG's DSRO, CME was respon"sible for conducting periodic audits ofMFG's FCM-arm and worked 

with the other regulatory hodies of which the finn is a member. Some critics have suggested that the 

failure of MFG demonstrates that the current system of front line aUditing and regulation by clearing 

houses and exchanges is deficient because of conflicts of interest. However, there is no conflict of 

interest between the CME Group's duties as a DRSO and its duties to its shareholders both require that 

it diligently keep its markets fair and open by vigorously regulating all market participants. 

Federal law mandates an organizational structure that eliminates conflicts of interest. In addition, 

we have very compelling incentives to ensure that our regulatory programs operate effectively. We have 

established a robust set of safeguards designed to ensure these functions operate free from conflicts of 

interest or inappropriate influence. The CFTC conducts its own surveillance of the markets and market 

participants and actively enforces compliance with the CEA and Commission regulations. In addition to 

the CFTC's oversight of the markets, exchanges separately establish and enforce rules governing the 

activity of all market participants in their markets. Further, the NF A, the registered futures association for 

the industry, establishes rules and has regulatory authority with respect to every firm and individual who 

conducts futures trading business with public customers. The CFTC, in turn, oversees the effectiveness 

ofthe exchanges, clearing houses and the NF A in fulfilling their respective regulatory responsibilities. 

In summary, the futures industry is a very highly-regulated industry with several layers of 

oversight. The industry's current regulatory structure is not that ofa single entity governed by its 
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members regulating its members, but rather a structure in which exchanges, most of which are public 

companies, regulate the activity of all participants in their markets - members as well as non-members -

complemented with timher oversight by the NF A and CFTC. 

Conclusion 

CME Group is committed to working with Congress, CFTC, NF A, FIA and market participants 

to re-evaluate the current system to fmd solutions to ftuiher protect customer funds at the FCM level, and 

to restoring confidence in derivatives markets that so many rely on for their risk management needs. 

Finding solutions continues to be or highest priority. We are prepared to lead. 

Thank you for the opportunity to testify before the Committee today. 
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STATEMENT OF LOUIS J. FREEH 

BEFORE THE UNITED STATES SENATE 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

AUGUST 1,2012 

Chairwoman Stabenow, Ranking Member Roberts, and Distinguished Members 

of the Committee: 

My name is Louis J. Freeh and I am the Chapter 11 Trustee ofMF Global 

Holdings Ltd., the ultimate parent of the entire worldwide enterprise commonly known as 

MF Global, and five of its subsidiaries, which I will refer to as the chapter 11 estates. 

Thank you for inviting me to submit a written statement to the Committee in connection 

with the hearing on August 1,2012. I regret that a long standing, prior commitment 

prevents me from appearing in person at the hearing, and I truly appreciate our 

conversation, Chairwoman Stabenow, and your understanding in that regard. I welcome 

the opportunity to share with the Committee some of my observations as the trustee of 

the chapter 11 estates and to respond to any follow up questions for the record, as you 

have requested. 

Prior to its collapse, the entities that comprised the MF Global enterprise, which I 

will refer to as the "MF Global Group", employed 2,870 people and, through their 

regulated and unregulated broker-dealers and futures commission merchants, were some 

of the world's leading brokers in markets for commodities and listed derivatives. The 

MF Global Group maintained operations in, among other countries, the United Kingdom, 

Australia, Singapore, India, Canada, Hong Kong, Japan and Taiwan, and these entities 

provided access to more than seventy exchanges globally. The MF Global Group was a 

leader by volume on many of the world's largest derivative exchanges and, additionally, 

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was an active broker-dealer in markets for commodities, fixed income securities, equities, 

and foreign exchange. 

The MF Global Group's priority was to serve the needs of its diversified global 

client base, which included a wide range of professional traders, corporations, sovereign 

entities, institutional asset managers and hedge funds, and financial institutions. The MF 

Global Group also offered a range of services for brokers and individual traders --

including fanners and ranchers. 

Revenues were derived from three main sources: (i) commissions generated from 

execution and clearing services; (ii) principal transactions revenue, generated both from 

client facilitation and proprietary activities; and (iii) net interest income from cash 

balances in client accounts maintained to meet margin requirements, as well as interest 

related to the MF Global Group's collateralized financing arrangements and principal 

transactions activities. For fiscal year 2011, the MF Global Group generated total 

revenues of approximately $2.2 billion, revenues net of interest and transaction-based 

expenses of approximately $1.1 billion, and incurred a net loss of $81.2 million. 

In October 2011, everything changed. On October 31,2011, MF Global Holdings 

Ltd. and MF Global Finance USA Inc. filed for bankruptcy under chapter 11 of the 

Bankruptcy Code; the Securities Investor Protection Corporation put MF Global Inc., the 

U.S. broker-dealer and futures commission merchant subsidiary ofMF Global Holdings 

Ltd., into a SIPA liquidation proceeding and appointed Mr. James Giddens as the SIPA 

Trustee; regulated entities in the U.K. were put into administration; and other entities 

around the world began their own wind down proceedings. 

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As a result, entities that once operated as part of a global enterprise began to act 

as individual, independent entities, functioning separately with independent trustees or 

administrators at the helm. These trustees and administrators not only owe separate and 

distinct fiduciary duties to their respective entities and those entities' customers and 

creditors, but they are operating under competing bodies of law. Broadly speaking, for 

example, as the Chapter II Trustee I have a fiduciary duty to protect the interests of the 

creditors of the chapter 11 estates, which includes the financial institutions that provided 

MF Global with its $1.2 billion revolving credit facility, and the bondholders ofMF 

Global's publicly traded debt. My fiduciary duties do not extend to the former customers 

of the U.S. and U.K. broker dealers and futures commission merchants. 

The SIPA Tmstee's fiduciary duties, however, mn to a broader constituency, 

which includes not only the customers ofMF Global Inc., but the general creditors ofMF 

Global Inc. - including the chapter II estates. Similarly, the administrators of the former 

U.K. broker-dealer subsidiary have fiduciary duties akin to that of the SIP A Tmstee, as 

the U.K. administrators owe duties to both the former customers of the U.K. brokerdealer and the general creditors of that entity as well. 

All of these factors work to the detriment of the customers and creditors ofthe 

various estates, and add to the administrative costs borne by the respective estates. There 

inevitably is unavoidable, significant delay associated with implementation by the 

various trustees and foreign administrators of the statutory processes governing the 

liquidation oftheir respective estates. This is not to say that the trustees and 

administrators are not working cooperatively. For example, my professionals and the 

SIPA Trustee's professionals often speak daily, have engaged in information sharing 

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calls, and are currently discussing coordinated efforts to assist one another in the 

administration of their respective estates. Indeed, we had a very productive meeting with 

the SIPA Trustee's advisers just last Thursday. We find this cooperation to be 

invaluable, if not essential. I believe that the interests of all stakeholders are best served 

through coordinated efforts to return funds to customers and creditors in the manner 

prescribed by law, whether that law is Chapter II of the Bankruptcy Code, the Securities 

Investor Protection Act, the CFTC rules or foreign law. 

I would like to take a moment to address the subject of employees. The chapter 

II estates now employ 12 non-executive individuals and three remaining senior 

executives. This skeletal staff continues to serve an important function in the costefficient administration of the chapter II estates. As I said in my written testimony and 

statements made in response to questions from the Senate Banking, Housing and Urban 

Affairs Committee on April 24, 2012, no formal bonus program has been implemented 

nor will bonuses be paid to the executives or employees. This continues to be my 

position. 

As stated in my June 4th report filed in the bankruptcy court, a copy of which is 

submitted with my written statement, the chapter II estates and non-debtor affiliates 

under my control filed 112 claims against various MF Global affiliates with a face value 

of between $3.1 billion and $3.3 billion. Of those claims, 68 were filed against MF 

Global Inc., with a face value of$2.3 billion. Whether creditors of the chapter II estates 

will receive a significant distribution on their claims depends largely on whether the 

chapter II estates recover on their claims against MF Global Inc. And, ultimately, the 

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chapter 11 estates recovery on their claims against MF Global Inc. depends on MF 

Global Inc.' s ability to recover from counterparties and foreign affiliates. 

Another potential source of recovery for the chapter 11 creditors is causes of 

action. At this time, I cannot go into further detail as to any potential causes of action or 

recoveries on those causes of action as I have not completed my investigation, which is 

statutorily mandated by Bankruptcy Code section 1 I06(a)(3). Upon completion of my 

investigation, I will issue a report with my findings. I can affirmatively say that I am 

investigating all potential parties and all causes of action that might be brought on behalf 

of the chapter 11 estates, as I am obligated to do. 

To be clear, the various trustees and foreign administrators can and likely will 

assert different legal arguments to support their claims to property located throughout the 

world. The U.s. Bankruptcy Court and perhaps other courts will make those legal 

determinations. Notwithstanding court supervision of the wind-down of the chapter 11 

estates and the liquidation of the SIP A estate, it is clear even at this early stage that the 

competing, and perhaps at times conflicting, obligations and duties of the various trustees 

and foreign administrators have had, and will continue to have, the effect of extending the 

length of time necessary for all of the estates to conduct their investigations, to determine 

the location and value of assets, to recover those assets, and ultimately to make 

distributions to customers and/or creditors. 

There has been a great deal of publicity regarding the alleged shortfall in 

customer property, including media reports as recently as last week that referenced the 

disappearance of $1.6 billion in customer funds, or a shortfall of $1.6 billion in customer 

funds. It is my belief, however, based upon currently available public data in the United 

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States and reports issued by affiliates and administrators around the world, that -- whether 

from the return of funds from foreign administrations or settlements obtained by the 

SIPA Trustee from bank clearing houses, exchanges and trading counterparties -- all of 

the customers ofMF Global Inc. eventually will be made whole by the SIPA Trustee. 

Further, this current data demonstrates that MF Global Inc. should have significant excess 

funds available after its former customers have been made whole for distribution to its 

general creditor claims class, which includes the chapter 11 estates' sizable claims 

against MF Global Inc. 

The administration of these chapter 11 estates, together with the parallel work of 

the SIP A Trustee and that of the foreign administrators, makes this one of the most 

complex matters of its kind. The shared goal, however, is very simple: to recover every 

single dollar available, in the manner prescribed by law, for the benefit of every eligible 

customer and creditor, and not for those who brought about this historic collapse in the 

process. 

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TESTIMONY OF GARY GENSLER 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION 

BEFORE THE 

U.S. SENATE COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

WASHINGTON, DC 

August 1,2012 

Good morning Chairwoman Stabenow, Ranking Member Roberts and members of the 

Committee. I thank you for inviting me to today's hearing on the recent events related to 

Peregrine Financial Group. I'm pleased to testifY along with my fellow Commissioner Jill 

Sommers. 

Peregrine Financial Group, Inc. 

Background 

On July 10, the Commodity Futures Trading Commission (CFTC) filed a complaint in 

federal court against Peregrine and its sole owner, Russell Wasendorf, Sr., alleging that they 

misappropriated customer funds from an account held at US Bank. 

Criminal authorities arrested Mr. Wasendorffor lying to the CFTC, and they advised the 

court that they intended to file more criminal charges in the future. 
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The CFTC's complaint, along with the criminal charges, tells a story of deliberate 

dishonesty and deception. In a written statement found when he attempted suicide, as quoted in 

the criminal charges, Mr. Wasendorfsaid he committed fraud, manufactured phony bank 

documents, and forged bank signatures. In short, the charges against him are that he took 

customers' funds right out of the bank, and lied about it for years. 

The System of FCM Oversight 

Peregrine is a CFTC-registered Futures Commission Merchant (FCM). The National 

Futures Association, a futures industry self-regulatory organization, is responsible for the firm's 

front-line oversight. The way our oversight system has been set up for decades, SROs are the 

primary regulators ofFCMs, introducing brokers, commodity pool operators, and commodity 

trading advisors. In 2000, Congress affirmed the Commission's reliance on SROs by amending 

Section 3 of the Commodity Exchange Act to state: "It is the purpose of this Act to serve the 

public interests ... through a system of effective self-regulation of trading facilities, clearing 

systems, market participants and market professionals under the oversight of the Commission." 

Further, based on this system and the realities of limited CFTC resources, in the wake of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the NFA also 

will take on additional examination and registration duties with regard to swap dealers. 

As part of its oversight responsibility, the NF A is required to conduct periodic audits of 

non-clearing member FCMs' customer funds in segregated and secured accounts. The CFTC 

oversees the NFA, examining them for the performance of their duties. We do such 

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examinations on a periodic basis, usually looking at one of these significant areas: the NF A's 

FCM examination program, sales practices, disciplinary programs, monthly financial statement 

reviews, and the NFA's training and staffing levels. Prior to 2008, the CFTC only infrequently 

reviewed the NFA's FCM examination program. More recently, the CFTC has moved to a 

quarterly review of the NFA's FCM examination program in which the agency selects a small 

sample of the NFA's FCM work papers to review. Recent CFTC examinations of the NFA 

included recommendations for clearer documentation of audit procedures, enhanced training and 

supervisory review procedures, and establishing requirements for the filing of amended financial 

statements. In addition, the CFTC also does limited-scope reviews ofFCMs in a "for cause" 

situation that are sometimes referred to as "audits," but they are not full-scale audits as 

accountants commonly use that term. 

Under CFTC rules, FCMs must have their annual financial statements audited by an 

independent CPA using Generally Accepted Auditing Standards. As part of this certified annual 

report, the independent accountant also must conduct appropriate reviews and tests to identify 

any material inadequacies in systems and controls that could violate the Commission's 

segregation or secured amount requirements. Any such inadequacies are also to be reported to 

the SRO and the Commission. 

The Oversight oj Peregrine 

The NFA last completed an audit of Peregrine in May 2011, and was in the process of 

conducting another periodic audit over the last several weeks. Peregrine's financials for the year 

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ending December 31, 20 II, were reviewed and certified by its independent CPA expressing a 

clean opinion on both the financial statements and internal controls report. 

In 2000, the CFTC brought an enforcement action against Peregrine, finding in an Order 

that the firm had violated net capital rules. At the time, Peregrine was much smaller than it was 

in 2012, with roughly $800,000 in net capital requirements and $23 million in customer 

segregation requirements. The firm was ordered to pay a civil penalty and to take steps to 

improve its financial controls, including retaining a second independent public accounting firm 

to perform reviews of certain financial accounts and to report its findings to the CFTC. The firm 

retained PricewaterhouseCoopers. 

The CFTC's Order in 2000, resolving the enforcement investigation, was the culmination 

of a process that began with limited-scope reviews conducted by the CFTC examinations staff in 

the I 990s. During these reviews, the staff noted a number of problems at Peregrine regarding, 

among other things, net capital, infusions of capital to avoid net capital violations, internal 

financial controls, and records of segregated and secured customer assets and liabilities. Other 

issues related to accounting for receivables and payables; transactions and agreements with 

affiliates; differences between journal entries on the company's books and the statements of one 

of its banks, Harris Bank; accuracy of books and records; the abilities of the firm's auditor; and 

providing customers with timely trade confirmations and monthly statements. In addition, CFTC 

staff questioned whether Peregrine had tried to mislead them concerning some of these 

accounting issues. The staff also noted issues regarding the sufficiency ofNF A audits. 

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Subsequently, in 2007 and 2008, the CFTC examinations staff reviewed Peregrine's 

classification and reporting of customer-owned securities and the investment of customer funds 

for compliance with CFTC Regulations. The limited reviews identified improperly titled 

segregation bank accounts, which were corrected during the examination. In addition, the staff 

in 2010 performed a limited, two-day review of Peregrine's anti-money laundering compliance. 

Although we do not yet know the full facts of what happened in this matter, it is clear that 

the system failed to protect the customers of Peregrine. The NF A and CFTC staff over the years 

did not detect Mr. Wasendorfs alleged stealing of customer funds, which came to light only a 

few weeks ago. Though the local police cannot prevent every bank robbery and market 

regulators cannot prevent every financial fraud, we all must do better. We must do everything 

within our authorities and resources to strengthen oversight programs and the protection of 

customer funds. 

Customer Protection 

CFTC Customer Protection Reforms to Date 

The Commission has been actively working to improve protections for customer funds. 

This includes: 

5 

The completed amendments to rule 1.25 regarding the investment of funds bring 

customers back to protections they had prior to exemptions the Commission granted 
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between 2000 and 2005. Importantly, this prevents use of customer funds for in-house 

lending through repurchase agreements; 

Clearinghouses will have to collect margin on a gross basis and FCMs will no longer be 

able to offset one customer's collateral against another and then send only the net to the 

clearinghouse; 

The so-called "LSOC rule" (legal segregati.on with operational comingling) for swaps 

ensures customer money is protected individually all the way to the clearinghouse; and 

The Commission included customer protection enhancements in the final rule for DCMs. 

These provisions codify into rules staff guidance on minimum requirements for SROs 

regarding their financial surveillance of FCMs. 

In addition, last month, we approved an NF A proposal that stemmed from a coordinated 

effort by the CFTC, the SROs, and market participants, including from the CFTC's two-day 

roundtable earlier this year on customer protection. 

6 

The three key areas of reform included in the NF A rules are: 

First, FCMs must hold sufficient funds in Part 30 secured accounts (funds held for 

u.s. foreign futures and options customers trading on foreign contract markets) to 

meet their total obligations to customers trading on foreign markets computed under 

the net liquidating equity method. FCMs will no longer be allowed to use the 

alternative method, which had allowed them to hold a lower amount of funds 

representing the margin on their foreign futures; 
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Second, FCMs must maintain written policies and procedures governing the 

maintenance of excess funds in customer segregated and Part 30 secured accounts. 

Withdrawals of 25 percent or more of excess funds in these accounts (that are not for 

the benefit of customers) must be pre-approved in writing by senior management and 

reported to the NF A; and 

Third, FCMs must make additional reports available to the NF A, including daily 

computations of segregated and Part 30 secured amounts, as well as twice monthly 

detailed information regarding the cash deposits and investments of customer funds. 

CFTC Restructuring and Enforcement 

The CFTC also has implemented a significant restructuring, based on a new strategic 

plan, regarding our oversight ofSROs and intermediaries. 

The CFTC last year established a new division dedicated solely to the oversight of the 

SROs and intermediaries. We created a branch within the division to specifically oversee 

examinations. We were able to attract talented individuals from the private sector with many 

years ofrelevant experience to lead this new division and branch. We have begun the process of 

strengthening our examination program, including adding risk and control elements. Separately, 

we also recently created a Consumer Outreach Office to help consumers get information about 

avoiding fraud. 

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In addition, the CFTC's enforcement ann aggressively pursues bad actors in the markets. 

In the last two years, the Division of Enforcement has been filing cases and opening 

investigations at the highest rate in the CFTC's history. Roughly half of the cases involve fraud 

against customers. 

Since October 2009, the CFTC has brought 22 cases against registered FCMs, 13 of 

which involved supervision failures and one of which involved a failure to maintain customer 

secured funds properly. In the same period, the CFTC brought two cases in federal court against 

FCMs, one for violating segregation rules and the other for failing to be properly capitalized and 

to maintain books and records. 

The Commission in April charged JPMorgan Chase Bank, N.A. for unlawful handling of 

Lehman Brothers, Inc.'s customer segregated funds and imposed a $20 million civil monetary 

penalty. In another case against a public accounting firm and a CPA partner of the firm, the 

Commission imposed sanctions for railing to conduct proper audits of a registered FCM. In one 

of our supervision failure cases, a registered FCM was sanctioned for failing to follow its own 

compliance procedures regarding "know your customer" requirements. 

Customer Protection Reforms Ahead 

While the Commission's enhanced customer protection rules, staff reorganization and 

enforcement efforts to date have been significant, I believe we must do more. I believe we need 

to further enhance the agency's rules for customer protection. As outlined below, staff 

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recommendations, based on substantial commissioner and market participant feedback, are now 

drafted and in front of commissioners. 

First, we must incorporate the NFA rules approved last month into the Commission's 

regulations so that the CFTC can directly enforce these important reforms. 

Second, I believe it is critical that we bring the regulators' view of customer accounts into 

the 21st century. We must give the SROs and the CFTC direct electronic access to FCMs' bank 

and custodial accounts for customer funds, without asking the FCMs' permission. Further, 

acknowledgement letters (letters acknowledging that accounts contain segregated customer 

funds) and confirmation letters must come directly to regulators from banks and custodians. 

Third, I believe we need more transparency to customers about their funds. Futures 

customers, if they wish, should have access to information about how their assets are held and 

with whom, similar to that which is available to mutual fund and securities customers. 

Fourth, I believe we need to consider enhanced controls at FCMs regarding how 

customer accounts are handled. 

In addition, I believe we need to carefully consider additional rules laying out the SROs' 

requirements for conducting examinations and audits. 

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Regarding the Commission's oversight of SROs and intennediaries, though we're 

making progress through our reorganization and new rules, the recent events at Peregrine 

highlight the necessity of looking at the decades-old system of SROs and the Commission's role 

in overseeing SROs" 

I have directed the CFTC's staff to do a full review of how the agency conducts oversight 

of the SROs, as well as limited scope reviews ofFCMs, to detennine what improvements can 

and should be made" As part of this review, we have reached out to the Public Company 

Accounting Oversight Board (PCAOB), which oversees the audits of public companies" The 

Dodd-Frank Act gave the PCAOB oversight authority over the audits of brokers and dealers who 

are registered with the Securities Exchange Commission" The PCAOB has agreed to give us the 

benefit of its insights and expertise" 

Last week, the CFTC held a Technology Advisory Committee meeting to examine how 

technology can be incorporated as a tool for customer fund verification" Building on the 

customer protection public roundtable earlier this year, I also have asked CFTC staff to hold 

another public roundtable discussion on customer, protection issues, including examination 

techniques and procedures, which will take place during the second week of August 

Resources 

Confidence in the futures and swaps markets is dependent upon a well-funded regulator" 

The CFTC is a good investment of taxpayer dollars" This hardworking staff of710 is just 10 

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percent more than what we had at our peak in the 1990s though the futures market has grown 

fivefold. The CFTC also will soon be responsible for the swaps market eight times bigger than 

the futures market. 

The Commission's limited resources have historically not allowed for direct oversight of 

FCMs. There are 46 staff members, including 35 audit staff, on the CFTC's examinations team 

who oversee four SROs, which in tum have responsibilities for more than 4,341 registered 

persons. On top of the current lack of staff for examinations, our responsibilities are expanding 

to include reviews of many new market participants. For instance, there are currently 115 FCMs, 

and staff estimates a similar number of swap dealers will ultimately register. More frequent and 

in-depth risk-based, control-oriented examinations are necessary to assure the public that firms 

have adequate capital, as well as systems and procedures in place to protect customer money. 

Greater coverage by regulators - like having more cops on a beat - will improve the integrity 

and heighten the deterrent effect of the review process. 

The President's FY2013 budget, following a similar request in 2012, asked for $308 

million, investing in our technology and human resources, to better protect the public. 

Market participants depend on the credibility and transparency of well-regulated U.S. 

futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be 

assured that the agency can adequately oversee these markets. 

Thank you and I look forward to your questions. 

II 
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Testimony of James W. Giddens 

Trustee for the Securities Investor Protection Act Liquidation ofMF Global Inc. 

U.S. Senate Committee on Agriculture, Nutrition and Forestry 

August 1, 2012 

Chairwoman Stabenow, Ranking Member Roberts, and Members ofthe Committee: Thank you 

for inviting me to testify today. My name is James Giddens. I am the court-appointed Trustee for 

the Securities Investor Protection Act (SIP A) liquidation of the failed broker-dealer, MF Global 

Inc. I would like to provide the Committee with an update on efforts to return assets to former 

customers of MF Global Inc., as well as an update on my investigation into the events that led to 

the failure ofMF Global and considerations stemming from the lessons learned in the 

liquidation. 

My office continues to work tirelessly and expeditiously for the benefit of the former customers 

of MF Global Inc., and my consistent goal has been the return of as much customer property as 

possible, as quickly as possible, in a manner that is fair to all customers and that is consistent 

with the law. 

Customer Distributions 

When I last testified before this Committee in December, I reported to you that my office had 

distributed over $4 billion to former MF Global Inc. retail commodities customers with US 

futures positions via three bulk transfers. 

I am now making an additional interim distribution to former commodities customers with 

finalized claims, as approved by the Bankruptcy Court: 

• 4d property: I am distributing approximately $600 million of customer property held as 

segregated by MF Global Inc. for its former commodity futures customers who traded on 

US exchanges (4d property). This distribution is in addition to the more than $4 billion in 

4d property already distributed and allows customers to receive approximately 80% of 

their 4d property. 

30.7 property: I am distributing approximately $50 million of customer property held as 

secured by MF Global Inc. for its former commodity futures customers who traded on 

non-domestic exchanges (30.7 property), primarily in the United Kingdom. This is the 

first distribution of30.7 property, and this distribution allows customers to receive 

approximately 5% of their 30.7 property. 

• Domestic delivery class: A distribution will also begin shortly for customer property 

related to a domestic delivery class, which I have identified as consisting of physical 

customer property that has been or will be reduced to cash in any manner and which the 

Court approved as a separate class of commodities customer property. 
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With the completion ofthe first interim distribution, I will have returned approximately $4.7 

billion to the former commodities customers ofMF Global Inc. 

I have also received Court approval to sell and transfer approximately 318 active retail securities 

accounts, which is substantially all of the non-affiliate securities accounts at MF Global Inc. All 

retail securities customers have received 60% or more of their account value, and already 

approximately 80% of former MF Global Inc. securities customers have received nearly the 

entirety of their account balances because of Securities Investor Protection Corporation (SIPC) 

advances. 

Claims Process 

My office has received over 27,000 commodities customer claims asserted in amounts of 

approximately $10 billion, over 1,000 securities customer claims asserted in amounts of 

approximately $1.4 billion, and over 6,000 general creditor claims asserted in amounts of 

approximately $23 billion. 

My office has now determined virtually all commodities customer claims and securities customer 

claims. Determination letters are being issued to claimants on a rolling basis. The deadline for 

filing general creditor claims more recently passed, and my office is in the process of reviewing 

and analyzing these claims. 

Most retail customer claimants have agreed to the determinations made by my office, and fewer 

than 2% have so far filed objections, many of which seek clarifications as opposed to challenging 

the merits of my determination. In that regard, my staff is working with claimants at all stages of 

the process in an attempt to reconcile and resolve claims matters, and my instruction to the team 

is only to pursue claims-related litigation when absolutely necessary to preserve the estate for all 

customers. All such claimants are entitled to due process and ultimately a trial before the 

Bankruptcy Court ifthe disputes cannot be resolved without judicial intervention. Until these 

disputes are resolved, I am limited in the amount of additional funds that I can distribute to 

customers, because I must appropriately reserve funds for all possible outcomes. 

The primary objections to my claims determinations requiring large reserves were filed by 

administrators or trustees for affiliated MF Global entities, including MF Global UK Ltd. and 

particularly MF Global Holdings Ltd. and its affiliated debtors, which have filed securities 

customer claims of over $607 million and commodities customer claims of over $147 million, in 

addition to general creditor claims of over $1.6 billion. 

I have also marshaled over $1 billion in assets that were not specifically segregated for 

customers by MF Global Inc. I believe that, at a future date after the claims determinations are 

finalized, a significant portion of these assets may need to be allocated to commodities and 

securities customers under principles and in amounts that will be established by an allocation 

motion subject to Court approval. 
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Agreements and Litigation 

Since the initiation of the liquidation proceeding, I have worked to recover and distribute as 

much customer property as possible as quickly as possible, and in furtherance of that goal, I have 

sought to resolve outstanding conflicts with parties through negotiation wherever possible. 

I have now reached agreements with two significant parties: the CME Group and MF Global 

Canada. Both of these agreements will support my ability to distribute additional customer funds: 

• CME Group: I have filed a motion seeking Bankruptcy Court approval for an agreement 

reached between my office and CME Group that includes the return of over $130 million 

in property held by CME Group to the MF Global Inc. estate for the benefit of former 

commodities customers, as well as additional unallocated funds. 

MF Global Canada: The Bankruptcy Court approved in July an agreement between my 

office and MF Global Canada Co. that provides for the return of approximately $61 

million to the MF Global Inc. estate. In addition, the resolution completely withdraws the 

MF Global Canada omnibus claim of approximately $53 million against MF Global Inc. 

Subject to parallel approval by the Canadian Court, the agreement will reconcile and net 

the parties' respective claims and avoid the uncertainty, delay, and expense of complex, 

cross-border litigation with a foreign affiliate. 

In the U.K., litigation is progressing to resolve a dispute between my office and the U.K. Joint 

Special Administrators as to whether the customer property that is the subject of my 

approximately $700 million client claim with the Joint Special Administrators was or should 

have been segregated under English law. A target date of April 2013 has been set by the English 

Court for the start of the trial. I believe it is crucial that this intellectual dispute over how 

property was or should have been handled be urgently resolved so that the affected customers 

can receive back the property that is owed to them, and I will continue to explore a consensual 

resolution, if possible. 

Investigation and Potential Claims 

In June, I filed a report on my independent investigation into the failure ofMF Global with the 

Bankruptcy Court. 

My investigation concluded that as attempts were made to transform MF Global into a fullservice global investment bank, management failed to add to its Treasury Department and 

technology infrastructure, which was needed to meet the demands on global money management 

and liquidity. Management's actions, along with the lack of sufficient monitoring and systems, 

resulted in customer property being used during the liquidity crisis to fund the extraordinary 

liquidity drains elsewhere in the business, including margin calls on European sovereign debt 

positions. 

In light ofthese conclusions, I have determined there may be valid claims against certain 

individuals and entities: 
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• Directors & Officers: I believe that there are colorable claims, including claims for 

breach of fiduciary duty and negligence, against fonner MF Global CEO Jon Corzine, 

fonner MF Global CFO Henri Steenkamp, and fonner MF Global Assistant Treasurer 

Edith O'Brien, among others. In this connection, I am participating in the prosecution of 

these claims by cooperating with plaintiffs in the pending lawsuits against these parties. 

Any funds received through prosecution of the claims will be returned to customers by 

my office, based on determinations already made through the claims process as described 

above. 

• JPMorgan Chase: I am engaged in active discussions with JPMorgan Chase (JPM) with 

respect to transfers that I believe may be voidable or otherwise recoverable. JPM has 

cooperated with my investigation. To date, JPM has returned approximately $89.2 

million in customer property and $518.4 million in non-segregated unallocated MF 

Global Inc. assets, subject to certain reservations of JPM's security interest in such funds. 

This sum includes $168.1 million in funds representing the proceeds of excess collateral 

that JPM held at the commencement ofMF Global Inc.'s liquidation. 

Shortfall 

There remains an approximately $1.6 billion shortfall in segregated property available to return 

to fonner customers. I am urgently working to eliminate the shortfall by detennining the size of 

customer claims pools with the passing ofthe June 2, 2012, deadline for filing claims and by 

continued efforts at the recovery of funds through negotiation and litigation. In addition, I may 

request Court approval for the allocation of non-segregated property to the pools of customer 

property. 

Recommendations 

My investigation report included recommendations for legislative, regulatory or other refonns 

that might help avert similar liquidations in the future, or at least alleviate their consequences. 

These topics may merit further study and input from regulators, industry experts, and members 

of the public: 

• Eliminating the segregated versus secured distinction in CFTC Regulation 30.7, ensuring 

consistency of customer protection when trading overseas, and monitoring compliance 

abroad closely. 

• Creating a protection fund for futures and commodities customers - to provide parity 

with securities customers and bank depositors - under a certain threshold, and 

implementing suitability standards for customers of Futures Commission Merchants 

(FCMs). 

• Providing for civil liability for officers and directors in the event of a commodities 

segregation shortfall. 

• Considering simplifying some CFTC rules for bulk transfers and claims in an FCM 

liquidation proceeding. 
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• Enacting legislation explicitly authorizing a trustee's standing on behalf of customers. 

I also support the new rules recently approved by the CFTC that will further protect futures 

customers, including rules that: 

• Abolish the alternative calculation method and require FCMs to use the net liquidating 

equity method representing the total account balance owed to customers when 

determining the secured funds the FCM must hold to meet customer obligations. 

• Require FCMs to maintain written policies and procedures governing the maintenance of 

excess customer segregated and secured funds. 

• Require written pre-approval by senior management for any withdrawal of more than 

25% of excess segregated or secured funds that is not for the benefit of customers, and 

filing of notice with the National Futures Association (NFA) of any such withdrawal. 

• Require additional filings with the NF A, including daily segregation and secured amount 

computations. 

Conclusion 

My office has made every effort to communicate directly and frequently with customers. Our 

website includes updates, court filings, and claims information, including a section addressing 

the common questions being asked by customers in calls or other communications to my staff. 

My staff and I are answering customer calls and emails and holding meetings with customer 

groups and counsel. I have established special hotlines for customers to call with questions about 

their claims determinations, the treatment of their physical property, or tax issues. 

If your constituents have any questions, I encourage them to visit MFGlobalTrustee.com, email 

my staff at MFGITrustee@hugheshubbard.com, or call our call center at 1-888-236-0808. 

I fully understand the frustration of many former MF Global Inc. customers, some of whom you 

have heard from directly. When a broker-dealer fails under the unprecedented circumstances 

surrounding MF Global's demise, the liquidation is necessarily complex. My office has been 

working tirelessly with speed and diligence to identify ways to return assets to customers to the 

full extent of our ability under the applicable provisions of SIPA, the Bankruptcy Code, and 

CFTC regulations. 

Thank you Chairwoman Stabenow, Ranking Member Roberts, and other Members of the 

Committee for the opportunity to testify before you and to submit this testimony for the full 

record of the hearing. 
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--------~-------- National Grain and Feed Association 1250 Eye St, N.W, Suite 1003, Washington, D.C. 20005-3922 

Phone: (202) 289-0873, FAX: (202) 289-5388, E-Mail: ngfa@ngfa.org, Web Site: hllp://www.ngfa.org 

TESTIMONY OF THE 

NA TlONAL GRAIN AND FEED ASSOCIATION 

TO THE 

COMMITTEE ON AGRICULTURE 

UNITED STATES SENATE 

AUGUST 1,2012 

Good morning, Chainnan Stabenow, Ranking Member Roberts, and members ofthe committee. 

I am Diana Klemme, Vice President and Director of the Grain Division at Grain Service 

Corporation, an Introducing Broker based in Atlanta, Georgia. GSC provides brokerage services 

to businesses and individuals hedging agricultural price risk, as well as advisory and educational 

services to clients and other firms. Our clients include country grain elevators, fanners and endusers of commodities. 

This morning, I am testifYing on behalf of the National Grain and Feed Association (NGFA), the 

national trade association representing grain elevators, feed and feed ingredient manufacturers, 

processors and other commercial businesses that utilize exchange-traded futures contracts to 

hedge market risk and assist producers in their marketing and risk-management strategies. We 

appreciate the opportunity to testifY before the committee today, and commend you for 

conducting this important hearing. 

I serve on the NGFA's Risk Management Committee, as well as its MF Global Task Force, 

formed to develop recommendations in the aftennath ofthe failure ofMF Global. Our priorities 

are to advocate regulatory and policy changes that will help ensure that another similar situation 

does not recur, and to enhance protections for commodity futures customers. 

Many NGFA-member finns have been affected deeply by the MF Global Holdings bankruptcy 

and the subsequent liquidation of futures commission merchant (FCM) MF Global Inc. 

Following the bankruptcy, customers' accounts were frozen, and then transferred to other FCMs 

in a chaotic fashion and with a dearth ofinfonnation to help customers manage their financial 

exposure, Today, another distribution of funds from the MF Global trustee is underway with the 

goal of bringing all commodity customer distributions to about 80 percent of account value. 
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However, many firms still have received only 72 percent of their funds with no assurance they 

ever will be made whole. 

It is worth reemphasizing that these customer funds were required to be segregated and held safe 

by MF Global. Our industry had believed for years that segregated customer funds were 

completely safe. But we now see that was not the case. The unprecedented loss of customer 

funds in the MF Global debacle has led to a loss of confidence in futures markets and in the 

ability ofthe current system to protect customer funds. 

As the NGFA's task force considered regulatory and policy changes in the aftermath ofMF 

Global, we asked ourselves: "Was MF Global a one-time situation, or is the level of customer 

risk still significant? Did the MF Global failure and its consequences rise to the level that 

merited significant change?" 

Unfortunately, we know today that serious risk still is present. The discovery of apparently longterm fraud and misappropriation of customer funds at Peregrine Financial Group (PFG) 

highlights again the need for more effective regulatory oversight and meaningful change that will 

ensure safety for customer funds, both before a failure occurs and in the event of future FCM 

liquidations. 

We still are awaiting details of the situation surrounding the PFG situation. On its face, tile PFG 

failure appears to have some key differences from MF Global namely, that customer funds 

were intentionally misappropriated for a variety of illegitinlate purposes over a very long period 

of time. However, the cumulative effect ofMF Global and PFG failures occurring within a 

relatively short time - and especially the failure of PFG at a tinle when regulators presumably 

were on heightened alert for problems has been a huge loss of confidence in regulators and in 

the adequacy of current rules to protect customer funds. This failure of two firms in nine months 

- with massive financial loss to customers - is incomprehensible and demands immediate 

change. We look forward to a full explanation by regulators of exactly what happened at PFG. 

In the meantime, we believe there are steps that should be taken to begin restoring confidence 

and to bolster protections for segregated customer funds. The loss of customer confidence in the 

system is the most critical and urgent issue that must be addressed. 

To better illustrate why the loss of confidence in the present system of managing customer funds 

is urgent and unsustainable, I would like to use as an example GSC's core client base: the 

typical country elevator. Country elevators, large and small, buy grain from farmers and sell 

futures against that ownership. These hedges eliminate price risk until the grain is received, 

aggregated and sold to exporters, feedlots or other domestic buyers typically in larger volumes. 

Hedging provides a vital service to agriculture - buying when farmers want to sell and selling 

when the end buyer needs the commodity. 

Elevators also buy commodities that farmers want to price for future crops. Forward contracts 

can allow the farmer to buy land and inputs with greater confidence, knowing their production is 

priced, at least in part. The elevator may have to hold and maintain these short futures hedges a 

year or more and be financially able to meet any margin calls if prices rise. Consider an actual 

typical country elevator that currently holds the following futures positions: 
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Com 

Soybeans 

Wheat 

short 620 futures contracts 

short 100 futures contracts 

short 120 futures contracts 

Short Total 

As of Friday, July 20: 

Open Trade Equity (7/20112) 

Initial Margins 

Total Funds sent to the FCM 

= 3,100,000 bushels 

= 500,000 bushels 

= 600,000 bushels 

= 4.2 million bushels of open short futures 

($7.5 million) Mark to market 'loss' I 

$1.9 million held on deposit at FCM 

= $9.4 million (equivalent to $2.24 per bushel) 

I Based on the original futures sale price(s) marked to the close on 7120/2012. 

This elevator now has had to send a total of$9.4 million in Initial and Variation margin calls into 

a system where no one any longer can assure them those funds are 100 percent safe. This 

customer has met every margin call immediately - a huge act of faith when this business still is 

hoping for the final recovery of funds missing in the collapse of MF Global. Further, agricultural 

hedgers and others rely on their lenders to provide plUch of the financing for these margin calls. 

Com and soybean prices already have hit record highs this summer. Now, this country elevator 

must continue to hold short futures hedges until the grain is received and sold, and hedges can be 

lifted. The firm has sent $9.4 million and the manager must be prepared to ask the lender for, 

and send more money, as long as market prices continue to increase. Conversely, if futures 

prices decline, this elevator may show substantial 'mark-to-market' gains on futures day-to-day. 

The hedger needs to know those funds actually will be available to withdraw upon demand. 

This is but one small example. Multiply it by the aggregate size of U.S. agriCUlture and one can 

envision the scope of the financial demands and exposure on owners and managers of thousands 

of businesses that use futures to reduce risk. 

NGFA's Recommendations 

In early April, the NGFA submitted to the Commodity Futures Trading Commission (CFTC) 

preliminary recommendations for enhanced reporting, transparency and accountability. 

Generally, these recommendations were developed with the intent of assisting customers by 

providing them with more information to evaluate FCMs with which they do business. In 

addition, several of our recommendations focused upon requiring greater scrutiny by the CFTC 

and selt:regulatory organizations of FCM practices and financial reporting, as well as requiring 

FCMs to develop and adhere to policies and procedures that rigorously will ensure proper 

safeguarding of customer funds. Those recommendations are attached, and I would be happy to 

discuss them in greater detail. 
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Late last month, the NGF A submitted a second set of recommendations to the leadership of both 

the Senate and House Agriculture Committees. These recommendations involve significant 

changes in customer account structure, reforms to the U.S. bankruptcy code to enhance customer 

rights and protections, and the potential extension of insurance coverage to commodity futures 

customers. The NGF A's letter transmitting our latest recommendations is attached, and I would 

like to highlight several of those today: 

Reforms to the U.S. Bankruptcy Code 

The NGFA believes that a number of revisions in the U.S. bankruptcy code would provide 

greater protection for commodity futures customers. Briefly, we would like to see various 

provisions of the Commodity Exchange Act, CFTC regulations and the bankruptcy code 

harmonized to provide greater clarity and avoid interpretive inconsistencies. The NGF A also 

would like to see the code revised to strengthen CFTC authority to appoint a trustee and to state 

clearly that customers always should be first in line for distribution of funds in a liquidation. 

Commodity customer committees should be authorized to represent commodity customers' 

interests, and "safe harbor" bankruptcy provisions should be revised so as not to limit a trustee's 

ability to recover customer funds. 

The NGFA's recommendations are described in more detail in the attached letter, and we would 

welcome the opportunity to work with the committee, regulators and stakeholders to move 

bankruptcy code reforms forward as expeditiously as possible. 

Fully Segregated Customer Accounts 

Current legal authority provides for pro rata distribution by the trustee of customer property that 

was held by a failed FCM. That means that all customers must share equally in losses in the 

event of a shortfall offunds. The NGFA recommends establishment of a new type of account 

structure for use by FCM customers on a voluntary basis that provides for full segregation of 

customer assets, not commingled with FCM funds or other customer funds. It will be important 

in establishing a new fully-segregated structure that customer funds not fall under the "customer 

funds" definition in the bankruptcy code, thereby exposing them to pro rata distributions and 

loss-sharing. Creation and maintenance of fully-segregated accounts necessarily will result in 

some additional costs that likely will be borne by customers. For that reason, we prefer that the 

use of such accounts be voluntary, based upon the agreement between an FCM and its 

customers. 

We believe that a pilot program would be a useful way to test the mechanics of this new account 

structure and to begin to judge its true costs. The NGFA is eager to work with commodity 

customers, FCMs, lenders and regulators to identifY potential participants. We believe a pilot 

program leading to fully segregated accounts can be implemented relatively quickly, without the 

need for legislation. 
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Insurance for Commodity Futures Customer Accounts 

Because a fully segregated account structure may not prove to be a practical alternative for all 

customers, the NGFA also has recommended that insurance coverage be extended to commodity 

customers, in much the same way that insurance protection currently exists for securities 

customers under the Securities Investor Protection Corporation (SIPC). Details involving the 

appropriate level of coverage and funding will need to be determined. But the NGF A believes 

the added protection for customers will be perceived as significant and meaningful in today's 

environment. 

Thank you for the opportunity to share the views and policy recommendations of the National 

Grain and Feed Association. I would be pleased to respond to any questions. 
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COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

U.S. SENATE 

EXAMINING THE FUTURES MARKETS: RESPONDING TO THE FAILURES 

OF MF GLOBAL AND PEREGRINE FINANCIAL GROUP 

STATEMENT OF WALTER L. LUKKEN 

PRESIDENT AND CHIEF EXECUTIVE OFFICER 

FUTURES INDUSTRY ASSOCIATION 

AUGUST 1,2012 

Chairwoman Stabenow, Ranking Member Roberts and Members of the Committee, FIA 

is the leading trade organization for the futures, options and over-the-counter cleared 

derivatives markets. Our membership includes the world's largest derivatives clearing 

firms as well as leading derivatives exchanges and clearinghouses from more than 20 

countries. Our core constituency consists of futures commission merchants (FCMs), 

those regulated businesses that transact, guarantee and clear the futures trades of 

customers and end-users. The FINs mission since its inception in 1955 has been "to 

protect the public interest through adherence to high standards of professional conduct 

and financial integrity ... " With that mission in mind, I would like to address the 

industry's response to the failure ofMF Global last October as well as the recent 

discovery of fraud at Peregrine Financial Group (PFG). 

Peregrine Financial Group 

Three weeks ago, we were made aware that more than $200 million in customer funds 

was missing from Peregrine Financial and that the falsification of financial records 

appears to go back 20 years. On the heels of the MF Global collapse, this is appalling 

and absolutely devastating news for everyone in our industry, and most of all the 

customers who are victims of this egregious fraud. PFG was not a big firm, but its 

demise resonates throughout the industry. Members of the futures industry remain 

outraged as more becomes known of this extensive fraud carried out on futures 

customers. 

In the futures industry, we took considerable pride in the knowledge that the regulated 

futures markets had come through the financial crisis of2008 with relatively few 

problems. During those difficult weeks, the futures markets continued to operate without 

significant incident to manage the volatile risk stemming from the financial crisis and to 

discover transparent prices when confidence was lost in the pricing of the over-thecounter markets. The regulated futures markets, and the regulatory regime that underpins 

them, became the foundation of mandated swap clearing of Title VII of the Dodd-Frank 

Act. . 
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We can no longer say that the futures markets came through these times unblemished. 

The failures ofMF Global and Peregrine Financial are a stark and unwelcome reminder 

that, no matter how well designed a regulatory structure may be, diligent and sustained 

efforts by regulators and the firms they regulate are essential to prevent losses to 

customers from mismanagement or fraud. 

Peregrine Financial's fraud has had a terribly damaging effect on public confidence in the 

customer funds protections provided under the Commodity Exchange Act and the 

Commission's rules. This confidence was earned over decades by the many individuals 

who comprise the regulated futures industry through their hard work and upright 

behavior. Unfortunately, one person's conduct has instantaneously shattered this trust 

and now we all must shoulder the burden of regaining the trust, however long it may 

take. 

At FIA, we understand that it is going to take time to regain public trust and we are 

committed to doing whatever it takes to restore confidence in the safeguards for customer 

funds. Doing nothing is not an option. 

We also recognize that this is a collective problem, calling for collective solutions. 

Firms, exchanges, end-users and regulators must work together to identifY the additional 

tools that are needed to protect customer funds and restore confidence and then 

implement them promptly and efficiently. 

Post-MF Global Reforms 

The industry and regulators have already taken a number of important steps in the wake 

of the MF Global collapse to strengthen the customer protection regime in the futures 

markets. In February, PIA released its Initial Recommendations for Customer Funds 

Protection, which were prepared primarily by FIA's Financial Management Committee. 

This committee, which is comprised of senior FCM finance and treasury staff, as well as 

representatives of depositories, has been meeting regularly since the MF Global 

bankruptcy to consider enhancements to finn policies and procedures that will further 

assure customer funds protection. The members of this committee have an exceptional 

depth of knowledge. They have taken part in several Commission roundtables and can be 

a tremendous resource for both the Commission and the SROs as they consider additional 

amendments to their rules. 

The PIA recommendations were discussed in detail in our letter to Chairwoman 

Stabenow in June, a copy of which is included with this testimony for the benefit of the 

Committee. In brief, PIA called on each FCM to adopt and document - to the extent not 

already in place - internal control policies and procedures relating to the protection of 

customer funds. In particular, FIA recommended that FCMs maintain appropriate 

separation of duties among individuals responsible for compliance with customer funds 

protections and develop a training program for chief financial officers and other relevant 

employees to help ensure that the individuals responsible for the protection of customer 

funds are appropriately qualified. FIA is pleased to see that the CFTC and industry self-
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regulatory organizations (SROs) have adopted or are actively considering adopting all of 

these suggestions. 

We also recommended and supported rules recently adopted by the Chicago Mercantile 

Exchange and National Futures Association that subject all FCMs to enhanced 

recordkeeping and reporting obligations, including: (i) transmitting daily customer 

segregation balances to their respective designated self-regulatory organization (DSRO); 

and (ii) requiring the chief financial officer or other appropriate senior officer to 

authorize in writing and promptly notify the FCM's DSRO whenever an FCM seeks to 

withdraw more than 25 percent of its excess funds from the customer segregated account 

in any day. The Commission has now approved these changes. 

Another of our recommendations calls on the Commission to require that each FCM 

certify annually that there are no material inadequacies in its internal controls regarding 

maintenance and calculation of adjusted net capital and compliance with the rules 

regarding the protection of customer funds. FIA encourages the Commission to adopt 

this recommendation as part of its package of audit improvements. 

Clearly, these recommendations for strengthening internal controls are relevant to both 

MF Global and Peregrine Financial. We have witnessed over the years a number of 

instances where lax auditing controls or a lack of separation of duties related to the 

movement and protection of customer money have led to wrongful activity and fraud. 

The adoption of these basic audit and internal control recommendations will go a long 

way to detect and deter inappropriate behavior going forward. 

FIA also has taken efforts to educate customers on the scope of the protections for their 

funds so they can make well-informed decisions when choosing where to do business. In 

February, we issued Frequently Asked Questions on Customer Funds Protections, which 

is being used by FCMs to provide their customers witll increased disclosure on the scope 

of how the laws and regulations protect customers in the futures markets. This document 

continues to be updated as we gather comments from regulators on other areas that 

should be covered. In addition, we will be expanding this document to ensure that 

customers have material information when evaluating an FCM. 

FIA's Transparency Initiative 

Even with all that has been done, the recent events involving Peregrine Financial make it 

evident that more is needed. In this respect, I would like to discuss the "Transparency 

Initiative" that I announced two weeks back. 

First, FIA strongly supports providing regulators with the independent ability to 

electronically review and confirm customer segregated balances across every FCM at any 

time. 

Second, FIA supports the creation of an automated confirmation process for segregated 

funds that will provide regulators with timely information that customer funds are secure. 
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Technology solutions can help prevent this type of event from occurring again and 

several board members of the FIA participated in last week's CFTC Technology 

Advisory Committee meeting that discussed technology solutions aimed at better 

protecting customer funds. 

Third, FIA supports the creation of an "FCM Information Portal" that will centrally house 

firm-specific financial and related information regarding FCMs so customers can more 

readily access material information when evaluating an FCM. FIA's board is actively 

considering ways to construct and populate such a system. 

Fourth, FIA recommends that FCMs publicly certify as soon as practicable that they are 

in compliance with the Initial Recommendations for Customer Funds Protection that FIA 

issued in February, specifically that they have adopted and implemented the internal 

control policies and procedures related to the protection of customer funds. These 

controls should be subject to independent review and oversight by the SROs and 

independent auditors. 

Most individual firms have already begun to make efforts to implement these important 

changes and disclose more information in response to this crisis of confidence, but this 

effort must be industry-wide and FIA is committed to leading that effort. 

In this regard, FIA member fums have been pleased to take part in several forums 

focused on means to better protect customer funds, including this Committee's staff 

roundtable in April, several Commission staff roundtables, and the Commission's 

Technology Advisory Committee last week. We look forward to the Commission staff 

roundtable on customer protection issues that Chairman Gensler has announced will take 

place in the second week in August. These forums have generated a number of 

worthwhile ideas from industry and customer representatives, including my fellowpanelists today, for further protecting customer funds and bringing confidence back to the 

marketplace. These recommendations deserve careful consideration. 

I was encouraged by Chairman Gensler's remarks before this Committee two weeks back 

that the Commission will be supporting and adopting many of these sensible industry 

recommendations that I have discussed. The "blocking and tackling" fundamentals of 

regulation depend on ensuring that firms have proper internal risk controls in place and 

that these are independently reviewed and verified. Those basics of smart regulation 

have not changed over time, and we look forward to working with the Commission to 

prioritize initiatives aimed at protecting customers. 

These preventative measures must also be accompanied by strong enforcement when 

fraud and other illegal conduct are uncovered. The prosecution of these individuals 

punishes those guilty parties and serves as a powerful deterrent for others tempted to 

defraud customers. We encourage law enforcement in these instances to vigorously 

pursue and prosecute these blatant violations of the law. 
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Conclusion 

While an individual bent on fraud can confound even the most sophisticated compliance 

framework, measures to mitigate the risk of fraud must continue to be vigorously pursued 

at all levels. The embezzlement at Peregrine Financial appears to have been missed by a 

generation of regulators at both the federal and self-regulatory levels. But it is going to 

take a collective effort by these same regulators, as well as the industry whose reputation 

has been severely damaged by these incidents, to find the necessary solutions to bring 

customer confidence back to the markets. 

There is no easy solution-no magic bullet-that will bring back the trust lost in these 

past weeks. Instead, it's going to take a lot of hard work across the whole industry to 

implement a host of improvements to how FCMs conduct their business and how their 

conduct is examined and audited by the regulators. Better internal controls, more 

transparency on the movement of funds, independent and more frequent third-party 

verification of customer balances-those are the starting points for this process, but we 

are actively seeking out and considering any and all solutions that might contribute to the 

healing process. I hope today' s hearing is the beginning of a constructive, fruitful 

dialogue with Congress on how to make this industry safer than ever before, and restore 

your faith in our model for price discovery and risk management. Our customers deserve 

better and FIA is wholly committed to earning back their confidence and ensuring that 

customer funds have the highest degree of protections going forward. 

Thank you for allowing me to testify. 
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G~12!:rr~~!;!,§:r5?,~\:!"f£~!£t!!?J:I 125S0UTH WACKER DRIVE. STE 300 I CHICAGO. 'L 60606 

FAX: 312~212-4073 I OFACE: 312-344-3076 

STATEMENT OF JOHN L. ROE 

BEFORE THE UNITED STATES SENATE 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

AUGUST 1,2012 

Good morning Chairwoman Stabenow, ranking member Roberts and members of the Committee. Thank you for the 

invitation to appear before you today to discuss the Commodity Customer Coalition's reconunendations for the policy 

response to the MF Global bankruptcy, as weB as the recent insolvency of PFGDest. It has become a very risky 

proposition to tender one's property to a commodity broker. An industry which just a year ago prided itself that no 

customer had ever lost a penny as the result of a clearing member default now hopes customer losses due to broker 

insolvencies will be limited to hundreds of millions of dollars, instead of billions of dollars. 

Whatever the motives for recent breaches in the segregation protections, simple schemes subverted hundreds of regulators 

and auditors tasked with monitoring customer property at commodity brokers. The system of commodity regulation is 

broken. In fact, the system which regulates non-clearing FCMs is so broken that the regulator in charge of auditing 

PFGBest's financials could not tell that the fines levied against PFGBest were being paid to regulators with customer 

money--$700,OOO this year alone.' 

Before this Committee, CFfC Chairman Gensler testified that, just as it is unreasonable to expect police to stop all bank 

robbers, it is unreasonable to expect commodity regulators to stop all fraud. Yet, bank customers do not live in fear that 

their deposits will be robbed by the bank. Moreover, in the event that a bank theft is so large that it causes the bank to 

become insolvent, bank customers have insurance to protect their deposits. Should Chairman Gensler's robbers hold up a 

broker-dealer, their customers are also afforded insurance to protect their cash and securities. Commodity customers are 

only protected by the regulators and the Commodity Exchange Act, the relevant portions of which were passed when the 

industry was about 2% of its present size. 2 

There is no mechanism in place outside of the bankruptcy process to deal with shortfalls in customer property. Once 

customer accounts are attached to an FCM bankruptcy, the potential for losses to customer property has only begun, In 

addition to whatever assets with which the broker has absconded, customers face losses stemming from their inability to 

manage frozen trading positions and collateral. In the first bulk transfer of customer property ordered by the SIP A 

Trustee for MP Global customers, 10,000 margin calls were issued which had to be cleared on the same business day. As 

a result, millions of positions were liquidated. Customers holding positions on foreign boards of trade had their positions 

held for much longer periods and were unable to manage their risk associated with these positions. 

Customers then face a bankruptcy process with fees in excess of $200 an hour for paralegals, $450 an hour for 

inexperienced attorneys and law firm partners billing nearly $1,000 an hour. The firms submitting these bills have the 

audacity to claim their rates have been discounted in the public interest. The market price for these services is anywhere 

from 30% to 70% less than the rates in the applications for fees we see in recent court filings. The bankruptcies of MF 

1 NFA fined PFGBest in February 2012: http://goo.gI/NrpOL.lfPFGBest had a deficit in segregation at that time, then this money 

belonged to PFGBest customers. 

:< Bankruptcy provisions of the Commodity Exchange Act were <lmpnnprl in 1978, a year in which the Futures Industry Association 

reports 58 million contracts trading in the US. in 2011, over 3 ,racts traded in the us. 
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Global and PFGBest will drag on for years, the administrati ve fees will run into the hundreds of millions of dollars and if 

there is not enough estate property to cover these fees, customer losses will be compounded. 

Participants in American financial markets deserve better. They deserve the strongest, most efficient legal protections 

available. They deserve a safety net when regulators fail. We have to stop expecting the regulators to do their jobs and 

start offering customers protections when they do not. If Me. Gensler's robbers cannot be stopped then at a minimum they 

must be insured against. 

AN FCM LIQUIDITY FACILITY 

Among the policy recommendations that the Commodity Customer Coalition has proposed to mitigate future FCM 

insolvencies), the most important is an account insurance mechanism. We propose an industry-funded liquidity facility, 

which focuses on providing liquidity to plug shortfalls in customer property and ensure accounts are quickly transferred to 

new brokers with positions intact. The fast transfer of customer accounts is critical to clearing the customers from the 

machinations of bankruptcy proceedings. This fund would then step into the shoes of customers who would have been in 

the bankruptcy. It would pursue recoveries for the fund's liquidity disbursement to facilitate the transfer of customer 

accounts and reserve property against claims made against customer property by counterparties. 

This liquidity facility would not be government funded or managed and it would be designed to shield taxpayers from the 

burden of FCM insolvency. Assets for the fund could be raised transactional1y, as well as through member firm 

assessments. Last year, a one penny per contract fee--half of the transaction fee assessed per contract by the :N'-FA--would 

have raised over $30 million for such a fund. Such cash flow would grow to substantial resources in little time and 

provide collateral for loans to cover insolvencies in the immediate term. 

There is a working model of this type of fund in Canadian markets. Both PFGBest and MF Global had Canadian 

subsidiaries. The insolvency of these Canadian affiliates is expected to result in no losses for Canadian customers. MF 

Global's Canadian subsidiary held about $385 million in customer property, an amount roughly equivalent to the customer 

property held by PFGBest4

• Some 7,800 customer accounts of MF Global Canada were transferred with 100% of their 

property to a new broker within two weeks of the insolvency. This transfer was facilitated by the Canadian Investor 

Protection Fund which provided MF Global Canada's Bankruptcy Trustee with a 20% guarantee of the assets of MF 

Global Canada's customer property. This guarantee plugged a 20% shortfall in assets and facilitated the immediate 

transfer of customer property. The only reason it took two weeks to process this transfer was due to the SIPA Trustee's 

mistaken transfer of assets residing in Canadian customer accounts in the US. These assets had to be transferred back to 

Canadian control, which delayed the broker transfer. 

The Canadian Investor Protection Fund has reserved its own capital in the event ongoing litigation between the US and 

Canadian entities of MF Global is resolved to the detriment of the Canadian estate. Whether or not it is, Canada's 

commodity customers can still make the claim that no customer has ever lost a penny as the result of a clearing member 

default. 

Like all types of insurance, there must be some coverage limits for a US-based FCM liquidity facility. The Canadian 

Investor Protection Fund covers up to $1 million per customer of a shortfall in their property. If such limits were applied 

to a US insurance mechanism managing MF Global's insolvency, only accounts with more than $5 miUion in assets would 

3 For a complete description of all ece recommendations, please see our proposal entitled: Recommendations on the Poficy 

Response to the MF Global Bankruptcy. http://goo.gilL4AJQ. 

4 From the C1PF 2011 Annual Report: http://goo.giltIPGc 
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be at risk of sustaining a 10ss.5 Additional limits could include classes of customer property--segregated funds (regulation 

4d), secured funds (regulation 30.7 funds) or specifically identifiable property--or an opt-in mechanism could be 

employed to exclude participants who do not wish to be covered. 

If the FDIC can insure $4.3 trillion in bank deposits with a reserve ratio which has fluctuated between 1.22% and 0.27%, 

surely the conunodities induslr)' can insure the $190 billion or so in segregation with a similar reserve ratio of exposure to 

insured accounts. 

SPECIFIC CRIMINAL PENALTIES FOR MISUSE OF CUSTOMER FUNDS 

While the PFGBest case will most certainly result in criminal convictions for perpetrators of its fraud, the probability of a 

criminal conviction in the MF Global case is less certain. The lesson of MF Global should not be that there are no 

criminal consequences for swiping customer funds for the proprietary benefit of a broker. Should prosecutors not seek 

charges in connection with MF Global's insolvency, Congress must enact specific criminal penalties to punish the misuse 

of customer property at FCMs. While no law can deter the raw greed of a PFGBest-like scheme, strict criminal penalties 

can deter firms which might be willing to use customer funds for proprietary purposes in the absence of them. It is 

doubtful that executives or their subordinates will be willing to risk incarceration for misusing customer property. 

MEASURES TO DIFFUSE THE RISK OF DUALLY REGISTERED BROKER-DEALERS 

One of the most obvious differences between the PFGBest and MF Global bankruptcies is that PFGBest's liquidation is 

being conducted under the Chapter 7 provisions of the Bankruptcy Code as opposed to the SIP A statute. MF Global's 

broker-dealer and FCM operations were combjned in a single corporate entity and, as a SIPC member, SIPC petitioned 

t~e Court for a SIP A liquidation of MF Global. PFGBest did have a SIPC-member broker-dealer affiliate, but its 

operation was held in a separate legal entity from PFGBest's FCM operation. 

The combination of broker-dealer and FCMs into a single corporate entity carries with it several risks. One is that, at the 

outset of an insolvency of such a finn, the application of SIP A will cause tremendous confusion as to customer priorities. 

At a minimum, this results in more pleadings and a slower track for the bankruptcy proceeding. Additionally, securities 

customers are less sensitive than commodity customers to the administrative costs of a SIPA liquidation as they are 

afforded account insurance. In trus sense, it was possible for the 200 or so securities accounts (which contained only 

around $400 million) to prime the 38,000 commodity customer accounts holding over $6 billion in assets in MF Global's 

SlPA Liquidation. SlPA's claims process is much slower and affords far less discretion to the Trustee than the Chapter 7 

and CEA provisions which typically govern commodity broker bankruptcies. 

Anot~er risk of joint broker-dealer FCMs is illustrated by the recent fine levied against .lPMorgan for its unlawful 

handling of Lehman's customer segregated funds. lPMorgan extended credit to Lehman for its own proprietary trading 

based on the value of customer segregated balances held by Lehman at lPMorgan. After Lehman's failure, lPMorgan 

attempted to withhold those funds. The CFTC fined JPMorgan $20 million for the unlawful handling of these funds. As 

was the case with MF Global, Lehman's illiquid broker-dealer operation sought the use of commodity customer collateral 

for proprietary purposes, 

There is a tremendous concentration risk associated with joint broker-dealer FCMs, as 80% of customer segregated 

property in the US resides in just 10 firms. 9 of these 10 firms were recipients of over $11 trillion in assistance from the 

5 The account class of regulation 4d customers of MF Global, Inc, whose co!lateral was margining positions on US exchanges, has 

received 80% of that property from the SIPA Trustee. If insurance covered up to $1 million of a shortfall, then losses would only be 

incurred by accounts with more than $5 million in assets. Regulation 30.7 customers, who have received less than 10% of the 

portion of their account held as 'secured funds', would be exposed to losses at a lower threshold. 
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Federal Reserve Bank during the 2008-2009 financial crisis. In fact, over $35 bi1lion in corrunodity customer property has 

been exposed to insolvency at broker-dealer FCMs since the financial crisis.6 Most of these firms are systemically 

important investment banks, which means that their comingled FCM operations should give regulators pause. 

The Commodity Customer Coalition urges Congress to consider forcing broker-dealers and FCMs to split their operations 

into separate legal entities. This will ensure that insolvent FCM entities enter Chapter 7 Hquidations while insolvent 

broker-dealers undergo SlPA liquidations, Forcing this separation will also reduce the potential for illiquid broker-dealer 

operations to borrow from commodity customer property. It will also limit the concentration risk associated with brokerdealer FCMs by ensuring that insolvencies are contained within specific entities. If forcing the legal separation of brokerdealer FCM entities is beyond the pale, then at a minimum the unencumbered collateral of commodity customers with 

accounts at broker-dealer FCMs should be covered by SIPc. 

BANKRUPTCY REFORM 

Specific reforms to the Bankruptcy Code may be outside the purview of this Committee, but such reforms are an 

important component of a complete policy response to recent FCM insolvencies. Those reforms should include the 

prevention of the automatic application of the Safe Harbor provision of the Bankruptcy Code. Simply put, the law should 

not allow the recipients of stolen property the means by which to keep it. Market pricing or fee limits should be 

introduced for the administration of bankruptcy cases. Additionally. there should be a statutory provision for customers to 

sit on the Creditors Committee of a bankrupt FCM's parent company in· a Chapter II proceeding. This will help defray 

the legal costs associated with bankruptcies which foUow the same tack as MF Global. Finally, affiliate and parent firms 

of insolvent FCMs should be forced by law to subordinate their claims in bankruptcy to commodity customer claims. 

This will increase the speed at which future Trustees of bankrupt brokers can make distributions to customers. 

CONCLUSION 

Some in the industry will argue that substantive changes have already been made to commodity regUlations, They will 

argue that these changes are sufficient to diminish the likelihood of future frauds and will serve to assuage the probability 

of future insolvencies inv01ving shortfalls in customer property. They will point to the NFA's recent requirement for 

electronic bank statements and the abolition of the alternative method for the calculation of secured funds as evidence of 

this. They will say that we do not need costly new regulatory regimes, we simply need to enforce what is on the books. 

However, this logic assumes that thieves lack ingenuity. It assumes that the same technological advances used by the 

regulators will not also aid the thieves themselves. History demonstrates that regulators are the last to adopt new 

technologies. No more poignant evidence of this is that, in 2012, regulators were still relying on paper statements 

requested from a Post Office box in Cedar Rapids, Iowa, 

If we are to protect ourselves from Chairman Gensler's robbers, the industry is going to have to do a little better than that. 

We urge Congress to act to protect commodity customers when and where the industry does not. 

6 MF Global and Lehman, along with firms that would have gone bankrupt without intervention (Bear Stearns and Merrill Lynch), 

held over $35 billion in segregated customer property. 
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TESTIMONY OF DANIEL J. ROTH 

PRESIDENT AND CHIEF EXECUTIVE OFFICER 

NATIONAL FUTURES ASSOCIATION 

BEFORE THE UNITED STATES SENATE 

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY 

August 1, 2012 

Thank you, Madam Chairwoman. My name is Daniel Roth and I am the 

president of National Futures Association. For years the futures industry has built an 

impeccable reputation for safeguarding customer funds deposited at FCMs in 

connection with futures trading. Now, for the second time in just nine months, we are 

dealing with a shortfall in customer segregated funds at an FCM. Once again, 

customers have suffered real harm, the type of harm that all regulators attempt to 

prevent. 

The full facts are not yet known, but it appears that Peregrine's customer 

losses are the result of an elaborate fraud achieved through a set of forgeries and 

falsities rooted in both the firm's external and internal financial records. Forged external 

records included bank statements, bank confirmations, print-outs of daily online 

summary reports of bank balances, cashier's checks, bank acknowledgement letters, 

bank deposit tickets and bank receipts all purportedly from US Bank. The firm's internal 

financial records, including daily and month-end account reconciliations, general ledgers 

and trial balances were also false to the extent they were based on forged US Bank 

records. Moreover, Peregrine submitted to NFA false daily segregation reports, monthly 

financial statements and segregated investment detail reports, and annual certified 

financial statements. Even the firm's customer statements were false to the extent the 

firm led customers to believe that sufficient assets were on deposit to cover customers' 

liabilities. 

I would like to review for this committee the recent chronology of events 

surrounding the Peregrine fraud, the fundamental changes that need to be made in the 

way we protect customer funds and monitor firms for compliance with the rules, how we 

are going to make those changes and the steps we have already taken. 

NFA began an examination of Peregrine in mid-June. During the audit, 

we informed Peregrine staff that NFA was changing its method for obtaining bank 

confirmations to a web-based e-confirmation process. We had completed the 

necessary data entry for this process by the first week in July, and told Peregrine staff 

that the firm must authorize its participation in the e-confirmation process. On Sunday, 
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July 8, Mr, Wasendorf, the Chairman of Peregrine, provided the required authorization 

that was sent to him a week earlier, The next day he attempted suicide, 

As of the close of business on July 6th, the previous Friday, Peregrine had 

reported to us that the firm was holding approximately $380 million in customer 

segregated funds, with just over half of that amount on deposit at US Bank, On July 

9th, Peregrine notified the CFTC and NFA of Wasendorfs attempted suicide and we 

immediately joined in a teleconference with Peregrine staff, We directed firm personnel 

to go to the bank and have the bank manager join the conference call to confirm the 

balances as of the previous Friday. The bank manager informed us that the actual 

balance in the account was approximately $5 million. 

We then asked about the balances on the dates for which NFA had 

received written bank confirmations in our two most recent audits-in 2010 and 2011, 

Those bank confirmation requests had been mailed by NFA to the P,O. Box on the 

purported bank acknowledgment letter we had received for the customer segregated 

account. (In our experience, it is not at all uncommon for banks holding customer 

segregated funds to use P,O. Boxes to receive confirmation requests since it is a 

means for them to control the vast amount of paperwork they receive,) In this case, the 

bank manager informed us that the balances reflected on the two most recent 

confirmations received by NFA in 2010 and 2011 were similarly inflated. 

NFA immediately issued an emergency Member Responsibility Action, 

freezing the firm's accounts and restricting it to trading for liquidation only. That night 

the firm's clearing FCM issued margin calls that were not met and began liquidating 

open positions. The next day the CFTC filed its injunctive action and the firm filed its 

bankruptcy petition, By then approximately 98% of customer futures positions had been 

liquidated, 

This is certainly not the first time that NFA has taken emergency action in 

a fraud case involving forgery. We issue 8 to 10 Member Responsibility Actions per 

year, most after detecting some form of fraud, many of them Ponzi schemes, In most 

cases we uncover the fraud relatively quickly and close the firm before the losses mount 

too high. In a few cases, though, we have uncovered major frauds involving well over 

$100 million. Several of our cases, both large and small, have involved forged bank 

documents that were identified by our staff. What sets this case apart is that it involves 

a registered FCM, an elaborate, pervasive and convincing level of forgeries, and worst 

of all the loss of segregated customer funds. 

This most recent case is an extremely painful reminder of the lessons we 

learned, and have acted on, after MF Global. The following points are clear: 

• For our markets to thrive, customers must know that their funds are safe. 

It is the job of the regulators, both government regulators and SROs, to 

provide the public with the highest level of assurance possible. 
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• NFA followed audit steps developed by the Joint Audit Committee that were 

consistent with CFTC Financial and Segregation Interpretation No. 4-1 in all 

of our examinations of Peregrine. But to assure ourselves of that, a 

committee of our public directors has directed the commission of an internal 

review of our audit practices and procedures, and the execution of those 

procedures in the specific instance of Peregrine. 

• Notwithstanding that, and notwithstanding it was NFA's actions that 

uncovered this fraud in our most recent exam, the simple fact is that 

Wasendorfs forgeries fooled us, and fooled us for longer than any of IJS 

would like. 

• Our audit steps alone are not good enough anymore. We are implementing 

better ways to monitor members for compliance, especially with regard to 

customer segregated funds, and are looking for even more ways to improve 

monitoring of firms for compliance with the rules. 

Shortly after the demise of MF Global, we formed an SRO Committee with 

the CME and representatives of other exchanges, including ICE, the Kansas City Board 

of Trade and the Minneapolis Grain Exchange. As discussed below, the SRO 

Committee developed a number of rule proposals that have already been approved by 

our Board. Early on in its deliberations, the committee recognized that we need to 

make better use of technology to monitor firms for compliance with segregation 

requirements. 

The committee has developed a proposed rule that will be presented at 

NFA's August Board meeting that would require FCMs to provide online, view-only 

access to bank balances for customer segregated and secured amount accounts to the 

firm's designated SRO. We understand the CME will adopt the same rule. Under this 

rule, SROs will be able to check any customer segregated bank account balance for 

any FCM any time, without asking the firm or the bank, and compare those balances to 

the firm's daily segregation report. NFA intends to expand this approach, once it is 

implemented, to receive daily reports from all depositories for customer segregated 

accounts, including clearing FCMs. We will develop a program to compare these 

balances with those reported by the firms in their daily segregation reports. While there 

may be reconciling items due to pending additions and withdrawals, the system will 

generate an immediate alert for any material discrepancies. 

We have also agreed with the CME to perform an immediate confirmation 

of all customer segregated bank accounts for all of our FCM Members using the 

e-confirmation process I referred to earlier. The completion of this work within the next 

week or so should help ensure that another Peregrine is not lurking in the industry. 
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All of this is in addition to the rule changes already approved by NFA's 

Board in May and just recently approved by the CFTC. Those changes include rules 

requiring that: 

• All FCMs must report certain information concerning the FCM's financial 

condition that will then be made available to the public on NFA's web site. 

This information includes the firm's capital requirements; its excess capital; 

the amount of customer segregated funds held by the firm; the amount of 

excess segregated funds maintained by the firm; whether the firm engages in 

proprietary trading, once that term is defined in the context of the Volker rule; 

and whether any custodial bank holding customer funds is an affiliate of the 

FCM. 

• All FCMs must report to NFA detailed information on how customer 

segregated funds are invested, and that information will also be made 

available to the public through NFA's web site. 

• If any FCM reduces its level of excess segregated funds by 25% in anyone 

day by making disbursements that are not for the benefit of customers, a 

financial principal of the firm must approve the disbursement, must 

immediately notify the firm's DSRO, and must certify that the firm remains in 

compliance with all segregation requirements. 

All of these rule changes promote greater transparency for both customers 

and regulators and should help prevent a recurrence of the type of problems we saw at 

MF Global. These rule changes, however, are only the beginning. The MF Global and 

Peregrine customer losses are a painful reminder that we must continuously improve 

our surveillance, audit and fraud detection techniques to keep pace with changing 

technology and an ever-more-complicated financial marketplace. 

Madam Chairwoman, for so long as there have been financial markets, 

there has been fraudsters who attempt to steal other people's money, and no regulator 

can provide assurance that fraud can be completely eliminated. But this is the second 

time in nine months that customers have suffered losses due to misconduct or fraud on 

the part of an FCM, and when customers suffer those devastating losses, it is also 

devastating for the industry. We know that we can never completely eliminate fraud, but 

we must continue to adopt rules and surveillance techniques to try to eliminate the 

possibility that this could happen again. The steps we took at our May Board meeting 

and the proposed steps outlined above are a start in that process. We look forward to 

working with Congress, the Commission and the industry to achieve that goal and no 

ideas should be off the table in this process. 
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STATEMENT OF COMMISSIONER JILL E. SOMMERS 

COMMODITY FUTURES TRADING COMMISSION 

BEFORE THE 

UNITED STATES SENATE 

COMMITTEE ON AGRICULTURE, NUTRITION and FORESTRY 

WASHINGTON, DC 

August 1, 2012 

Good morning Chairwoman Stabenow, Ranking Member Roberts, and members 

of the Comrnittee. Thank you for inviting me today to discuss "the Continuing Review of 

MF Global: Accountability in the Futures Markets." Over the past nine months the 

Cornmodity Futures Trading Cornmission has conducted a thorough analysis of the 

books and records of MF Global and continues to work closely with the Trustee in the 

SIPA bankruptcy proceeding to recover customer funds. We are also engaging in a 

comprehensive and ongoing enforcement investigation. It is imperative that the 

Commission, the industry, and the Congress identify and assess the causes for the 

collapse and shortfall in custorner funds and take corrective action where possible. At 

Chairman Gensler's request, Commission staff has developed recommendations for 

enhancing Commission and designated self-regulatory organization (DSRO) programs 

related to the protection of customer funds, which includes changes to Commission 

rules governing futures commission merchants (FCMs), enhanced Commission 

oversight of DSROs, and possible statutory changes, among other things. We must do 

everything in our power to restore confidence in the futures markets so that producers, 

processors and other end-users of commodities can once again hedge their price risks 

without fear of their funds being frozen or lost. 

On November 9, 2011, the Commission voted to make me the Senior Commissioner 

with respect to MF Global Matters. This authorizes me to exercise the executive and 

administrative functions of the Commission solely with respect to the pending 

enforcement investigation, the bankruptcy proceedings, and other actions to locate or 

recover customer funds or determine the reasons for shortfalls in the customer 

accounts. Today I would like to provide you with information regarding the SIPA 

proceedings, our ongoing coordination with the SIPA Trustee, current protections for 

customer funds, and regulatory oversight of FCMs. While I am unable to discuss the 

specifics of our ongoing enforcement investigation, I will provide a brief overview. 

Dual Registration/SIPA Proceedings 

MF Global, Inc. (MFGI), a subsidiary of MF Global Holdings Ltd., was a duallyregistered BD-FCM, and therefore was subject to the jurisdiction of both the CFTC and 

the Securities and Exchange Commission (SEC). The Chicago Mercantile Exchange 

(CME) was the DSRO for MFGl's futures market activities, and had primary 

responsibility for overseeing the FCM's compliance with the capital, segregation and 

financial reporting obligations required by the CFTC. The Chicago Board Options 
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Exchange and the Financial Industry Regulatory Authority were the SROs for MFGl's 

securities market activities, and had primary responsibility for overseeing the BO's 

compliance with securities regulations. 

Under the Securities Investors Protection Act of 1970 (SIPA), the SEC has the 

authority to refer an entity registered as a broker-dealer (BO) to the Securities Investors 

Protection Corporation (SIPC) if there is reason to believe that the BO is in or is 

approaching financial difficulty, SIPC may initiate a liquidation proceeding to protect 

customers of an insolvent BO when certain statutory criteria are met. When a BO is 

also a registered FCM, as MFGI was, there is one dually-registered entity and the entire 

entity gets placed into liquidation, Because there is one entity, it is not possible to 

initiate a SIPA liquidation for the BO and a separate bankruptcy proceeding for the 

FCM, Indeed, SIPA prevents a BO with even one securities customer from filing for 

bankruptcy without SIPA's permission, and a SIPA liquidation proceeding acts to stay 

any other bankruptcy proceeding for the BO, 

It is important to note, however, that when a dually-registered BO-FCM is placed 

into a SIPA liquidation proceeding, SIPA provides that the relevant provisions and 

protections of the Bankruptcy Code, the Commodity Exchange Act (CEA or Act) and the 

Commission's regulations apply to the claims of commodity customers just as they 

would if the entity wete solely an FCM and in a non-SIPA bankruptcy proceeding. 

Coordination with the SIPA Trustee 

The Commission has worked closely with the SIPA Trustee, James Giddens, 

since the outset of the proceedings, to help protect MFGI's former commodity 

customers. We have shared information and analysis, including analysis of the 

movement of commodity customer funds in order to identify potentially improper 

withdrawals and transfers, and to track down assets for the benefit of the commodity 

customers. The Commission's staff has given the SIPA Trustee advice on the 

requirements of commodity broker liquidation laws, under Title 11 and CFTC 

regulations, to ensure that customers are protected, We have supported his efforts to 

return the maximum amount of customer property as quickly as possible, consistent 

with his obligations. As part of those efforts, we have filed a series of briefs in the 

bankruptcy court explaining how these laws must be applied to effect Congress' and the 

CFTC's design that customers be repaid in priority to other creditors. Throughout this 

process, the Commission has maintained, and will continue to maintain, an independent 

view of the best interests of commodity customers and the requirements of the law, The 

public interest has been served by this cooperation, The Commission and its staff 

continue to stand ready to work with the SIPA Trustee to achieve the goal of recovering 

additional funds for the benefit of MFGI commodity customers, both domestically and 

abroad, 
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Current Protections for Customer Funds 

Section 4d of the CEA and Commission regulations require an FCM holding 

customer funds to treat such funds as belonging to the customer at all times and to 

segregate from its own funds any money, securities or property deposited by its 

customers to margin, guarantee, or secure futures or options positions entered into on 

Commission designated contract markets (Section 4d funds). FCMs are prohibited from 

using a customer's funds to margin or guarantee the trades or contracts of another 

customer, or of the FCM. The FCM may, however, commingle the funds of one futures 

customer with funds belonging to other futures customers in a single account or 

accounts. The FCM is required to maintain sufficient funds in segregated accounts to 

cover the net liquidating equity (Le., total account balances due) of each of its 

customers at any given point in time. 

The Act and regulations also require an FCM to hold in separate accounts 

(designated as "Part 30 secured accounts") customer funds deposited for trading 

futures and options listed on foreign boards of trade. The FCM may commingle the 

foreign futures funds deposited by one customer with the funds deposited by other 

foreign futures customers. An FCM may not, however, commingle Section 4d funds 

with Part 30 secured account funds. 

Customers are required to post margin to support their futures and option 

positions. Generally, a customer deposits more than the minimum initial margin 

required for the positions established. The additional funds provide a buffer so a 

customer can place trades without posting additional margin and lessen the likelihood of 

repeated margin calls or having positions liquidated if margin calls are not met on a 

timely basis. In addition to customers depositing additional margin, in practice, FCMs 

typically maintain significant amounts of their own capital as "excess segregated funds." 

By doing this, one customer's deficit due to market moves or unmet margin calls is 

covered by the FCM's buffer and does not result in one customer's funds being exposed 

to the credit risk of another customer. FCMs are not obligated to provide excess 

segregated funds, but given the legal obligation to have sufficient funds in segregated 

accounts at all times to cover all liabilities to customers, FCMs generally find it prudent 

to have a buffer. 

A customer may withdraw excess margin funds or use such funds as the 

customer deems appropriate. This would include using the funds for non-futures related 

transactions with the FCM. If the excess funds held by the FCM are used in a manner 

directed by the customer such that the funds are not maintained in a segregated or 

secured account, the funds would not have the protections afforded customer funds 

under the Bankruptcy Code and Part 190 of the Commission's regulations. 

FCMs are also free to withdraw excess funds in Section 4d accounts deposited 

by and belonging to the FCM. At no time, however, mayan FCM withdraw customer 
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funds from a Section 4d account to use those funds for its own purposes, regardless of 

any intention to replace them at a later date or time. 

Oversight of FCMs 

FCMs are subject to CFTC-approved minimum financial and reporting 

requirements that are enforced in the first instance by a DSRO, for example, the CME, 

or the National Futures Association. DSROs also conduct periodic compliance 

examinations on a risk-based cycle every 9 to 15 months. 

Determining compliance with segregation requirements is a mandatory part of 

each examination. Examinations also include a review of the depository 

acknowledgement letters, the account titles of segregated accounts, verifying account 

balances, and ensuring that investment of customer funds is done in accordance with 

Commission regulations. 

FCMs are required to file monthly unaudited financial reports with the 

Commission and the DSRO. These reports include the FCM's segregation, secured 

and net capital schedules, and any "further material information as may be necessary to 

make the required statements and schedules not rnisleading." Each financial report 

must be filed with an oath or attestation, and for a corporation, the oath must be by the 

Chief Executive Officer or the Chief Financial Officer. FCMs must also file annual 

certified financial reports with the Commission and the DSRO. The audits require, 

among other things, that if an auditor resigns or is replaced, the FCM is required to 

notify the Commission of certain disagreements with statements made in reports 

prepared by the prior aUditor. The FCM is also required to request that the prior auditor 

provide a letter stating whether the auditor agrees with the statements made by the 

FCM in its notice to the Commission. Auditors also must test internal controls to 

identify, and report to the Commission, any "material inadequacy" that could reasonably 

be expected to: inhibit a registrant from completing transactions or promptly 

discharging responsibilities to customers or other creditors; result in material financial 

loss; result in material misstatement of financial statements or schedules; or result in 

violation of the Commission's segregation, secured amount, record keeping or financial 

reporting requirements. 

Ongoing Investigation 

The Commission's Division of Enforcement is also actively engaged in the 

investigation concerning the shortfall of customer funds. Staff is interviewing witnesses 

and reviewing documents, as well as other information. They are proceeding as 

expeditiously as they can. As the Committee will understand, I cannot disclose any 

specific details of the investigation because they are nonpublic, and because I do not 

want to prejudice any potential enforcement action. In general, however, depending on 

the specific facts and circumstances, a shortfall in customer segregated funds could 

amount to a violation of the CEA and Commission regulations including those that: (1) 

govern segregated funds; (2) prevent theft of customer money; (3) require our 
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registrants to properly supervise accounts; (4) prevent making false statements; and (5) 

prohibit deceptive schemes. Depending on the specific facts and circumstances, the 

Commission could file an enforcement action against corporate entities and for 

individuals who have violated the CEA or regulations. In addition, depending on the 

specific facts and circumstances, individuals could also be liable if they are "control 

persons" of a company that violated the law. A "control person" generally refers to 

management. Depending on the specific facts and circumstances, an enforcement 

action could be filed against individuals who "aid and abet" violations by companies. 

Finally, Commission regulations impose obligations on accountants who audit FCMs 

and on the banks that hold customer segregated funds for FCMs. My mention of these 

particular provisions does not in any way limit the Division's investigation or the relief we 

can seek, nor does it indicate that the Division has reached any conclusions. 

Generally, the Commission has the authority to, among other things, seek and 

impose civil monetary penalties, require a defendant to disgorge ill-gotten gains, obtain 

restitution for customers and obtain other injunctive relief. In terms of civil monetary 

penalties, the Commission can seek the greater of three times the defendant's gain, or 

a set amount, which is currently $140,000 per violation. Civil monetary penalties are 

paid to the U.S. Treasury, while restitution is paid to victims who suffered losses. 

The Commission is a civil enforcement agency,"so we cannot seek imprisonment 

as a sanction in an enforcement action. However, a willful violation of the CEA, or our 

regulations, is a federal crime, which can be prosecuted by a United States Attorney. 

We do not have any say in whether or not the criminal authorities prosecute, and I 

understand that they have a higher burden of proof than we have. 

Conclusion 

I understand the severe hardship that MF Global's bankruptcy has caused for 

thousands of customers who have not yet been made whole. These customers may 

have correctly understood the risks associated with trading futures and options, but 

never anticipated that their segregated accounts were at risk of suffering losses not 

associated with trading. The shortfall in customer funds was a shock to the markets 

from which we have not yet recovered. 

I believe the Commission can make improvements to our regulatory oversight of 

FCMs and DSROs to help restore confidence in the futures markets, and I will work with 

the Commission and Congress to implement the rules necessary to enhance our ability 

to protect market users and to foster open, competitive, and financially sound markGets. 
AGRIC-48812 with DISTILLER

(115) 

DOCUMENTS SUBMITTED FOR THE RECORD 

AUGUST 1, 2012 

AGRIC-48812 with DISTILLER

116 

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RatIngs Atlas 

_Re_tur_n O_F --"-__ ~_ 

STRAITSFINAN(IALllC 

'WEll$'FAR~AD~ISORS"tC,; , 

IT) AM£RITRADE INC 

DEUTSCHE BANK SECURITIES INC 

ICAP CORPoRAlES LtC 

GHflNANClAlSLLC 

t No data <lvaiJ<lble 

AtlasRatings.com 

info@AtlasRatings.com 

May 2012 Report 
117 

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78277.066

Atlas RatIngs Return OF 

t No data available 

AtlasRatings.com 

lnfo@AtlasRatings,com 

May Z012 Report 
118 

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78277.067

Atlas RatIngs 

WHITE """~",aAl:""",,,inoi" 

ues FINANCIAL SfRVlCES INC 

TIMBER H!ll LLC 

MORGAN STANLEI' SMITH BARNEY LlC 

UNNGROUPTHE 

Return OF 

t No data aval!able 

AtiasRatings.com 

info@AtlasRatings.com 

May 2012 Report 
119 

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RatIngs Atlas Return OF Capital> Return on Capital 

AtlasRatings.com 

info@AtlasRatings,com 

May 2012 Report 
120 

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Atlas Ftatlngs_Re_tur_no_F~ ____ ~_. 

t No data avallable 

Explllllation of Metrits lind ClassitlCations 

Atlas fCM Composite ~iltlng~ 

AtlasRatings,(om 

info@AtlasRatings.com 

May 2012 Report 

The Atlas fCM Compo~ite Rating is our pro]Jrtetary composite score of aU the criteria measured by Atlas Ratings. Each category is measured, weIghed and combined to c~ate the filial 

5CQre awarded to each FCM. This final rating is OOf measure of the FeM's heahh in reiatloo to iH peers. 

AtlaS FCM Rating 12-month PE:lta: 

The 12·month change in the Atlas FCM Composite Rilling shows tile long-term improYemellt or deterioration in the ifldividual FCM, An ideal fCM maintains II high rating with little 

annual change, therefore maintaining healthv and SOUI'd busineu practices. 

Clellring or Non-Clearing FCM: 

Not all FeMs ¥e dearing F(Ms... Some de'3fthroogh other FeMs WIth ertablished dearing relatIOnshIps. ~C' denotes a c1earlnQ FeM and ~NC" denotes a non·clearing FeM. "LC" denotes 

an fCM with limited dearing Cllpabi!ities, thiS means they only dear throui:h one 01' two domestic exchanges. "*~ denotes an FeM that has clearing capabilities but is not currently 

dearin~ trades. If a FCM is not a cleanng fCM, Ihe clearing relationship can be found 0!1 our website: www.AllasFlalings.com. 

Net Capihl RatJo: 

The nel. capital ratio meaSures the FCM's extllss net capitaltoitsr letcapitall'f!quiremef1t. The higher this ratio, the better c.apitafized Ihe FCM and the iarger the fil'lancial buffer. 

CUstomer Funds Ffow: 

The flow of customer funds is monitored to see whether il'ldividuals and more imponantiy institutions are maintaining, beginnll'lg Of dosing out financial relationshipS with the 

underlying FCM. A large OlI1flow of customer funds is a red flag and warrants caution as there mily be some developments that large institutiOl1al clients deem worrisome. Some FCMs 

that clear throuch a secondary FCM do not report monthly customer fun dlevels. 
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Atlas RatIngs 

Transparenq: 

Return OF Capital> Return on Capital 

AtlasRatings.com 

info@AtlasRatings.com 

Atlas Ratings indudes Hm metrlc!o measure tMe amount of ilvaifablelnformatlorl about each FCM, The higher thetransparenry, the mDr!': weight 1:<111 be assigned to oor Mias 

Composite Ratil1ga5.Slgnedtotheunderiyinll FCM. 

MilrketVa!uiJtian: 

Ati3.'l R~tmll~ monitofl> the equity miJrket's composite view of the FCM, if it is publicI.,. traded or if its parent company Is publicly traded. The company's stock price performill1ce is not 

mea~ured again.~t the broad stofi mar~et, rather its brokerage and financial peers. As with our other measurements, market valuation is a!so relative. Atlas monitors the company's 

valualionreiativetothebrokerageandbllnkingvaluationsaswhole. 

BusinessDlversifJCativn: 

An FCM with f~ sources of operational Income can be concerning, particularly in an environment of near-zero inter!.'::rt rales where interest earned on deposit~ is neaf-lefO. A FCM 

With a diverse business structure is preferable. In the case of a buSineu disruption, a dillerse revenue stream will provide a buffer and iI!!OW It to meet operational e:(penses. 

CFTC/NFADisciplinaryAcllons; 

The CFTC and NFA monitor and audit each and every FCM, Any monetary penalties or disdpUf\ary actions are a red Rag and warrant closer examination of the FCM, These disdphnary 

actiUlls range from a cease and llesist order to monetary penalties which range from II couple thousand to several million dollars. 

GlobillIExdlanBePena~S: 

futures ex.cilanges mOl1itOf their dearing member's record keeping. conduct and dearing procedures. When violations arise, the e~change m"Y penaHle the d~aring fCM. MOilltoring 

the penalties <=Igned by the exch3nge provides a view into the busineu habits of the underlying FCM, The number of penalties and the sile of any fines must be viewed H'l the contell:t 

of how much bUSIlles5 the FCM dears thrOlJgh the el(change am! the level of rustomer a'iSets held under the FCM. We normalilf'c this metric to the volume of trades an FCM dears 

Arbiu;rtion;H1dRepar.rtions: 

When i£>ues arise between the FCM and a customer, we take notire. Sometimes these cases are as simple as a customer that lost funds through poor trading. Other times, the FCM has 

not kept up lIs fiduciary duty orlnlemal errors led to a loss of client runds.luullli are dealt with by the NFA and bya panel ofarbitratorS.i'iSueS indude but are not limited to! chuflllOg, 

misrepresentations, high prl3'iure sales, failure to llisdose ris~, failure to supervise, unrultabilily, omissions of fact, failure to hedge, mismanagement, excessive commj£>ions and 

finallV,fraud. 

Segregated funds Baok He-alth: 

Cu~omer flJl'lds are segregated from the FCM and are held with a banking institution or with all elCchange. Due to the structure of the futures markets, funds in &Ce!lS of ne~sary 

margin wi!! be kept segregated with the bankmg mstitutlC)fl. We monitor the health of the bafllG u5ed by each FCM to determine the capitalllation levels and their re~erveJ; to caYer 

non-performifl!! tOilns. In addit'on to monltorlng a number of the baflk's financial ratios we also monitor the trend of these ra;tios to determine the bank's financ]ai improyement or 

de!enoratlon. 

Diliciajrmm An AUas Fern Composite Ratmg from Atlas fl.atings is not II recommendation or oplnlO1'1 that is intended to suhstitute for a financial ad~iscr's or investor's independent 

assessmem of whether to tiuy, sell or hold any finanaal products. The A\lurcm Composite Rating is a statement of opinion derived objectively through our software from public 

Information abolJt the relevant entity. Thisillformation and the related Atlas Fem Composite Ratmg and related analYSfS provided in the reports bV Atlas Ratings do not repre5.ent an 

offer 10 trade III seruntie5. The research Inf[Jrmatfon (;OntalOl"d therein Is an objective and independent reference source, .... hich shol.lld be used III amJunctlon with other IMarmation 

in formmg the basis for an ln~stment declslon. Atl;;ls Ratings believes that ali of Its report .. afe based on reliable data and information, but Atlas Ratin&, has not verified thl5 or 

obtained an independent verlficatiOll t[)tnis effect. Atl<ls Ratings pr ovldes no guarantee with respect tothe accuracy or compieteness ofthedatareli~dupon, nor the roncluSlons 

derived from the data. Each Atlas Fern Composite Rating IS a relative, probablllstic assessment of the credit risk of the relevant entity and its potential to meet financial obligatIons. ft is 

not a statement that default Will or wlUnot occur given that Cllcumstances change and managemeflt can adopt new strategies. Reports have been prepared at the request of, and for 

!hepurpose of,thesubscrihers to our service only, and neither Atias Rating snoranvofouremployees aCCllptanvresponSlbilttyonanvgrol.lndwhatsoever, inciUc!1OgliabiHtyin 

negligence, to any other person. Finally, Atias Ratmgs and Itsemplo vees accept no liability whatsoever foreny direct, indirect orconsequ entiai loss of any kind ariSlIlg from the use of 

its ratings and rat.ng research If! any way whatsoever, I.lnless Atlas Ratingsls neSligent 10 misinterpreting or manipulating Ihe data, in which case, our maXimum liabifltvto ourdleflt is 

the amount of our fee for the repott 
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July 27, 2012 

BY EMAIL 

The Honorable Debbie Stabenow 

Chairwoman, Committee on Agriculture, Nutrition and Forestry 

United States Senate 

328-A Russell Senate Office Building 

Washington, DC 20510 

Dear Senator Stabenow: 

Thank you for the invitation to submit a written statement for the record in connection 

with the Committce's upcoming hearing entitled "Examining the Futures Market: Responding to 

the Failures of MF Global and Peregrine Financial," which is scheduled to take place on 

Wednesday, August 1,2012. Accompanying this letter is my written statement and a copy of the 

First Report of Louis J. Freeh, Chapter 11 Trustee ofMF Global Holdings Ltd., et ai., For the 

Period October 31, 2011 through June 4, 2012, which was filed on June 4, 2012 with the United 

States Bankruptcy Court in the Southern District of New York. 

I regret that a long-standing, prior commitment prevents me from appearing in person at 

the hearing on August 1 st, and I greatly appreciate your consideration and understanding in 

pem1itting me to submit a written statement in lieu of a personal appearance. I understand that 

members of the Committee may have questions for the record, and I will respond to any follow 

up questions if the Committee so desires. 

3711 Kennett Pike, Suite 130 

Wilmington, DE !9807 

+ I (302) 824~ 7139 

350 Fifth Avenue. Suite 3100 

New York, NY 10118 

.1 (646) 558-3632 

Sincerely, 

Louis 1. Freeh 

2445 M Street, NW, Third Floor 

Washington, DC 20037 

+ I (202) 390-5959 
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MORRISON & FOERSTER LLP 

1290 Avenue of the Americas 

New York, New York 10104 

Telephone: (212) 468-8000 

Facsimile: (212) 468-7900 

Brett H. Miller 

Lorenzo Marinuzzi 

Melissa A. Hager 

Attorneys for the Chapter 11 Trustee 

UNITED STATES BANKRUPTCY COURT 

SOUTHERN DISTRICT OF NEW YORK 

------------------------------ x 

In re 

MF Global Holdings Ltd., et aI., 

Debtors. 

--------------------------- - x 

Chapter 11 

Case No. 11-15059 (MG) 

(Jointly Administered) 

FIRST REPORT OF LOUIS J. FREEH, 

CHAPTER 11 TRUSTEE OF MF GLOBAL HOLDINGS LTD., et aI., 

FOR THE PERIOD OCTOBER 31, 2011 THROUGH JUNE 4, 2012 

ny-l043908 
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TABLE OF CONTENTS 

INTRODUCTION ......................................................................................................................... 1 

INITIAL CHAPTER 11 FILINGS .............................................................................................. 4 

1. MF Global Holdings Ltd. and MF Global Finance USA Inc ............................................. 4 

A. October Petition Date and First Day Motions ............................................................. 4 

B. The Initial Debtors' Professionals .............................................................................. 7 

C. Description of the Initial Debtors' Businesses .......................................................... 11 

STATUTORY CREDITORS' COMMITTEE ......................................................................... 11 

1. Committee Members ......................................................................................................... 11 

II. Committee Professionals .................................................................................................. 11 

A. Dewey & LeBoeufLLP ............................................................................................ 11 

B. Capstone .................................................................................................................... 12 

C. Rust Consulting, Inc .................................................................................................. 12 

III. Committee Activity ........................................................................................................... 12 

CHAPTER 11 TRUSTEE .......................................................................................................... 13 

1. Appointment of Chapter 11 Trustee ................................................................................. 13 

II. Trustee's Professionals ..................................................................................................... 14 

A. Freeh Group International Solutions, LLC ............................................................... 14 

B. Freeh Sporkin & Sullivan, LLP ................................................................................ 15 

C. Morrison & Foerster LLP ......................................................................................... 15 

D. Pepper Hamilton LLP ............................................................................................... 16 

E. Covington & Burling LLP ........................................................................................ 17 

SUBSEQUENT CHAPTER 11 FILINGS ................................................................................. 18 

1. MF Global Capital LLC, MF Global FX Clear LLC, MF Global Market Services LLC, 

and MF Global Holdings USA Inc ................................................................................... 18 

A. Petition Date and First Day Motions ........................................................................ 18 

B. Appointment of Chapter 11 Trustee ......................................................................... 21 

C. Brief Description of the Businesses .......................................................................... 22 

DEBTORS' OPERATIONS ....................................................................................................... 22 

1. Description of Global Operations ..................................................................................... 22 

II. U.S. Debtors ...................................................................................................................... 23 

A. Attrition of Employees .............................................................................................. 23 
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B. Real Estate and Leases .............................................................................................. 25 

C. Pre-petition Debt Facilities ....................................................................................... 26 

D. Equity Interests ......................................................................................................... 28 

E. Use of Cash Collateral .............................................................................................. 28 

MF GLOBAL INC ...................................................................................................................... 29 

I. SIPA Trustee and Professionals ........................................................................................ 30 

II. SIPA Trustee's Duties Under SIPA .................................................................................. 30 

III. Description ofMFGI BusinesslRole in Global Operations .............................................. 32 

A. Repos-To-Maturity ................................................................................................... 33 

B. The RRTM ................................................................................................................ 37 

C. Pre-Petition Funding ................................................................................................. 39 

IV. Claims Filed Against the SIP A Estate .............................................................................. 46 

A. Legal Issues Related to the Debtors' Claims ............................................................ 47 

MF GLOBAL GROUP ENTITIES IN THE UNITED KINGDOM ...................................... 53 

1. MF Global Holdings Europe Limited ............................................................................... 53 

II. MF Global U.K. Limited .................................................................................................. 53 

A. Reports Filed by the Special Administrators ............................................................ 54 

B. Overview ofIssues Related to Special Administration ofMFGUK ......................... 54 

III. MF Global UK Services Limited ...................................................................................... 60 

IV. MF Global Finance Europe Limited and MF Global MFG Overseas ............................. 60 

A. Creditors' Committees ofMFG Overseas and Finance Europe ............................... 62 

MF GLOBAL GROUP ENTITIES IN THE REST OF THE WORLD ................................ 63 

I. Australia ............................................................................................................................ 63 

II. Canada ............................................................................................................................... 64 

III. Hong Kong ........................................................................................................................ 65 

IV. India .................................................................................................................................. 66 

V. Ireland ............................................................................................................................... 68 

VI. Japan ................................................................................................................................. 68 

VII. Mauritius ........................................................................................................................... 69 

VIII. Singapore .......................................................................................................................... 70 

IX. Taiwan ............................................................................................................................... 71 

MISCELLANEOUS ISSUES ..................................................................................................... 72 

I. Recovery of Trading Close Out Valuation ....................................................................... 72 

II. Recovery of Tax Refunds ................................................................................................. 72 

III. Sale of De Minimis Assets ................................................................................................ 73 

IV. Insurance ........................................................................................................................... 74 

A. MFG Assurance ........................................................................................................ 74 
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B. The E&O Policies ..................................................................................................... 75 

C. Substantive Provisions of the MFGA E&O Policies ................................................ 76 

D. The D&O Policies ..................................................................................................... 80 

E. Substantive Provisions of the D&O Policies ............................................................ 81 

F. Insurance-Related Litigation ..................................................................................... 83 

V. Litigation ........................................................................................................................... 84 

A. Administration of the Chapter 11 Estate ................................................................... 84 

B. Corporate Personhood ............................................................................................... 86 

C. Miscellaneous Litigation ........................................................................................... 87 

VI. Congressional Hearings and Testimony ........................................................................... 88 

VII. Third party Investigations ................................................................................................. 89 

CONCLUSION ........................................................................................................................... 91 
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INTRODUCTION' 

Prior to the commencement of the Chapter 11 Cases, MF Global Holdings Ltd. 

("Holdings Ltd.") and its worldwide affiliates and subsidiaries (collectively, the "MF Global 

Group"), through its regulated and unregulated broker/dealers ("BID") and futures commission 

merchants ("FCM"), were a leading brokerage firm offering customized solutions in the global 

cash and derivatives markets. The MF Global Group provided execution and clearing services 

for products in the exchange-traded and over-the-counter ("OTC") derivatives markets, as well 

as for certain products in the cash market. The MF Global Group operated globally, with a 

presence in, among other locations, the United States, the United Kingdom, France, Singapore, 

Australia, Hong Kong, Canada, India and Japan, providing its clients with global market access 

to more than seventy securities and futures exchanges and facilitated trades in the OTC markets. 

As the global economy soured in the Fall of2011, the MF Global Group was confronted 

by numerous challenges. On September 1,2011, Holdings Ltd. announced that the Financial 

Industry Regulatory Authority ("FINRA") informed it that MF Global Inc. ("MFGI"), Holdings 

Ltd.'s regulated U.S. operating subsidiary, was required to modify its capital treatment of certain 

repurchase to maturity ("RTM") transactions that were collateralized with European sovereign 

debt and increase its net capital pursuant to Securities and Exchange Commission ("SEC") Rule 

ISc3-1, with which MFGI complied. 

Thereafter, on October 24, 2011, Moody's Investor Service ("Moody's") downgraded 

Holdings Ltd.'s rating to one notch above '1unk" status based on its beliefthat (i) Holdings Ltd. 

would announce lower than expected earnings and (ii) the current low interest rate environment 

This Court approved the appoinnnent of Louis 1. Freeh as chapter 11 trustee (the "Trustee") on November 28, 

2011. On April 12,2012, the Court requested that the Trustee submit a report on the status oflhe Chapter 11 Cases 

(as defmed below) and the Trus!;)e's efforts to wind-down the Debtors' (as defined below) estates (the "Report"). 

The Trustee reserves his right to amend this Report should further information arise pertaining to the facts and 

circumstances set forth in this Report. 
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and volatile capital markets conditions made it unlikely that the MF Global Group would be able 

to meet, in the short term, the profitability targets Moody's had set for the MF Global Group. 

Moody's also raised concerns about the MF Global Group's RTM positions, increased risk 

appetite and capitalization, as well as internal risk management or control issues.' 

On October 25, 201 I, Holdings Ltd. announced its results for its second fiscal quarter 

ended September 30, 2011. Holdings Ltd. disclosed that it posted a $191.6 million GAAP net 

loss in the second quarter, compared with a loss of $94.3 million for the same period the prior 

year. The net loss reflected, among other things, a decrease in net revenue primarily due to the 

contraction of proprietary principal activities. The loss also included valuation allowances 

against deferred tax assets, which accounted for $119.4 million of the $191.6 million in GAAP 

net loss. With regard to the RTM position, concerns over euro zone sovereign debt had caused 

global market fluctuations in prior months and, in particular, the weeks leading up to the 

bankruptcy filings of the Initial Debtors (as defined below). The MF Global Group's weakened 

core profitability and increased risk-taking, in the form of its European RTM positions, led Fitch 

Ratings and Moody's to further downgrade the MF Global Group to "junk" status on October 27, 

20 II. This sparked an increase in margin calls against MFGI and an exodus of its customers, 

threatening overall liquidity . 

Following the October 24 Moody's downgrade, some ofMFGI's principal regulators--

the Conunodity Futures Trading Conunission ("CFTC"), the SEC and the Chicago Mercantile 

Exchange ("CME") -- expressed grave concerns about MFGI's viability and whether it should 

continue operations in the ordinary course. The MF Global Group explored a number of 

The MF Global Group held a long position totaling $6.3 billion in a short-duration European sovereign debt 

portfolio fmanced to maturity, which included debt securities ofBelgium, Italy, Spain, Portugal and Ireland. These 

countries had some ofthemost troubled economies in the euro wne. The RTM exposure was divided between 

MFGI and Fineo (as defmed below). 
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strategic alternatives with respect to its business operations, including a sale of the businesses in 

part or in whole. On October 30, 2011, with the MF Global Group's overall liquidity quickly 

diminishing to unsustainable levels, a sale to Interactive Brokers collapsed when Holdings Ltd. 

advised Interactive Brokers, and the regulators, that a potential significant shortfall in customer 

segregated funds had been identified. 

Beginning on October 31, 2011 (the "October Petition Date"), several entities of the MF 

Global Group filed for bankruptcy, dissolution, administration and/or liquidation in the various 

jurisdictions in which the MF Global Group operated. This Report, among other things, 

summarizes the progress made to date in the chapter 11 cases (the "Chapter 11 Cases") of 

Holdings Ltd., MF Global Finance USA, Inc. ("FinCo") (together with Holdings Ltd., the 

"Initial Debtors"), MF Global Capital LLC ("Capital"), MF Global FX Clear LLC ("FX 

Clear"), MF Global Market Services, LLC ("Market Services," and collectively with Capital 

and FX Clear, the "Unregulated Debtors"), and MF Global Holdings USA Inc. ("Holdings 

USA", and collectively with the Unregulated Debtors, the "Subsequent Debtors," and the 

Subsequent Debtors collectively with the Initial Debtors, the "Debtors") to maximize the value 

of the Debtors' estates for the benefit of creditors and all parties in interest. 

This Report focuses on the Debtors' Chapter 11 Cases and the Trustee's efforts to meet 

his duties under chapter 11 of title 11 of the United States Code, as amended (the "Bankruptcy 

Code"), and his fiduciary duty to maximize value and returns to the Debtors' creditors. To 

maximize the creditors' returns, the Trustee must realize value from the various entities of the 
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MF Global Group that are in administration or liquidation proceedings both domestically and 

abroad.' 

Initially, the Report details the Debtors, their Chapter 11 Cases, their businesses, the 

appointment of the Official Committee of Unsecured Creditors ofMF Global Holdings Ltd., et 

al. (the "Committee") and the Trustee, and the various professionals retained to assist with the 

wind-down ofthe Debtors' estates. 

The focus of the Report then turns to the relationships between the Debtors and the MF 

Global Group, detailing the over $2 billion in financing provided by the Debtors to MFGI and 

the proprietary transactions entered into by the Debtors with and among MFGI and MF Global 

U.K. Limited ("MFGUK"). In addition, an analysis of the claims against the MF Global 

Group's worldwide affiliates is provided. The Trustee has attempted to provide the most 

complete and transparent account of all ofthe Debtors' claims against all other entities in the MF 

Global Group. 

Finally, the Report closes with a discussion of additional topics of interest that have 

arisen during the Chapter 11 Cases, including various court proceedings, litigations and 

testimony before Congress. 

INITIAL CHAPTER 11 FILINGS 

I. MF GLOBAL HOLDINGS LTD. AND MF GLOBAL FINANCE USA INC. 

A. October Petition Date and First Day Motions 

On the October Petition Date, the Initial Debtors filed voluntary petitions under chapter 

11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of 

For a summary ofthe claims filed by the Debtors and their non-debtor affiliates against all members of the MF 

Global Group that are the subject ofliquidation proceedings and administrations throughout the world, see Exhibit 

A. 
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New York (the "Court"). On the October Petition Date, the Initial Debtors filed the following 

first day motions in order to make their transition to, and operation in, chapter II occur with 

minimum interruption or disruption to their businesses or loss of productivity or value. 

1. Joint Administration. 

The Initial Debtors requested the joint administration of their Chapter II Cases for 

procedural purposes only to reduce costs and facilitate the administrative process by avoiding the 

need for duplicative notices, applications, and orders. On November 2,2011, the Court entered 

an order authorizing joint administration.' 

2. Schedules and Statements Extension Motion. 

The Initial Debtors sought to extend the deadline to file their schedules of assets and 

liabilities and statements of financial affairs (collectively, the "Schedules"). Given the 

complexity of the Initial Debtors' businesses, as well as the effort required to prepare for and 

conduct their Chapter II Cases on an emergency basis, the Initial Debtors determined that they 

would not be in a position to accurately complete their Schedules within the deadline provided 

by the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and the Local 

Bankruptcy Rules for the Southern District of New York (the "Local Rules"). On November 2, 

2011, the Court entered an order extending the deadline for filing the Schedules.' 

3. List of Creditors and Initial Notices. 

To ease the administrative burden of the Chapter II Cases on the Initial Debtors' estates, 

the Initial Debtors requested authorization to (i) prepare a consolidated list of creditors in the 

form maintained in the ordinary course of business and in electronic format only, (ii) file a 

Docket No. 19. 

Docket No. 21. The deadline to tile the Schedules subsequently was further extended. The Trustee tiled the 

Schedules for five of the Debtors on May 18,2012 and dIe remaining Debtor on May 30, 2012 (Docket Nos. 692-

70 I, 707, 708). 
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consolidated list ofthe 50 largest general unsecured creditors, and (iii) mail initial notices. The 

Initial Debtors also requested authority not to file (i) the consolidated list of creditors described 

above, but instead to make such lists available only upon request, and (ii) a list of each Initial 

Debtor's equity security holders. On November 2, 2011, the Court entered an order granting the 

Initial Debtors' requests, provided that a list of the Initial Debtors' equity holders be maintained 

by GCG, Inc. ("GCG"), the Court-appointed claims and noticing agent, and made available upon 

request.' 

4. Cash Management, Business Forms, and Intercompany Transfers. 

The Initial Debtors requested (i) a waiver of the requirement in the U.S. Trustee 

Guidelines that pre-petition bank accounts be closed and new post-petition bank accounts be 

opened, (ii) authority to continue to use all business forms existing immediately prior to the 

October Petition Date, without reference to the Initial Debtors' status as debtors in possession, 

provided that the Initial Debtors would use their reasonable best efforts to refer to their status as 

debtors in possession on all checks issued after the commencement of the Initial Debtors' 

Chapter 11 Cases and on other physical business forms after the Initial Debtors' existing stock 

was exhausted, and (iii) authority to continue intercompany transactions among the Initial 

Debtors and accord superpriority status to all post-petition intercompany claims. The Court 

entered four interim orders and a final order on December 14,2011 authorizing the Initial 

Debtors to continue using their existing bank accounts, cash management system and business 

forms, and to continue intercompany transactions among the Initial Debtors, according 

superpriority status to all post-petition intercompany claims.' 

Docket No. 20. 

Docket Nos. 25, 119,205,254,276. 
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5. Cash Collateral. 

The Initial Debtors sought authority to use funds held in their accounts (the "Cash 

Collateral") at JPMorgan Chase Bank, N.A. ("JPM") to maintain sufficient liquidity so that the 

Initial Debtors could continue to operate their businesses in the ordinary course of business 

during their Chapter II Cases. The Initial Debtors asserted that immediate and ongoing use of 

Cash Collateral was required to fund the day-to-day activities of the Initial Debtors, including 

payments to employees and vendors in the ordinary course of business whose services and goods 

were integral to the Initial Debtors' operations. Without the use of the Cash Collateral, the Initial 

Debtors would be unable to pay for services and expenses necessary to preserve and maximize 

the value of the Initial Debtors' estates. 

The Court entered an order on November 2, 2011 authorizing the Initial Debtors to use 

Cash Collateral on an interim basis, and an order on December 14,2011 authorizing the Initial 

Debtors to use Cash Collateral on a final basis, subject to certain terms and restrictions.' 

B. The Initial Debtors' Professionals 

1. Skadden. Arps. Slate. Meagher & F10m LLP. 

On January 23, 2012, the Trustee filed an application to retain Skadden, Arps, Slate, 

Meagher & F10m LLP ("Skadden"), nunc pro tunc to the October Petition Date, as the Initial 

Debtors' bankruptcy counsel through November 28,2011 and thereafter as special counsel to the 

Trustee through March 31, 2012.' Prior to the October Petition Date, Skadden was retained for 

advice on strategic options in connection with efforts to respond to the Debtors' financial 

circumstances. Skadden's service included, among other things, assisting the Initial Debtors 

Docket Nos. 26, 275. 

Docket No. 386. 
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with restructuring their financial affairs and capital structure, and, as necessary, advising the 

Initial Debtors with respect to any reorganization cases filed under chapter 11 of the Bankruptcy 

Code. Skadden worked closely with the MF Global Group to restructure its business, and when 

those efforts failed, to file petitions under chapter 11 of the Bankruptcy Code and address the 

numerous issues that resulted therefrom. After his appointment, the Trustee sought to retain 

Skadden on a limited basis to capture the knowledge and insights into the cases that Skadden had 

gained during its tenure as the Initial Debtors' proposed bankruptcy counsel, and to ensure a 

seamless transition to his professionals. Specifically, Skadden's services were used to assist the 

Trustee with (i) the surrender of leased premises at 717 Fifth Avenue, (ii) tax refund matters, and 

(iii) other matters where Skadden had acquired material knowledge during its representation of 

the Initial Debtors. On February 9, 2012, the Court entered an order authorizing the retention of 

Skadden through and including March 31, 2012.10 

2. FTI Consulting, Inc. 

On January 23, 2012, the Trustee filed an amended application to retain FTI Consulting, 

Inc. ("FTI") as financial advisors to the Initial Debtors from October 31, 20 II to November 28, 

2011, and as financial advisors to the Trustee thereafter." FTI provides consulting and advisory 

services, including assistance with (i) the preparation of financial-related disclosures required by 

the Court, the Bankruptcy Code, the Bankruptcy Rules and the Local Rules, (ii) analyses related 

to the pursuit of debtor in possession financing and the use of Cash Collateral, (iii) the 

identification and implementation of short-term cash management procedures, (iv) the 

development and implementation of key employee retention and other critical employee benefit 

10 Docket No. 436. 

" Docket No. 389. 
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programs, (v) the identification of core business assets and the disposition of assets or liquidation 

of unprofitable operations, (vi) the identification of executory contracts and leases and analysis 

of costlbenefit evaluations with respect to the affirmation or rejection of each, (vii) the valuation 

ofthe present level of operations and identification of areas of potential cost savings, (viii) 

analysis of creditor claims, including assisting with development of databases, as necessary, to 

track such claims, (ix) monitoring the various other insolvency proceedings and administrations 

of the Initial Debtors' affiliates, (x) the evaluation and analysis of avoidance actions, (xi) 

forensic accounting, forensic reviews and investigations, information technology issues, data 

retention, data preservation, data collection, and data analysis, and (xii) certain other issues 

related to the Chapter 11 Cases. On February 9, 2012, the Court entered an order authorizing the 

retention of FTI.12 

3. Kasowitz, Benson, Torres & Friedman LLP. 

On January 23, 2012, the Trustee filed an application to retain Kasowitz, Benson, Torres 

& Friedman LLP ("Kasowitz") as the Initial Debtors' conflicts counsel through November 28, 

2011 and thereafter as special investigative counsel to the Trustee through March 31, 2012.13 

Kasowitz's tasks consisted primarily of assisting the Trustee in connection with certain formal 

and informal investigative matters and the transition of those matters to the Trustee and his 

counsel, Freeh Sporkin & Sullivan, LLP. Since the October Petition Date, the Initial Debtors 

have received numerous subpoenas and information requests from various governmental 

agencies such as the SEC and the CFTC, which require the preservation, collection and review of 

voluminous data and documents in the possession, custody or control of the Initial Debtors. 

12 Docket No. 438. 

13 Docket No.3 84. 
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Kasowitz had been selected earlier by the Initial Debtors as conflicts counsel to coordinate their 

document preservation efforts and respond to various investigative subpoenas and requests. The 

Trustee subsequently sought to retain Kasowitz as special investigative counsel for a limited time 

to (i) take advantage of the knowledge and experience that Kasowitz acquired in representing the 

Initial Debtors in these matters prior to the appointment of the Trustee, (ii) avoid unnecessary 

duplication of efforts, and (iii) assist the Trustee in expeditiously responding to the numerous 

investigations and requests for information, and managing the process of identifying, preserving, 

collecting and analyzing electronic and hard copy documents in the Initial Debtors' possession, 

custody and control. On February 9, 2012, the Court entered an order authorizing the retention 

of Kasowitz14 

4. GCG. 

On October 31,2011, the Initial Debtors filed an application to retain GCG as the claims 

and noticing agent for the Initial Debtors' Chapter 11 Cases." In light ofthe number of 

anticipated claimants and parties in interest, the Initial Debtors believed that appointing GCG, an 

independent third party, to act as claims and noticing agent would provide the most effective and 

efficient means, and relieve the Initial Debtors and the Clerk's Office of the administrative 

burden, of noticing, administering claims, and assisting in other administrative tasks. On 

November 2,2011, the Court entered an order authorizing the retention ofGCG.16 

14 Docket No. 439. 

" Docket No.5. 

J6 Docket No. 22. 
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C. Description of the Initial Debtors' Businesses 

1. Holdings Ltd. 

Holdings Ltd. was a public company that traded on the New York Stock Exchange under 

the ticker symbol "MF," and since the October Petition Date trades under the ticker symbol 

"MFGLQ". Holdings Ltd. is a corporate holding company that is the direct or indirect parent of 

all of the other companies in the MF Global Group. 

2. FinCo. 

FinCo is a New York corporation that provided financing services to affiliated companies 

and third parties. 

STATUTORY CREDITORS' COMMITTEE 

I. COMMITTEE MEMBERS 

On November 7, 2011, the Office of the United States Trustee (the "U.S. Trustee"), 

under Bankruptcy Code sections 1102(a) and (b), appointed the following unsecured creditors to 

the Committee: (I) Wilmington Trust Company, (2) JPM, (3) Bank of America, NA ("BoA"), 

(4) Elliot Management Corporation, and (5) Caplin Systems Ltd." 

II. COMMITTEE PROFESSIONALS 

A. Dewey & LeBoeuf LLP 

On January 19,2012, the Court authorized the Committee's retention of Dewey & 

LeBoeufLLP ("Dewey") as legal counsel, nunc pro tunc to November 9, 2011, to advise and 

assist the Committee with respect to the administration of the Chapter 11 Cases." 

17 Docket No. 51. Upon information and belief, Elliot Management Corporation has resigned from the 

Committee. 

" Docket No. 377. The Trustee has been advised that the Committee will substitute Proskauer Rose LLP 

("Proskauer") for Dewey as counsel. 
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B. Capstone 

On February 9, 2012, the Court authorized the Committee's retention of Capstone 

Advisory Group, LLC, together with its wholly-owned subsidiary Capstone Valuation Services, 

Inc. ("Capstone", and together with Proskauer, the "Committee Professionals"), as its financial 

advisor, nunc pro tunc to November 9, 2011, to help guide the Committee through the Debtors' 

reorganization efforts and to assist it in the tasks associated with negotiating and implementing a 

chapter II plan.'9 

C. Rust Consulting, Inc. 

On May 5, 2012, the Committee filed an application to retain Rust Consulting, Inc. as 

administrative agent to establish and maintain the Committee's website and to assist the 

Committee in providing the Debtors' unsecured creditors with access to information in 

connection with the Chapter 11 Cases.20 The application will be heard by the Court on June 14, 

2012. 

m. COMMITTEE ACTIVITY 

On March 7, 2012, the Court entered the Stipulation and Agreed Order Between the 

Chapter 11 Trustee and the Statutory Creditors' Committee of MF Global Holdings Ltd., et al. 

Regarding Creditor Access to Information Pursuant to 11 Us.c. §§ 105(a), 1102(b)(3) and 

1103(c),2' which sets forth the procedures for creditors' access to information and provides that a 

vendor be retained by the Committee to serve as administrative agent for the Committee website. 

'9 Docket No. 435. 

20 Docket No. 668. 

21 Docket No. 533. 
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As noted, the Committee selected Rust Consulting, Inc. to serve as administrative agent, subject 

to Court approval. 

CHAPTER 11 TRUSTEE 

I. APPOINTMENT OF CHAPTER 11 TRUSTEE 

On November 21, 2011, the Initial Debtors and the Committee filed ajoint emergency 

motion requesting that the Court direct the appointment of a chapter II trustee to reorganize 

and/or liquidate the Debtors' assets for the benefit of the Debtors' estates, their creditors, and 

other stakeholders." The Debtors and the Committee believed that a court-appointed chapter II 

trustee would have the reputation, experience, and confidence to manage and coordinate the 

investigations ofthe various court-appointed administrators and regulators in the MF Global 

Group administrations, and would do so in a manner that is more efficient and cost effective than 

could be achieved by the debtors in possession. The Initial Debtors and the Committee also 

believed that the appointment of a chapter II trustee would be in the best interests of the Initial 

Debtors' estates and the stakeholders of those estates, allowing the trustee to aid in the 

management of, and facilitate, global cooperation with the various court-appointed 

administrators and regulators of the non-Debtors ofthe MF Global Group, as well as work with 

the Committee for the prompt recovery of assets for the benefit of creditors. 

On November 22, 2011, the Court entered an order directing the appointment ofa chapter 

11 trustee." 

22 Docket No. 131. 

" Docket No. 156. 
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On November 25,2011, the U.S. Trustee appointed the Trustee, which appointment was 

approved by the Court and accepted by the Trustee on November 28,2011 and December 2, 

2011, respectively." 

II. TRUSTEE'S PROFESSIONALS" 

A. Freeh Group International Solutions, LLC 

On January 23, 2012, the Trustee filed an application to retain Freeh Group International 

Solutions, LLC ("FGIS") as his business and operations advisors, nunc pro tunc to November 

28,2011," to (i) manage the facilitation and coordination of information and data exchange 

between the various worldwide administrations, (ii) coordinate workflow administration between 

the Trustee's professionals, the Committee and its professionals, and the various worldwide 

administrations, (iii) assist the Trustee with the day-to-day management of the bankruptcy 

process, including evaluation of strategic and tactical options with respect to the liquidation 

proceeding respecting MFGI under the Securities Investor Protection Act of 1970, 15 

U.S.C. § 78aaa, et seq., as amended ("SIP A"), and various insolvency administrations 

throughout the world, as well as management of the wind-down of the Debtors' operations, and 

(iv) assist the Trustee in undertaking additional tasks that the Court may direct, to the extent 

those tasks are consistent with these delineated services. As part of the above tasks, FGIS 

formulates for the Trustee strategies for the cost-effective utilization of existing company 

personnel and the integration of the company's staff with the financial advisory team and other 

professionals retained in the Chapter II Cases. 

24 Do.cket Nos. 168, 170,210. 

25 The Trustee's professionals have agreed, at the request of the Trustee, to a 10% reduction of their hourly rates. 

26 Docket No. 390. 
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On April 5, 2012, the Trustee and the U.S. Trustee entered into a stipulation regarding the 

retention and employment ofFGIS," and on April 10, 2012, the Court entered an order 

authorizing such retention." 

B. Freeh Sporkin & Sullivan, LLP 

On January 23, 2012, the Trustee filed an application to retain Freeh Sporkin & Sullivan, 

LLP ("FSS") as his investigative counsel, nunc pro tunc to November 28,2011,29 to (i) represent 

the Trustee in his dealings with various regulatory authorities, (ii) represent the Trustee in his 

dealings with various prosecutors' offices and law enforcement authorities, (iii) represent the 

Trustee in his dealings with various U.S. House and Senate Committees and Sub-Committees, 

(iv) coordinate information requests and responses to all regulators, congressional committees, 

prosecutors' offices, lender groups, and other parties in interest in the bankruptcy process, (v) 

assist the Trustee in his investigation of the acts and conduct of the Debtors, including 

conducting witness interviews, and (vi) assist the Trustee in undertaking additional tasks that the 

Court may direct, to the extent those tasks are consistent with these delineated services. On 

February 9,2012, the Court entered an order authorizing the retention ofFSS.30 

C. Morrison & Foerster LLP 

On January 23, 2012, the Trustee filed an application to retain Morrison & Foerster LLP 

("MoFo") as general bankruptcy counsel to the Trustee, nunc pro tunc to November 28, 2011.31 

As general bankruptcy counsel, MoFo is responsible for (i) advising the Trustee with respect to 

27 Docket No. 610. 

28 Docket No. 618. 

29 Docket No. 388. 

30 Docket No. 437. 

3i Docket No. 391. 
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his powers and duties as Trustee and in the continued management and operation of the 

businesses and properties of the Debtors, (ii) attending meetings and negotiating with creditors 

and parties in interest, (iii) advising the Trustee in connection with any sale of assets in the 

Chapter 11 Cases, (iv) taking all necessary action to protect and preserve the Debtors' estates, 

including prosecuting actions on behalf of the Trustee and the Debtors, defending any action 

commenced against the Trustee or the Debtors, and representing the Debtors' interests in 

negotiations concerning all litigation in which the Debtors are involved, including, but not 

limited to, objections to claims filed against the Debtors, (v) preparing all motions, applications, 

answers, orders, reports, and papers necessary to the administration of the Chapter II Cases, 

(vi) appearing before the Court, any appellate courts, and the U.S. Trustee, and protecting the 

interests of the Debtors before such courts and the U.S. Trustee, (vii) performing other necessary 

legal services to the Trustee in connection with the Chapter II Cases, including (a) analyzing the 

Debtors' leases and executory contracts and the assumption or assigrunent thereof, (b) analyzing 

the validity of liens against the Debtors, and ( c) advising on corporate, litigation, and other legal 

matters, and (viii) taking all steps necessary and appropriate to bring the Chapter II Cases to 

conclusion. On February 9, 2012, the Court entered an order authorizing the retention of 

MoFo." 

D. Pepper Hamilton LLP 

On January 23, 2012, the Trustee filed an application to retain Pepper Hamilton LLP 

("Pepper") as special counsel to the Trustee, nunc pro tunc to November 28, 2011,33 to provide 

services related to (i) tax issues, including tax audits and refunds, and tax issues involving 

J2 Docket No. 440. 

J3 Docket No. 385. 
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affiliates, employee benefit issues, and certain insurance matters affecting the Debtors' estates, 

(ii) WARN Act litigation matters and insurance litigation related to insurance claims, defenses 

and indemnities, (iii) miscellaneous real estate issues involving leases, furniture, fixture and 

equipment relating to the Debtors' relocation, and employment issues affecting the operation of 

the remaining business of the estate, and (iv) any matters as to which MoFo has a conflict 

involving JPM, BoA or UBS, A.G. and their affiliates. On February 9, 2012, the Court entered 

an order authorizing the retention of Pepper. 34 

E. Covington & Burling LLP 

On March 27, 2012, the Trustee filed an application to retain Covington & Burling LLP 

("Covington") as special insurance counsel to the Trustee, nunc pro tunc to November 28, 

2011," to (i) provide legal analysis and advice concerning the Trustee's rights and obligations 

with respect to the captive insurance subsidiary MFG Assurance Company Limited ("MFGA"), 

and policies issued to the Debtors by MFGA, (ii) review claims asserted under outstanding 

insurance policies and insurers' responses to such claims, and advise the Trustee with respect to 

such claims, (iii) represent the Trustee in the Chapter II Cases with respect to matters involving 

the scope or availability of insurance coverage or entitlement to proceeds under the policies, and 

(iv) confer with, and assist when appropriate, the Trustee's bankruptcy counsel concerning 

insurance coverage issues within the scope of Covington's special expertise, and pursue potential 

claims for indemnification or reimbursement under such policies on behalf of the Trustee. On 

April 12, 2012, the Court entered an order authorizing the retention of Covington." 

34 Docket No. 441. 

35 Docket No. 597. 

" Docket No. 627. 
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SUBSEQUENT CHAPTER 11 FILINGS 

I. MF GLOBAL CAPITAL LLC, MF GLOBAL FX CLEAR LLC, MF GLOBAL 

MARKET SERVICES LLC, AND MF GLOBAL HOLDINGS USA INC. 

A. Petition Date and First Day Motions 

The commencement of the Chapter 11 Cases of Holdings Ltd. and FinCo severely 

impacted certain of their U.S. affiliates. Since the October Petition Date, the Debtors have been 

discontinuing their operations and winding down their former businesses. 

To avoid the depletion of assets with no attendant benefit, the Unregulated Debtors f1Ied 

voluntary petitions under chapter 11 of the Bankruptcy Code on December 19,2011 (the 

"December Petition Date"). 

To facilitate the ongoing orderly wind-down ofthe other Debtors and their non-debtor 

aff1liates, Holdings USA f1Ied a voluntary petition under chapter 11 of the Bankruptcy Code on 

March 2, 2012 (the "March Petition Date"). 

The Trustee f1Ied the following first day motions on behalf of the Subsequent Debtors to 

ease their transition to chapter J 1 and cause minimum interruption or disruption to their 

businesses or loss of productivity or value. 

1. Joint Administration. 

The Trustee requested joint administration of the Chapter 11 Cases of the Subsequent 

Debtors with the jointly administered Chapter 11 Cases ofthe Initial Debtors to reduce costs and 

facilitate the administrative process by avoiding the need for duplicative notices, applications, 

and orders. On December 21, 2011 and March 6, 2012, the Court entered orders granting joint 

administration of the Initial Debtors' and the Subsequent Debtors' cases." 

37 Docket Nos. 298, 528. 
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2. Application of Certain Orders to the Subsequent Debtors. 

On each of the December Petition Date and the March Petition Date, the Trustee 

requested entry of an order making certain of the orders entered in the Chapter II Cases ofthe 

Initial Debtors applicable to the Subsequent Debtors to avoid unnecessary duplication and 

expenses to the Subsequent Debtors and their estates." These orders included and/or involved 

the appointment of the Trustee as the chapter 11 trustee of each of the estates, the retention of the 

professionals discussed above for each of the estates, and various other motions filed in the 

Initial Debtors' cases. On December 23, 2011 and March 7, 2012, the Court entered orders 

declaring these previous orders to be applicable to the Subsequent Debtors." 

3. Cash Management, Business Forms, and Intercompany Transfers. 

The Subsequent Debtors requested (i) a waiver ofthe requirement in the U.S. Trustee 

Guidelines that pre-petition bank accounts be closed and new post-petition bank accounts be 

opened, (ii) authority to maintain cash management systems, (iii) authority to continue to use all 

business forms existing immediately prior to the December and March Petition Dates, without 

reference to the Subsequent Debtors' status as debtors in possession, provided that the 

Subsequent Debtors would use their reasonable best efforts to refer to their status as debtors in 

possession on all checks issued after the commencement of the Subsequent Debtors' Chapter 11 

Cases and on other physical business forms after the Subsequent Debtors' existing stock was 

exhausted, and (iv) authority to continue intercompany transactions among the Subsequent 

Debtors and accord superpriority status to all post-petition intercompany claims. The Court 

entered various interim orders and final orders authorizing the Subsequent Debtors to continue 

38 Docket Nos. 293, 509. 

39 Docket Nos. 303,534. 
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using their existing bank accounts, cash management system and business forms, and to continue 

intercompany transactions among the Subsequent Debtors, according superpriority status to all 

post-petition intercompany claims." 

4. Employee Compensation, Expense Reimbursement, 

and Withholding and Payroll-Related Taxes. 

The Trustee determined that the Subsequent Debtors had incurred certain Pre-petition 

Employee Obligations (as defined below) that remained unpaid as of the December Petition 

Date. To minimize the personal hardship on the employees, and to maintain the employees' 

morale during the Chapter 11 Cases, the Trustee requested: 

(i) authority to pay and honor various pre-petition employeerelated obligations of the Subsequent Debtors (collectively, the 

"Pre-Petition Employee Obligations") to or for the benefit of 

their employees, for compensation and expense reimbursements 

under all plans, programs and policies maintained by the 

Subsequent Debtors prior to the December and March Petition 

Dates (the "Benefit Programs,,);'1 

(ii) confirmation that the Trustee is permitted, but not required, to 

pay any and all local, state, and federal withholding and payrollrelated taxes relating to pre-petition periods, whether withheld 

from employees' wages or paid directly by the Trustee, to the 

applicable governmental authorities; 

(iii) confirmation that the Trustee is permitted to pay to third 

parties any and all amounts deducted from employee paychecks for 

payments on behalf of employees for garnishments, support 

payments, tax levies, bankruptcy payments, savings programs, and 

other similar programs; 

(iv) an order directing all banks to honor pre-petition checks, ACH 

debits, draw-downs, or other forms of funds transfers and 

'0 Docket Nos. 269, 378, 529, 625. 

'II These Benefits Programs include, without limitation, plans, programs, policies and agreements providing for (i) 

wages, salaries, contractual compensation, and other accmed or incurred compensation; (ii) workers' compensation 

obligations; (iii) employee health benefits; and (iv) retirement benefits. The Trustee stated that no individual 

employee was to receive payment in excess of $11,725 for pre-petition amounts owed. 
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disbursements for payment of the Subsequent Debtors' PrePetition Employee Obligations; 

(v) confirmation that the Trustee is permitted to take the necessary 

administrative actions to cause the 40 I (k) plan administrator or 

other benefits administrators, to the extent necessary, to terminate 

the 40 I (k) plan and other unnecessary benefits plans and/or 

programs; and 

(vi) authority to continue the post-petition payroll processing and 

administration of any Benefit Programs and Pre-Petition Employee 

Obligations that are administered or paid through a third-party 

administrator or provider, and pay any pre-petition claims of such 

administrators in the ordinary course of business. 

The Court entered several interim and final orders granting this relief.42 

B. Appointment of Chapter 11 Trustee 

On December 23, 2011, the Trustee was appointed as chapter 11 trustee of the estates of 

the Unregulated Debtors." This appointment was approved by the Court and accepted by the 

Trustee on December 27, 2011.44 

On March 8, 2012, the Trustee was appointed as chapter 11 trustee of the estate of 

Holdings USA." This appointment was approved by the Court on March 8, 2012 and accepted 

by the Trustee on March 12,2012." 

42 Docket Nos. 297, 551, 576, 626. 

43 Docket No. 304. 

44 Docket No. 306, 307. 

45 Docket No. 546. 

" Docket Nos. 548, 557. 
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C. Brief Description of the Businesses 

I. Capital. 

Capital is a New York limited liability company that provided foreign exchange, prime 

brokerage, and energy and credit default swaps. 

2. FX Clear. 

FX Clear is a New York limited liability company that provided foreign exchange 

execution and clearing services. 

3. Market Services. 

Market Services is a New York limited liability company that entered into matched 

principal trading of energy and agricultural products. 

4. Holdings USA. 

Holdings USA is a New York corporation that provided administrative services to 

Holdings Ltd. and its U.S. subsidiaries. 

DEBTORS' OPERATIONS 

I. DESCRIPTION OF GLOBAL OPERATIONS 

Prior to the October Petition Date, the MF Global Group, through its regulated and 

unregulated BIDs and FCMs, was one of the world's leading brokers in markets for cornrnodities 

and listed derivatives. The MF Global Group provided access to more than seventy exchanges 

globally and was a leader by volume on many of the world's largest derivative exchanges. The 

MF Global Group also was an active broker-dealer in markets for cornrnodities, fixed income 

securities, equities, and foreign exchange. 

The MF Global Group was headquartered in the United States and had operations in, 

among other countries, the United Kingdom, Australia, Singapore, India, Canada, Hong Kong, 
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Japan and Taiwan. A copy ofthe MF Global Group's organizational chart is annexed hereto as 

Exhibit B. The MF Global Group's priority was to serve the needs of its diversified global client 

base, which included a wide range of institutional asset managers and hedge funds, professional 

traders, corporations, sovereign entities, and financial institutions. The MF Global Group also 

offered a range of services for individual traders and introducing brokers. 

The MF Global Group derived revenues from three main sources: (i) commissions 

generated from execution and clearing services; (ii) principal transactions revenue, generated 

both from client facilitation and proprietary activities; and (iii) net interest income from cash 

balances in client accounts maintained to meet margin requirements, as well as interest related to 

the MF Global Group's collateralized financing arrangements and principal transactions 

activities. For fiscal year 2011, the MF Global Group generated total revenues of approximately 

$2.2 billion, revenues net of interest and transaction-based expenses of approximately $1.1 

billion, and incurred a net loss of $81.2 million. 

II. U.S. DEBTORS 

A. Attrition of Employees. 

Prior to the October Petition Date, the MF Global Group employed approximately 2,870 

employees worldwide, with approximately 1,300 employees in the United States. 

Approximately 250 of the U.S. employees were employed by the Debtors, while the remaining 

U.S.-based employees worked for MFGI. In the period immediately following the 

commencement of the Initial Debtors' Chapter 11 Cases, however, the Debtors began the rapid 

wind-down of their former operations, quickly reducing employee headcount and other costs and 

taking additional actions to preserve the assets oftheir estates for the benefit of stakeholders. 

Holdings Ltd. has been able to retain its President, Chief Financial Officer and General Counsel, 
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who have remained to assist the Trustee with the wind-down of the Debtors' estates. By 

December 2011, the Debtors had 30 other employees remaining as a result of the he ad count 

reductions. 

Since December 2011, 17 employees have left the Debtors' employment to pursue other 

opportunities. The loss of these employees had a considerable negative impact on the Debtors. 

As time passes, employees continue to leave the Debtors in favor of new opportunities and 

greater job security rather than assist the Debtors in the wind-down of their affairs. 

The remaining employees perform a variety of critical functions necessary for an orderly 

wind-down, a successful chapter II liquidation process, and compliance with the various 

obligations required under the Bankruptcy Code, the Bankruptcy Rules, the Local Rules and the 

Internal Revenue Code. The remaining employees are vital to the operations of the Debtors and 

implementation of the orderly wind-down during the pendency of the Chapter 11 Cases. The 

remaining employees' positions fall into the following descriptions: 

• Finance / General Accounting 

• Cash Management 

• Tax • Accounting Systems 

• Information Technology 

• Legal / Insurance 

• Transactional Finance 

• Restructuring Communications 

The remaining employees have essential knowledge and skills required to assist with the 

efficient and effective wind-down the Debtors' estates. This includes, but is not limited to, 

knowledge of investment positions to be unwound to maximize value to the estates; knowledge 

of historical financial and tax reporting and cash management systems; knowledge of 

intercompany relationships and receivables and payables balances; knowledge of complex legal 

structures and U.S. tax filing requirements; familiarity with important insurance issues affecting 
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the Debtors; and knowledge of information technology infrastructure and systems application 

needs. The remaining employees' knowledge and unique skill sets will enable the Trustee to 

complete the many tasks mandated by the Bankruptcy Code or that are otherwise necessary in 

the wind-down of the Debtors' operations and the liquidation oftheir assets. 

The remaining core group of employees also have assumed numerous finance and 

accounting functions previously provided by employees ofMFGI, including certain cash 

management, payroll and accounts payable accounting and processing for the Debtors. These 

employees also have assisted with federal and state tax compliance and bankruptcy 

administration responsibilities, including the preparation of monthly operating reports and the 

preparation of the Schedules for filing in the Debtors' cases. Moreover, using the Debtors' 

analysis of intercompany balances as of October 31,2011, which was made possible through the 

work and knowledge ofthe remaining employees, as detailed below, the Trustee is actively 

pursuing recoveries against former affiliates and has filed or is in the process of filing numerous 

and substantial claims against certain ofthe Debtors' domestic and foreign affiliates that are in 

insolvency proceedings in their local jurisdictions. These employees have shared a wealth of 

knowledge, which has allowed the Trustee and his professionals to organize and understand 

quickly the information necessary to create and execute strategies for the orderly liquidation of 

these estates. This would not have been possible, or certainly could not have been accomplished 

as quickly or as cost-effectively, without the institutional knowledge of and assistance from the 

Debtors' employees on a daily basis. 

B. Real Estate and Leases. 

Prior to the commencement of the Chapter 11 Cases, the Debtors maintained offices at 

717 Fifth Avenue, New York, New York 10022 (the related lease is referred to herein 
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as the "717 Lease"). Due to their changed financial circumstances and increasing employee 

attrition rate, the Debtors determined that thcy no longer needed to maintain an office of that 

size. In November 2011, the Debtors terminated the 717 Lease and moved into temporary office 

space located at 1350 Avenue of the Americas, New York, New York 10019. As of March I, 

2012, the Debtors entered into a lease to maintain their oftices at 142 West 57th Street, New 

York, New York 10019 (the "57th Street Lease"). The 57th Street Lease terminates on June 29, 

2013. By terminating the 717 Lease and entering into the 57th Street Lease, the Debtors have 

reduced their rent obligations by approximately $9 million on an annual basis. 

C. Pre-petition Debt Facilities 

I. Liquidity Facility. 

Prior to the October Petition Date, Holdings Ltd. and Fineo (in this capacity, the 

"Borrowers")''' entered into that certain five-year revolving credit facility dated as of June 15, 

2007 (as amended, supplemented or otherwise modified from time to time, the "Liquidity 

Facility") with JPM, as administrative agcnt. and the several lenders from time to time that are 

parties thereto (collectively, the "Liquidity Facility Lenders"). On June 29, 2010, the Liquidity 

Facility was amended (i) to pennit Holdings Ltd" in addition to certain of its subsidiaries. to 

borrow funds under the Liquidity Facility and (ii) to extend the lending commitments of certain 

of the Liquidity Facility Lenders by two years, from June 15,2012 to June 15,2014. Under the 

Liquidity Facility, the Liquidity Facility Lenders made available to the Borrowers the aggregate 

principal amount of approximately $1.2 billion, $1.172 billion of which was drmm as ofthe 

October Petition Date. 

" Holdings Ltd. was named as one of the Borrowers. Holdings Ltd. changed its jurisdiction of incorporation fTom 

Bermuda to the State of Delaware and has continued its existence as a corporation organized under the laws 0 f the 

St~te of Delaware under the name ofMF Global Holdings Ltd. 
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2. Secured Facility to MFG!. 

On June 29, 201 L MFGI entered into a $300 million 364-day secured revolving credit 

facility (the "MFGI Secured Facility") with a syndicate of lenders. The Trustee understands 

that, although the MFGI Secured Facility is not fully drawn, MFGI borrowed a substantial 

amount on the facility as of the October Petition Date. The SIPA Trustee has not provided a 

consistent answer regarding the exact amount outstanding on the MFGI Secured Facility as of 

the October Petition Date. 

JPM is the administrative agent under the MFGI Secured Facility. The MFGI Secured 

Facility is secured by eligible collateral that was held by MFG!. The Trustee believes that the 

borrowings under the MFG! Secured Facility were over-collateralized by securities pledged by 

MFG!. However. the SIP A Trustee has not provided any further details to allow the Trustee to 

ascertain the level of overcollateralization. Holdings Ltd. and FinCo provided unsecured 

guarantees ofMFGI's obligations under the facility. 

3. Unsecured Convertible Notes. 

Holdings Ltd. owes approximately $287.5 miHion in unsecured debt under certain 

1.875% Convertible Senior Notes due 2016 (the "1.875% Convertible Notes"). The 1.875% 

Convertible Notes mature on February 1, 2016 and are convertible at the option of the holders 

prior to August 1,2015 upon the occurrence of celtain events relating to the price of Holdings 

Ltd.'s common stock or various corporate events. 

Holdings Ltd. also has outstanding approximately $78.6 million in aggregate principal 

amount of9.00% Convertible Senior Notes due 2038 (the "9% Convertible Notes"). The 9% 

Convertible Notes mature on June 20, 2038 and are convertible at the option of the holders at any 
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time prior to the maturity date. Upon conversion, Holdings Ltd. must payor deliver cash, 

common stock or a combination thereof. 

In July 2011, Holdings Ltd. raised $325 million in aggregate principal amount of3.375% 

Convertible Senior Notes due 2018 (the "3.375% Convertible Notes," and. together with the 

1.875% Convertible Notes and the 9% Convertible Notes, the "Convertible Notes"). In August 

20 II, Holdings Ltd. also launched and priced its first senior unsecured debt offering, issuing 

$325,000,000 in five-year 6.25% senior notes (the "Senior Notes"), Holdings Ltd. used a 

portion of the net proceeds from these offerings to repurchase a portion of its existing 9% 

Convertible Notes, repaid a portion of its outstanding permanent indebtedness under the 

Liquidity Facility, and used the remainder for general corporate purposes. Wilmington Trust, 

N.A. is the indenture trustee for each of the Convertible Notes and the Senior Notes. 

D. Equity Interests 

As of June 30, 20 II, there were 1,500,000 shares of Series A Preferred Stock in Holdings 

Ltd. issued and outstanding to .I.e. Flowers. Also as of June 30, 2011,403,550 shares of Series 

B Preferred Stock were outstanding. 

E. Use of Cash Collateral 

In the period immediately following the commencement of the Initial Debtors' Chapter 

11 Cases, the Initial Debtors began the rapid wind-down of their fomler operations, swiftly 

reducing employee headcount and other costs and taking additional actions to preserve the assets 

of their estates for the benefit of stakeholders. The Initial Debtors simultaneously focused on 

obtaining debtor in possession financing to fund an orderly ,\ind-down of their estates. Despite 

their best efforts and extensive negotiations with potential lenders, the Debtors were unable to 

secure debtor in possession financing. The Initial Debtors did secure an interim Cash Collateral 
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agreement through a stipulated order with JPM, the administrative agent to the lenders under the 

Liquidity Facility, which, along with the recovery of unencumbered, liquid assets, provided the 

Initial Debtors with $8 million and allowed them to continue wind-down operations. 

Immediately after the appointment of the Trustee, the Initial Debtors entered into negotiations 

with JPM to increase the available Cash Collateral for use by the Initial Debtors to fund the 

Debtors' operations. Thereafter, the Initial Debtors reached an agreement with JPM for the 

consensual usc of approximately $21.3 million in Cash Collateral through and until September 

30,2012. The Court approved the terms of the stipulation and entered a final order on December 

14,2012 (the "Final Cash Collateral Order").'" At the time of the Final Cash Collateral Order, 

the Initial Debtors had recovered sufficient funds to 0 ffset the Cash Collateral previously used. 

As a part of the Court's written opinion issued with thc Final Cash Collateral Order, the 

Court ordered the Trustee to conduct an investigation into whether funds of the customers of 

MFGI that should have been segregated pursuant to CFTC and SEC rules had been commingled 

with the Debtors' Cash Collateral in the JPM Cash Collateral account. After the Trustee 

conducted an investigation, the Trustee issued his report on February 16,2012 that determined 

that none of the funds in the JPM account were commingled funds." The SIP A Trustee (as 

defined below) did not disagree with the conclusion reached by the Trustee's investigation. 

MF GLOBAL INC. 

On the October Petition Date, the Securities Investor Protection Corporation ("SIPC") 

began the orderly wind-down ofMFGI when it filed a complaint in thc United States District 

Court for the Southern District of New York (the "District Court") for the liquidation of 

48 Docket Nos. 272, 275. 

49 Docket No. 451. 
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MFGI." At that time, SIPC moved for an order determining that the customers ofMFG! were in 

need ofthe protections afforded under SIPA51 The District Court granted the order (the "SIPA 

Proceeding")" and thereafter transferred the SIP A Proceeding to this Court, The case caption 

and case name were changed to retlect its status as a liquidation proceeding in this Court, The 

case is now known as In re kIF Global Inc., Case No. 11-2790 (MG) SIPA. 53 

I. SIPA TRUSTEE AND PROFESSIONALS 

SIPC appointed James W. Giddens (the "SIP A Trustee") as trustee for the liquidation of 

MFGI. The SIP A Trustee then hired his firm, Hughes Hubbard and Reed, LLP as cowlsel. The 

SIP A Trustee also has retained Ernst & Young and Deloitte as consultants and forensic 

accountants to aid him in investigating the details of the collapse ofMPGI, and the impact of the 

MP Global Group's collapse on MFGI, as well as detemlining the claims customers and 

creditors have against MFG!, and, ultimately, recovering and distributing MFGI's assets to 

customers and creditors pursuant to the priority scheme established by statute. To assist the 

SIPA Trustee with matters in Europe, he retained Slaughter and Mayas U.K. cOW1sel. Blake, 

Cassels & Graydon LLP was retained as Canadian counsel. In addition, the SIP A Trustee 

retained Haynes and Boone, LLP as conflicts counsel. 

II. SIP A TRUSTEE'S DUTIES UNDER SIP A 

Pursuant to 15 U.S.c. § 78fff-l, the SIPA Trustee has the same fiduciary duties as a 

chapter 7 trustee, as long as those duties do not conilict with SIPA. The statute states: "[t]o the 

extent consistent with the provisions of this chapter or as otherwise ordered by the court, a 

50 In re MFGI Inc .. Case No. 11-02790 (MOl SIPA Docket No.1. 

51 Id. 

" Id. 

In re MFGI [nc .. Case No. 11-02790 (MO) SIPA Docket No.2. 
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trustee shall be subject to the same duties as a trustee in a case under chapter 7 of title 11:' 

Chapter 7 of the Bankruptcy Code requires the SIPA Tmstee to, among other things, "fumish 

such infonnation conceming the estate and estate administration as is requested by a party in 

interest." 11 U.S.C. § 704(a)(7). 

Courts reviewing the interplay between SIPA and the Bankruptcy Code have detemlined 

that a SIP A trustee is bound to serve all of the creditors of an estate, not one particular subset 

over another. Indeed, these comts determined that a chapter 7 trustee's primary duty is not to 

any individual creditor or even any particular class of creditors, but to the estate as a whole. 

Kusch v. Mishkin, et al. (In re Adler, Coleman Clearing Corp'), Case No. 95-08203(JLG), Adv. 

Proc. No. 95-9248(A), 1998 Bankr. LEXIS 1076, *49 (Bankr. S.D.N.Y. Aug. 24, 1998) (the 

court, in dismissing a breach of fiduciary duty claim against a SIP A trustee, stated that the 

trustee's duties to the estate prevail over the interests of any single customer). The Adler, 

Coleman court explained, in dicta, that to find that a SIP A trustee owes a greater fiduciary duty 

to customers than to general creditors would be "antithetical to the fundamental principles 

underlying our bankruptcy laws." ld.; see also Germain v. Connecticut National Bank, 988 F.2d 

1323,1330 n.7 (2d Cir. 1993) (stating that a chapter 7 trustee "is an officer of the court and owes 

a fiduciary duty both to the debtor and to the creditors as a group."). 

1be Debtors are (i) a securities customer ofMFGI under SIPA regulations (owed 

approximately $556 million), (ii) a futures customer ofMFGI lUlder the CFTC regulations (owed 

approximately $90 million), (iii) both a secured and lUlseeured creditor ofMFGI (owed 

approximately $1.667 billion), and (iv) the 100% equity holder ofMFGI. The Debtors are the 

single largest creditor of MFG!. The Debtors' estates are highly dependent on the SIP A estate 

not only for information, but for the retum of value to their creditors, who infused the SIP A 
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estate with in excess of $950 million in the month of October 2011 alone and more than $2 

billion overall. 

Ill. DESCRIPTION OF MFGI BUSINESS/ROLE IN GLOBAL OPERATIONS 

MFGI was a wholly-owned subsidiary of Holdings USA and an indirect subsidiary of 

Holdings Ltd. MFGI provided brokerage services to customers and affiliates on United States 

securities and commodity futures exchanges and on overseas exchanges through affiliates or 

independent correspondent clearing brokers. MFGI also was engaged in principal and 

proprietary" trading in U.S government and corporate securities, futures, and purchase and resale 

agreements, as well as stocklbond borrow and stocklbond loan activities." 

MFGI is registered with the SEC as a securities BID. As a securities BID, MFGI was a 

member of several regulatory organizations, including FINRA, the Chicago Board Options 

Exchange (the "CBOE"), the Depository Trust Clearing Corporation, the National Securities 

Clearing Corporation, and the Fixed Income Clearing Corporation. The CBOE was the 

designated examining authority of the MFGI BID's securities related activities. 

MFGI also is registered with the CFTC as a FCM. As a FCM, MFGI was a member of 

the National Futures Association, an industry self-regulatory agency. Additionally, MFGI was a 

member of the CME, the Chicago Board of Trade, the New York Mercantile Exchange, the 

Intercontinental Exchange, the Kansas City Board of Trade, and the Minneapolis Grain 

Exchange. The CME was the MFGI FCM's designated self~regulatory organization. 

Beginning in February 2011, MFGI was one 01'20 "primary dealers" to the Federal 

Reserve Bank of New York (the "Federal Reserve"). Designation as a "primary dealer" 

54 See Annex I ~ I. 

55 See Annex 11]7 for an explanation of stock/bond borrow and stock/bond loan activities. 
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enabled MFGI to serve as counterparty to the Federal Reserve in open-market operations, 

participate directly in U.S Treasury auctions, and provide analysis and market intelligence to the 

Federal Reserve's trading desks. 

A. Repos-To-Maturity 

In or around September 2010. the MF Global Group began aggressively acquiring long 

positions in European sovereign debt securities in MFGI as part of its proprietary trading 

activities. MFGUK acted as agent for the acquisitions. including the repurchase transactions 

("Rep os") to finance the purchases, and also cleared the trades since it was the only member of 

the MF Global Group that was a member of the relevant clearinghouses. such as the 

LCH.Clearnet Ltd. (in London) or LCH.Cleamet SA (in Paris) (collectively. "LCH Clearnet") 

or Eurex (together with LCH Clearnet. the "Exchanges"). Therefore. MFGUK served as the 

"counterparty" to MFGI in these transactions. 

To finance the MF Global Group's sovereign debt purchases, MFGUK would enter into 

back-to-back Repo transactions consisting of two legs -- a Repo leg with third parties to finance 

the acquisition and a reverse Repo leg. with MFGI to tinance MFGI's long position.56 By 

entering into the two offsetting back-to-back Repos. MFGUK was "flat" to the market and did 

not bear any of the associated risk that may have resulted from t1uctuations in the market value 

of the European sovereign debt positions. As a result, the economic risk of ownership was 

transfen'ed from MFGUK to MFG!. 

Under the tenus of the Repos '>vith third parties. MFGUK agreed to sell to the third party 

(and the third party agreed to purchase) European sovereign debt securities while MFGUK 

simultaneously agreed to repurchase those securities from the third party at an agreed upon 

56 A repurchase agreement, from the viewpoint of the party obtaining financing, is referred to as a Repo and a 

reverse Repo is from the perspective ofthe party providing financing. 
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repurchase price, on a date falling immediately prior to the maturity date of the securities. 

MFGUK and the third parties entered into the Repos either on a bilateral basis or cleared the 

transactions through the Exchanges. In the cases where an Exchange cleared the Repo, the 

Exchange would become the counterparty to the original parties under the Repo. MFGUK 

would then look to the Exchange, and not the financing counterparty, to satisfy the financing 

counterparty's obligations under the Repo trade (i.e., delivery of securities to MFGUK upon 

maturity of Repo against payment by MFGUK of Repo financing)." MFGUK posted the initial 

margin with the Exchanges to finance the leveraged long positions in European sovereign debt. 

Under the terms of MFGUK's reverse Repo with MFGl, MFGI agreed to sell to MFGUK 

various European sovereign debt securities, while MFGT simultaneously agreed to repurchase the 

securities from MFGUK at an agreed upon repurchase price, on a date falling immediately prior 

to the maturity date of those securities. The reverse Repo transactions were governed by the 

master securities sale and repurchase agreement previously entered into between MFGI and 

MFGUK, dated July 19,2004 (substantially in the form of the Global Master Repurchase 

Agreement published by the International Capital Market Association) ("'GMRA") and the 

confirmations that provided the details for each of the individual trades entered into thereunder. 

Under the terms of the reverse Repos. MFGI would post initial margin with MFGUK to finance 

the leveraged long positions in European sovereign debt. MFGI's purchase ofthe sovereign debt 

positions, with the associated financing from MFGUK, resulted in the bcndits and risks of 

economic ownership shifting from MFGUK to MFGI. 

57 Repo transactions where the maturity date ofthe financing is within two days of the maturity of the underlying 

security are commonly referred to as RTMs. See Annex I '\13 for a more detailed explanation ofRTM transactions . 

.18 LCH Cleamet acted as a clearing house (or exchange) and was essentially an intemlediary that helped mitigate 

counterparty credit risk. LCH Cleamet played a similar role as that of the Fixed Income Clearing Corporation in the 

United States. 
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At the time the MF Global Group began acquiring the European sovereign debt positions, 

each oftbe sovereign debt issuances was rated as investment grade (Moody's rated A or better). 

MFGUK, therefore, was required by the clearinghouses or third parties who were the 

counterparties to their trades to post only a small initial margin payment as low as 3% of the 

face amount of the securities to be financed through the R TM -- and in tum required only this 

amount from MFGI. This allowed the MF Global Group to build a highly leveraged ponfolio. 

MFGI met its initial margin obligations to MFGUK and subsequent variation margin calls as 

required by MFGUK using MFCWs own liquidity as well as intercompany loans provided by 

Fineo. The below diagram visualizes the end-to-end structure or the Rcpo to Maturity 

transactions prior to August 201 ]. 

End-to-End Structure of RTM Transactions" 

Holdings 

Ltd. 

Intercompany I I Cash , I 

rayablG'1 . 

FinCo 

Cash 

---~ 

<E-----... -. 

B Intercompany 

Payable 

MFGI 

R~po Liability Intercompany -,---> Payable ,,--_._--

Long Position 

Collateral 

Financing 

Counterparties 

O Margin : 

<E :;. 

MFGUK Long Position Exchanges 

_Re_p_oLiab~~~ __ ~ ____ ~ 

I 

l't. Cash I! Securities 

'oj'1 I 

Purchase of 

European Debt 

Positions 

Under the tenus of a Repo transaction, the financing countell,arty (e,g., MFGUK) 

generally has the right to require the borrower under the Repo (e.g., MFGI) to post additional 

59 See Annex 1 ~ 8 for an explanation ofintercornpany payable. 
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cash or securities as collateral resulting from decreases in tlte market value of the collateral 

underlying the Repo transaction. To accomplish this, the financing counterparty would issue a 

margin call. Accordingly, financing the acquisition of securities through tlte use of Rep os had 

the potential to create a significant risk to the liquidity ofMFGl and the MF Global Group as a 

whole."' A summary oftlte MF Global Group's net sovereign debt holdings is described in tlte 

below diagram. 

The MF Global Groul!'s RTM SummaIT as of9/30/2011 

Italy II) Spain (I) Belgium Portugal 

Net size ($ in millions) $3,213 $1,111 $603 $997 

% of total portfolio 51% 18% 10% 16% 

Weighted All). Maturity Dec 2012 Oct 2D12 Dec 2012 Mar 2012 

of Long Positions 

Maturity Schedule 6%· Mar2012 12% • Apr 2012 100%· Dec 2012 3% • Oct 2011 

3%· Aug 2012 61%· Oct 2012 36%· Nov2011 

91%· Dec 2012 27% • Dec 2012 61%· Jun 2012 

(')Includes France's short positions of $1.3 billion as proxy hedges, split equally between Italy and Spain. 

Source: Second Fiscal Quatter 2012 Results Investor Presentation 

Ireland 

$368 

6% 

Feb 2012 

18%· Nov 2011 

82% Mar2012 

NetTotal 

$6,292 

100% 

Ocl2012 

5%·Nov2011 

7%· Mar2012 

3%· Apr201 

7%· Jun 2012 

2%· Aug 2012 

15% Oct 2012 

61%· Dec 2012 

As the value of the MF Global Group's European sovereign debt positions deteriorated in 

the Summer and Fall of2011, MFGUK -- and consequently MFGl (and later Fineo) -- were 

required to post additional variation margin. In late October 2011, as the MF Global Group's 

credit ratings were downgraded, the Exchanges also required additional initial margin. MFGUK, 

as counterparty to the Exchanges, was responsible for meeting the Exchanges' margin calls, 

which at certain points were issued on a daily basis. MFGUK would then issue margin calls to 

60 See Annex 1 , 3 for an explanation of the potential for liquidity risk posed by these transactions. 
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MFG!, which the Trustee believes were funded in whole or in part by loans from FinCo. As the 

Trustee understands it, MFGUK made one or more "house" margin calls to MFGI that were in 

excess ofMFGUK's margin requirements with the Exchanges in order to eover potential 

intraday liquidity risk on margin calls to MFG! and to satisfy MFGUK's regulators. 

Two approaches taken to hedge the European sovereign debt portfolio and to limit the 

margin posting requirements therewith were: (i) MFGUK shorted $1.3 billion of French 

sovereign debt through the Exchanges as a proxy-hedge against its exposure to Italian and 

Spanish sovereign debt; and (ii) MFGUK entered into trades with counterpm1ies, including 

overnight, short-term and medium-tenn reverse Repos that were cleared through the Exchanges 

to reduce margin requirements ("Margin Reduction Trades") (with a back-to-back Repo 

transaction into MFG!).6! 

B. ThcRRTM 

In order to ensure that MFGI was in compliance with its capital requirements as of 

August 24, 2011, in late August 2011 MFGl entered into "back-to-back" reverse repo-tomaturity ("RRTM") transactions with FinCo for a portion of the RTM portfolio'i2 pursuant to a 

master repurchase agreement dated January 6,2011 between MFGl mld FinCo (the "FinCo 

MRA") aIld the transaction confirmations thereunder. These trades effectively made FinCo the 

beneficial holder of€2.925 billion of ItaliaIl bonds, This strategy allowed the MF Global Group 

to transfer the economic benefits and risks from MFGI (a regulated entity) to FinCo (an 

unregulated entity), aIld thereby reduce MFGI's regulatory capital requirements. The below 

diagram shows the RRTM transactions between MFGI and FinCo. 

OJ See Annex I at '\14 for an explanation of Margin Reduction Trades. 

See Annex I at '\13 for an explanation of RRTMs. 
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Rc-po 

Liability 

Fineo 

Long 

P05ition 

InterCompany 

Payable 

MFGI 

MFGI RRTM Transaction 

Margin 

Margin 

Payable 

Repo l.lability 

Long Position 

Repo 

Liability 

MFGUK 

Long 

Position 

Exchanges 

Margin 

The SIP A Trustee has indicated that the RRTM was booked flat, meaning that the 

financing was equal to the underlying value of the securities position. The Trustee cannot verifY 

that this information is correct because. despite the Trustee's request for all documents --

including confirmations issued under the master repurchase agreement between Fineo and 

MFGI, detailing the terms oflhe RRTM transactions -- the SIPA Trustee has yet to provide any 

such documents. 
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C. Pre-Petition Funding 

The relationship between the Debtors and MFGI can be reduced to three distinct types of 

intercompany activities: (i) financing; (ii) trading and (iii) general corporate administration. 

1. Financing. 

a. Subordinated Debt Financing. 

Holdings USA and FinCo provided a total of $600 million in subordinated debt fInancing 

(the "Sub-Debf') to MFGI prior to the October Petition Date. The Sub-Debt was memorialized 

in multiple loan agreements. The subordinated notes carried interest at the rate of 3D-day L1BOR 

plus 500 basis points (5%). A summary ofthe outstanding loan obligations as of the October 

Petition Date is included in the table below. 

CME/CBOE Loan Effective 

Lender Number Date Maturi~ Date Amount 

Holdings USA 287-120706-0001 12/31/2007 6128120\3 $65,000,000 

Holdings USA 287-120707-0001 12/3112007 9130/20\3 $65,000,000 

FinCo 287-120701-0001 12/31/2007 expired $0 

FinCo 287-120702-0001 12/3112007 6129/2012 $130,000,000 

FinCo 287-120703-0001 12/3112007 3130/2012 $130,000,000 

FinCo 287-120704-0001 12/3112007 expired $0 

FinCo 287-120705-0001 12/31/2007 913012011 $50,000,000 

FinCo 287-081001-0001 8/9/2010 7/3112013 $0 

FinCo 287-081001-002 811 0/201 0 7/3112013 $160,000,000 

Total $600,000,000 

b. Intercompany Loans. 

FinCo generally acted as the financing ann for the U.S. operations of the MF Global 

Group. FinCo provided substantial amounts of working capital financing to MFGl. In addition 

to the Sub-Debt, FinCo provided an additional $991 million in intercompany funding to MFGI 

(the "Intercompany Loans"). Substantially all of the Intercompany Loans ($875 million) were 

funded during October 2011. Again, although the Tmstee has requested information relating to 
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the use of these funds from the SIPA Trustee on multiple occasions, the Trustee only recently 

received the MFGI bank account statements -- in raw data form -- and the Trustee still is 

awaiting information regarding the Securities and Futures accounts of MFGl. Therefore, the 

Trustee has limited access to information that would aid in determining the purposes ofMFGI's 

funding requests. The Trustee believes that a portion of the Intercompany Loans (approximately 

$233 million to $293 million) was used by MFGI to fund variation margin payments to MFGOK 

during the ten days prior to the October Petition Date. Below is a schedule detailing the margin 

calls from MFGOK to MFGI during that timefran1c. 

Margin Statement 

Margin Can StatementMF Global Inc· Collateral Financing Portfolio 

As at COB: 

1!llttaIMargi~ ReqUirement 

Vanal!onMargm 

8uf!ermargm Iorfx exposure 

increaseCO\':rage 

TotaiMaryinrequlremen! 

LCHCieametSA 

LCHSAflIdmaIQin 

LCHCieame!Ud 

Total 

V,M,Breakdown 

Eurex 

lCHC1eametSA 

LCHCieametLtd 

Bliaterai 

28..Qct·11 Z].QcW 26-Oct·11 25-0ct·11 

A95,975,763 45U124390 410,983,534 277,302,875 

199,:J,14,353 182.811,558 lB5,592,4i5 188,277,'170 

5,000.000 5,000.000 5,000.000 5,[)QO,OOO 

c. Margin Financing. 

24-Oct-11 21.oct-11 1O.Qcf.11 

278,049,205 277.619,685 273,61}l,300 

182,979,874 174,800,604 173,978,d22 

5000,000 5,OQO,OOO 5,!JOO,000 

1~.()""1 13-Oct·11 

273,939,212 

167.180,609 

5,000,00IJ 

FinCo provided margin financing to certain MFGI customers. The purpose of this 

17-Oct-11 

275,899,31J.l 

151,OIXU9! 

5,000.000 

financing was to allow customers to acquire additional securities or futures positions. Generally, 
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the documentation memorializing the financing terms provided that the customers of MFGI 

granted FinCo a security interest in the customer's securities and/or futures accounts and MFGL 

as custodian ofthe securities and/or futures accounts, acknowledged FinCo's security interest. 

The SIP A Trustee, however, made distributions to these margin customers irrespective ofthe 

FinCo security interest in the account. In certain instances, the SIP A Trustee actually disbursed 

more money to the margin borrowers than they were entitled to receive. The Trustee 

understands that this was a result of the SIPA Trustee calculating the net equity of the margin 

borrower's account without taking into acconnt any outstanding loan obligation to FinCo. As a 

result, the SIPA Trustee actually distributed the Debtors' property to certain of the margin 

borrowers. The Trustee has sent letters to ten fomler customers of MFGI requesting that they 

repay the margin financing received from FinCo in the approximate aggregate amonnt of$36.9 

million. As of the filing of this Report, FinCo has not received any funds back from these 

customers. 

d. Repo Financing. 

(i) HTM Repo. 

In or around June 2009, Holdings Ltd. began acquiring a portfolio of securities c1assificd 

on its balance sheet for acconnt purposes as hold-to-maturity CHTM")"' and financed the 

purchases with Repo financing provided by the MFGI BID. Each Repo was governed by the 

master repurchase agreement dated as of May 19,2009 between Holdings Ltd. and MFGI and 

the confirmations issued detailing the specific transaction details (the "Holdings Ltd. MRA").64 

63 See Annex 1 '\15 for an explanation ofHTMs. 

64 Although requested by the Trustee on multiple occasions. at this time, the Trustee has not received copies of 

any confirmations issued by the MFGI BID under the Holdings Ltd. MRA detailing the salient terms of each HTM 

Repo financing transaction. 
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Initially, the FCM provided substantially all of the financing MFGI made available for 

the HTM portfolio. Later, the MFGI BID diversified the financing of the HTM portfolio to 

include third party investors. The FCM was able to provide this financing because the HTM 

securities were eligible investments under CFTC Regulation 1.25 ("Regulation 1.25").65 

Pursuant to authority under Section 4(c) of the Commodity Exchange Act the CFTC established 

a list of pcrinitted investments under Regulation 1.25 that. prior to the October Petition Date, 

included general obligations issued by any enterprise sponsored by the United States, bank 

certiJicates of deposit. commercial paper, corporate notes. general obligations of a sovereign 

nation (but only to the extent that the rCM had balances in segrcgated accounts owed to its 

customers denominated in that country's cunency) and interests in money market mutual lunds. 

In addition. a FCM could buy and sell permitted investments pursuant to resale or repurchase 

agreements. including Repos entered inl0 v,ith an affiliate and so-called "in-house" transactions, 

f.g .. between the BID and FCM businesses of the same legal entity. The Trustee understands 

that oyer time. the HTM portfolio was increasingly financed by third-party investors (as opposed 

10 using FCM financing) via back-lo-back Repo financing transactions entered into with 

counterparties by the MFGI BID. 

As of October 25,2011. the HTM portfolio consisted of government agency securities 

and corporate bonds (mainly issued by financial institutions) with a market value of $8.644 

billion (including accrued interest). The Repo financing associated with the HTM portfolio 

totaled $8.567 billion as of October 25, 2011. As a result, Holdings Ltd. had margin equity of 

$77 million in the Repo portfolio. The structuring of the HTM Repo is illustrated in the below 

diagram. 

65 See 17 CFR § 1.25. 
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FCM 

Customers 

(1) I , Cash J 

MFGI 

FCM 

·Physical possession 

and collat~ra! interest 

in HTM securities 

(3) 

Hold To Maturity Repo 

Holdings Ud. ·Economic 0\Vner of 

HTM positions 

'i' I Long Securities I 

Position I (2) ~ 

Margin & 

Collateral 

(Securities) 

MFGI 

BID 

Cash -~ 

(2) 

Collateral 

(Securities) 

-Repo counterparty 

·Inlermediary between 

FeM/Street and 

Holdings Ltd. 

Ii' 

Financing! 

I 

I Collateral 

(4) I (Securities) 

W 

Third Party Repo 

Counterparties 

Purchase of 

Eligible 

Securities 

(1) FeM customers posted cash (i.e" margin) at the FCM to enable them to trade futures. 

(2) Holdings Ltd. purchased $8,6 billion (market value as of October 25. 2011) of Regulation 1.25-

eligible securities that formed the HTM portfolio from various third party counterparties. The 

purchase was made by the MFGI BID side of the MFGl business on behalf of Holdings Ltd. 

Holdings Ltd. received economic ownership of the positions in exchange for initial margin and 

the posting of the securities back at MFGI as collateral. 

(3) The purchase of eligible securities was financed partially using FeM customer lunds. The MFGI 

BID entered into intra-company Repos with the FCM. whereby securities were posted as 

collateral in exchange for tlnancing. The FCM retained physical possession oHhe securities. 

(4) The purchase of eligibJe securities also was financed partially by third parties. MFGI entered into 

repo transactions with third party repo counterparties, whereby securities were posted as 

collateral in exchange for financing. 

FinCo appears to have provided financing for some HTM positions. According to an October 28 

report provided by the SIPA Trustee. there appears to have been $10.3 million (par value) of 

HTM positions that were not financed by the third-parties (the "Street") or with FCM funds and 

were instead financed through intercompany repos between MFGI and Fineo. 
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From October 25,2011 until the October Petition Date, Holdings Ltd. undertook a 

massive liquidation ofHTM positions with the goal offreeing up liquidity, during which time 

the HTM portfolio was reduced by about $7.2 billion to approximately $1.4 billion by October 

31, 2011. The Trustee has requested information fTom the SIP A Trustee regarding the close-out 

pricing for both the HTM Portfolio ,md the back-to-back Repo positions the MFGI BID entered 

into with the FCM or third parties. By reconstructing the wind-down of the HTM portfolio, the 

Trustee can determine the losses resulting from the precipitous liquidation of the HTM portfolio 

The Trustee requires this information to determine the HTM portfolio's impact on the funding 

provided by FinCo to MFGI and the extent of the Debtors' claims against MFGI. 

(ii) Box Repo 

FinCo entered into Repo financing transactions with the MFGI BID (the "Box Repo") 

where FinCo agreed to buy from the MFGI BID various securities (the "Box Portfolio"), with a 

simultaneous agreement of the MFGI BID to repurchase from FinCo those securities (or 

securities considered equivalent thereto) at a repurchase price the next day. This type of 

agreement is commonly referred to as an overnight Repo. The Box Repo transactions were 

governed by the tenns of the FinCo MRA and the confirmations issued for each transaction 

entered into thereunder. The MFGI BID held the securities comprising the Box Portfolio in 

custody for FinCo. The MFGI BID had the right to substitute collateral of equivalent value in 

the Box Portfolio and the Box Repo was generally rolled-over on a daily basis; however, the 

securities that fornled the Box Repo portfolio are identifiable. As ofthe October Petition Date, 

the MFGI BID was obligated to repurchase the Box Repo collateral from FinCo for 

$177,715,443.11. 
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2. Trading. 

Box Portfolio Repo 

Fineo 

MFGI 

BID 

Margin 

The Unregulated Debtors conducted certain trading activity, including futures, through 

MFGI (and also faced celiain of its counterparties directly). In addition, a non-debtor whollyowned subsidiary of Holdings Ltd., MF Global Special Investor LLC ("Special Investor"), also 

acquired a securities portfolio from MFGI and conducted its securities trading activities through 

MFG!. 

3. General Administration. 

As a global trading organization, the MF Global Group had integrated systems. including 

global accounting and tax systems and programs. Many of the MF Global Group's regulated 

entities also acted as clearing brokers and custodians for their affiliates. As a global 

organization, certain overhead costs and expenses for shared services that were incurred at the 

corporate level were allocated across the group in the ordinary course of their business. It was 

generally believed that system integration. as opposed to operating each of the affiliates in a silo, 

was a more cost-effective use of the MF Global Group's resources. 
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IV. CLAIMS FILED AGAINST THE SIP A EST ATE 

Total Number of Claims Filed Against this Entity 

by the Debtors and their Non-Debtor Affiliates": 68. 

Total Value of Those Claims: $2,317,765,096.00. 

On November 23, 2011, the Court entered an order establishing January 31, 2012 as the 

bar date for customers' claims against the SIP A estate and established JUlle 2, 2012 as the 

general bankruptcy claims bar date. The Debtors' estates filed 68 claims against MFGI totaling 

in excess of $2.3 billion. 

Securities and Futures Claims Filed Against MFGI 

by the Debtors and their Non-Debtor Affiliates: 58. 

Total Value of Those Claims: $646,798,448.00 

General Unsecured Claims Filed Against MFGI 

by the Debtors and their Non-Debtor Affiliates: 10. 

Total Value of Those Claims: $1,670,966,648.00 ($600 million in Sub-Debt claims) 

The below chart reflects a more detailed breakdow1l of the claims filed by the Debtors and nondebtor affiliates. 

66 In addition, contingent and unliquidated claims were filed by the Debtors against MFG!. 

67 In re MFGI Inc., Case No. 11-02790 (MO) SIPA Docket No. 423. 
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Debtors' and Non-Debtor Affiliates' Claims Against MFGI 

--.-~,-

Claimant Class of Claim No. of Amount Claims Description 

Holdings Ltd. Securities Customer 1 $77,332.223 HTM 

Holdings Ltd. Securities Customer I Unliquidated Trading 

Holdings Ltd. Futures Customer 3 Unliquidated Trading 

Holdings Ltd. General Unsecured 1 $38,720.558 General 

Holdings USA General Unsecured 1 $36,585,647 General 

Holdings USA General Unsecured I $130,000,000 Sub-Debt 

1 RRTM, Box 

FinCo Securities Customer $127,151,670 Repo68 

FinCo Futures Customer 10 $36,857,586 Margin Financing 

FinCo General Unsecured 1 $990,943,179 Loans 

FinCo General Unsecured 1 $552,948 General 

FinCo General Unsecured 1 $470,000,000 Sub-Debt 

Special Investor Securities Customer 21 $352,061,762 9/30 statements 

Special Investor Securities Customer 12 Unliquidated Trading 

Special Investor Futures Customer 1 $140.841 Trading 

Capital Futures Customer 3 $28.236,299 Trading 

Capital General Unsecured I $3,733,828 Trading 

Market Services Futures Customer 3 $25,016,824 Trading 

FX Clear Securities Customer 1 Unliquidated Trading 

FX Clear Futures Customer I $1,243 Trading 

FX Clear General Unsecured 1 $398,448 General 

FX Clear General Unsecured ! $29,300 General 

MFGA General Unsecured 1 $2,740 General 

Total 68 $2,317,765,096 

A. Legal Issues Related to the Debtors' Claims 

I. Holdings Ltd. Securities Customer Claim Related to HTM Portfolio. 

Holdings Ltd. filed a securities customer claim in an estimated amount of $77,332,223 

relating to the HTM Repo transactions. These claims were estimated because, prior to the 

customer claims bar date, the Trustee was llot in possession of an October account statement, but 

rather was relying on the Debtors' internal risk reports. The Trustee was not in possession of 

The total amount financed under the Box Repos was $177,715,443.11. 
174 

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details confirming the liquidation of HTM securities that took place after September 25, 2011. 

Therefore, the Trustee determined that, out of an abundance of caution, Holdings Ltd. should file 

an estimated claim, subject to reconciliation of its books and records with those of the MFGI 

BiD, the counterparty to the HTM transactions. The SIP A Trustee has not yet provided the 

details confirming the liquidation of the HTM portfolio after October 25, 2011. 

2. FinCo Repo Claim. 

On May 18,2012, the SlPA Trustee denied the FinCo claim related to the Repo 

transactions, including the RRTM and the Box Portfolio, when he sent the FinCo estate a letter 

of determination as to that claim. The SIPA Trustee stated that he denied FinCo's claim because. 

in his determination, the cash and securities upon which FinCo filed its claim are not customer 

property pursuant to SIPA. In addition, the SIPA Trustee indicated that FinCo's claims were 

being converted to general creditor claims. Moreover, FinCo's claim for $177,715,443.] 1 was 

being reduced to the liquidation value 01'$63,690,295.38, which appeared on FinCo's account 

statement as of October 31, 2011. 

The Trustee will object to the SIP A Trustee's detemlination of the FinCo claim for 

several reasons. First. a number of courts have found that a participant in Repo transactions is a 

customer for STPA proceedings. In the Matter a/Bevill, Bressler & Schulman Asset 

Management Corp., 67 B.R. 557 (D. N.J. 1986); City orE/kins v. Charles Darwin Davidson (In 

re Sy,.ink& Company. Inc.), 142 B.R. 874 (Bankr. E.O. Ark. 1992). Second, the FinCo MRA is 

clear that the parties intended to treat the Box Repo transactions as true purchase and sale 

transactions, with MFGI holding the securities under the FinCo MRA in custody for FinCo's 

account. Third, both FinCo and MFGI accounted for these transactions distinctly from other 
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financings, secured or unsecured. Thus. the Trustee believes that the FinCo claims are customer 

claims under SIPA, with facts similar to those in Bevill. Bressler and similar cases. 

Alternatively, if the Court tinds that FinCo does not fall within the SIPA definition ofa 

"customer," the Court should hold that MFGI, as custodian for the Box Repo securities, should 

tum over the Box Repo securities pursuant to Bankruptcy Code section 543. MFGI only has a 

possessory interest in the Box Repo securities, similar to that of a bailee, and thus the securities 

are not property of the SIP A estate under Bankruptcy Code section 541. 

As previously discussed, many of the documents underlying the Box Repo transactions 

remain in the possession ofthe SIPA Trustee and have not been provided to the Trustee. 

Although the Trustee believes that FinCo's claim is a customer claim based on one of the two 

alternative theories summarized herein, the Trustee cannot be certain as to the detennination of 

this claim. 

3. FinCo RRTM Claim. 

The SIPA Trustee has indicated that the RRTM was booked flat (i.e., the Repo financing 

was equal to the underlying mark-to-market value of the long position at the time the Repo was 

transacted). Thus, according to the SIPA Trustee, MFGI's books and records reflect that MFGI 

did not require FinCo to post initial or variation margin with respect to the RRTM transactions. 

FinCo provided funding to MFGI to enable MFGI to meet initial and variation margin calls from 

MFGUK with respect to the RTM portfolio. As a result of FinCo entering into the RRTM 

transaction with MFGI, certain of the financing provided by FinCo to MFGI -- for purposes of 

meeting margin requirements -- should have been characterized as margin posted by FinCo to 

MFGI to support the RRTM transactions (as opposed to a financing). In addition, any additional 

margin required of MFGI by MFGUK related to the RRTM position should have been 
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characterized as margin posted by FinCo to MFGI rather than as an intercompany loan. 

Accordingly, it is the Trustee's belief that a portion of the intercompany loans FinCo provided to 

MFGI should be characterized as margin related to the RRTM position. The finance function of 

MFGI in Chicago, however, was responsible for booking the intercompany general ledger 

entries. Therefore, the Trustee believes that FinCo should have either a direct claim against 

MFGUK for the margin related to the RRTM position or, in the alternative, FinCo should be 

entitled to priority treatment as a customer ofMFGI with a portion of the intercompany loan 

recharacterized to properly reflect its true nature (i.e., a margin payment). 

4. Special Investor Securities Customer Claims. 

Special Investor filed securities customer claims in an estimated amount of 

$352,061,762.16, relating to twenty-one securities accounts. These claims were estimated 

because, prior to the customer claims bar date, the Trustee only possessed account statements as 

of September 30, 201 I. On April 18, 2012, the SIPA Trustee rejected Special Investor's 

securities customer claims based upon an alleged subordination agreement, purportedly entered 

into between Special Investor and MFGI dated as of August 19, 2011. In the subordination 

agreement, Special Investor purportedly agreed to subordinate its claims to those ofMFGI's 

customers and creditors. 

In his denial letter, the S[PA Trustee valued the Special Investor securities claim at 

$43,768,836 as of October 31, 2011. The Trustee is continuing to investigate the propriety and 

enforceability of the purported subordination agreement refeued to in the SIPA Trustee's denial 

letter. The Trustee will decide whether to object to the SIPA Trustee's claim determination upon 

completion of his investigation. 
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5. Futures Customer Claims. 

On December 12,2011, the SIPA Trustee, the CFTC and SIPC submitted memoranda,"" 

pursuant to the Court's direction, setting forth their respective positions as to their expectations 

for the SIP A Trustee in allocating and distributing the property of the MFGI estate under the 

various statutory and regulatory provisions applicable to the SIP A Proceeding. 70 Each of the 

briefing parties argued that under the applicable regulations and statutes, all customer claims must 

be satistied in full before property ofthe estate may be used to pay any general creditors' claims. In 

addition, the SIPA Trustee, the CFTC and SIPC argued that "insiders," who were also brokerage 

customers, are subordinated to public customers' claims. 

On January 9, 2012, the Trustee filed his Statement in Response to Briefing Regarding 

the Legal Principles and Framework/or Allocation and Distribution o{Customer Property,'l 

wherein the Trustee disputed the purported broad authority granted to CFTC to determine what 

constitutes "customer property." 

All parties acknowledged that there are inconsistencies between the Bankruptcy Code 

and the Part 190 Regulations. The inconsistencies are highlighted in Bankruptcy Code sections 

726 and 766, which addresses the priority scheme for distributions to general unsecured creditors 

in a Commodity Broker Liquidation, and the Part 190 Regulations. Bankruptcy Code section 

7660)(2) states: 

Except as provided in section 510 of this title if a customer is not paid 

the full amount of such customer's allowed net equity claim from 

"9 In re MFGllnc., Case No. 11-02790 (MO) SIPA Docket Nos. 724···726. 

10 The briefs state that the applicable statutes and regulatory provisions include 15 U.S.c.§ 78fffto 78fff-4, 

Bankruptcy Code sections 105(a) 764. and 766(c), and 17 C.F.R. § 190.01 through 190.10 (the "Par! 190 

RegUlations"). 

71 In re MFG! Illc., Case No. 11-02790 (MO) SIPA Docket No.824. 
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customer property, the unpaid portion of sueh claim is entitled to 

distribution under 726 of this title. 

11 U.S.C. § 7660)(2). 

The Part 190 Regulations state: 

(a)(1) Customer property includes the following: 

(ii) All cash, securities, or other property which: 

(J) Is cash, securities or other property of the debtor's 

estate, including the debtor's trading or operating 

accounts and commodities of the debtor held in 

inventory, but only to the extent that the property 

enumerated in paragraphs (a)(l )(i)(E) and (a)(l )(ii)(A) 

through (a)(1)(ii)(H) of this section is insufficient to 

satisfY in full all claims of public customers. 

17 C.F.R. § 190.08(a)(1 )(ii)(1). 

The potential conflict is actually no conflict at all. The Bankruptcy Code is a set oflaws, 

while the Part 190 Regulations are merely a set of rules. Although rules can help to shape and 

aid laws, they cannot supersede or overtake them. One bankruptcy court has held just that. 

According to the Chief Judge for the Northem District of Illinois, when defining "customer 

property" under 17 C.F.R. § 190.08(a)(1 )(ii)(1), the CFTC went beyond its rule making 

authority. See In re Griffin Trading Co., 245 B.R. 291 (Bankr. N.D. Ill. 2000). The resulting 

definition of customer property was inconsistent with the plain language of the Bankruptcy 

Code. Id." Moreover, the rule appears (0 be at odds with the statutory duties that the SIPA 

Trustee owes to both customers and creditors ofMFGI. S'ee Adler Coleman, 1998 13ankr. 

LEXIS, at *48. 

72 The CFTC appealed the bankruptcy court's decision in Griffin Trading. The decision was vacated as part of a 

settlement agreement before the appeal was decided. 
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The Trustee continues to believe that the SIP A estate will recover sufficient segregated 

funds to pay all public futures customers in full. If, however, there is a shortfall of customer 

assets, the Trustee believes that the SIPA Trustee has misinterpreted the relevant statutory 

authority governing reallocation of general estate assets to cover such customer segregated assets 

shortfalls. Accordingly, except to the extent the SIPA Trustee provides a full accounting of the 

general estate assets sought to be reallocated and such accounting demonstrates that those assets 

should have been segregated pursuant to applicable regulation, the Trustee will continue to 

pursue all legal options to recover all assets to which the Debtors' estates are entitled. 

MF GLOBAL GROUP ENTITIES IN THE UNITED KINGDOM 

I. MF GLOBAL HOLDINGS EUROPE LIMITED ("HOLDINGS EUROPE") 

Holdings Europe is a wholly-owned subsidiary of Holdings Ltd. Holdings Europe is an 

investment holding company that is currently not in administration or liquidation. 

II. MF GLOBAL U.K. LIMITED 

Total num ber of claims filed against this entity 

by the Debtors and their Non-Debtor Affiliates:" 10. 

Total Value of Those Claims: $446.4 million to $563.8 million. 

MFGUK is a wholly-owned subsidiary of Holdings Europe and an indirect subsidiary of 

Holdings Ltd. MFGUK carried on business as a broker providing agency services, matchedprincipal execution and clearing services for exchange-traded and OTe derivative products, and 

non-derivative foreign exchange products and securities in the cash markets, including interest 

rates, equities, currencies, energy, metals, agricultural and other commodities. In connection 

with such business, MFGUK was registered with the United Kingdom's Financial Services 

Authority ("FSA") and authorized to carry on a number of regulated activities including advising 

73 In addition, contingent and unliquidated claims were med by the Debtors against MFGUK. 
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and arranging deals in investments, mTanging, safeguarding and administering assets, and 

dealing in investments as agent and principaL 

Following the October Petition Date, the directors ofMFGUK filed an application for a 

special administration order pursuant to the Investment Bank Special Administration Regulations 

2011 with the High Court of Justice (the "High Court"). The High Court granted the 

application and appointed Richard Fleming, Richm'd Heis and Michael Pink of KPMG LLP 

("KPMG") as joint special administrators ofMFGUK (the "Special Administrators") on 

October 31, 2011. 

A. Reports Filed by the Special Administrators 

The Special Administrators have filed a number of reports and updates in respect of the 

special administration ofMFGUK which can be found on a section ofKPMG's website relating 

to the special administration at \'iww.kpmg.co.uklmfglobaluk. This includes: 

(i) the Special Administrators' Proposals for achieving the 

purpose of the special administration ofMFGUK; 

(ii) the Special Administrators' presentation provided at the 

meeting of creditors and clients ofMFGUK on January 9, 2012; 

(iii) the Special Administrators' Report for a hearing in the 

High Court of England and Wales on February 3, 2012 (including 

an interim distribution model and commentmy on such model); 

(iv) Statement of Allairs of the Directors of MFGUK dated 

March 7, 2012; and 

(v) the Special Administrators' Progress Report for the six 

month period from October 31, 2011 to April 30. 2012 published 

on May 30, 2012 (the "Six Month Report"). 

B. Overview ofIssues Related to Special Administration ofMFGUK 

The initial meeting of creditors and clients ofMFGUK was held on January 9,2012. 

During the meeting, the creditors approved the Special Administrators' Proposals and elected a 
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creditors' committee. The committee currently consists of (i) BB Energy (Gulf) DMCC, (ii) 

Unipec Singapore Pte Limited, (iii) MFGl, (iv) Peabody Coal Trade International Limited, and 

(v) KIT Finance Europe AS. 

The claims against MFGUK include proprietary claims against assets held by or on 

behalf ofMFGUK including in the client money pool (as discussed further below) and claims of 

unsecured creditors. 

The Special Administrators established three separate bar dates depending on the class of 

claim to be filed against MFGUK. The bar date for client assets claims was February 29, 2012. 

The bar date for client money claims was March 30, 2012. The bar date for general creditor 

claims was April 30, 2012. Claims can still be made in respect ofal! these categories of claims 

after such dates. However, in respect of client monies and general creditor claims, any claim 

made after the bar date is not entitled to share in the first interim distribution in respect of such 

claims (as discussed further below). Any client asscts claims made after this date cannot disrupt 

any title acquired by any other person to whom such assets have been transferred. 

Client assets: The Special Administrators are not permitted to return client assets within 

three months of the bar date referred to above and are required to establish a Distribution Plan 

setting out, among other things. the process and mcchanism for tlle return of client assets and a 

schedule of dates on which client assets are to be returned. The Six Montll Report states that a 

draft ofthe Distribution Plan has been shared with MFGUK's creditors' committee and must be 

approved by the Court. The Special Administrators state that iliey intend to apply to the Court 

for the approval of the Distribution Plan in July 2012 with a view to commencing the return of 

client assets as soon as possible thereafter. 
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Client monies: In relation to client monies, an interim distribution has been declared at 

26% of the amount of claims that have been accepted. The Special Administrators commenced 

making interim distributions on client money claims in February, 2012. In the Six Month 

Report, the Special Administrators state that with respect to agreed claims, payments of $92.1 

million had been made as of May 29, 2012. This amount is less than 26% of the total an10unt of 

agreed claims due to various factors, including timing differences between the agreement of 

claims and the payment of dividends and "know-your-customer" checks. It was also noted that 

over 1,100 clients have submitted claims which conflict with MFGUK's classification of their 

accounts (which represents approximately 25% of all claims received). The Special 

Administrators also state that as of October 31, 201 L a significant portion of client money was 

held by third parties including clearing houses and exchanges. They state that as at April 30, 

2012, $918 million had been received by the Special Administrators in relation to client money 

and a further $161.8 million is due trom al1iliates (with 99% of the remaining client monies to be 

recovered now being held at al1iliated entities). 

Client money claims against MFGUK have been affected by the UK Supreme Court 

judgment in LBlE v eRC Credit Fund, which was handed down on February 29, 2012. This was 

a directions hearing regarding thc FSA's client money and client money distribution rules 

contained in chapter 7 ofthe FSA's Client Assets Sourcebook ('TASS"). Under the CASS 

rules, all client monies held by the relevant firm arc pooled upon ce11ain events, including a 

special administration, and all clients entitled to such assets share pro rata in the client money 

pool. The U.K. Supreme Court held that 0) a statutory trust attaches to all client money paid into 

a firm's house account from the moment it is received (whether money is client money will 

depend upon a number of factors including whether the client is retail or professional and the 
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relevant terms of business), (ii) the client money pool consists of all client money that is 

identifiable in any account of the fim1, whether or not a segregated account, and (iii) all clients 

that have an entitlement in respect of client money are entitled to a distribution from the client 

money pool by reference to their objective contractual entitlement to have client money 

segregated as at the date of pooling (whether or not actually segregated). 

The Special Administrators have stated that as a result of this judgment they will need to 

conduct a detailed and thorough regulatory and legal analysis of each client's position to 

establish if they had a claim in respect of client money that should have been segregated and 

conduct a forensic analysis into MFGUK's own bank accounts and, potentially, other assets to 

seek to identify client monies that were transferred to such accounts. The Special Administrators 

noted that the assistance of the court was likely to be needed to deal with these issues. 

Thereafter, on May 3,2012, the Special Administrators filed two applications for 

directions with the High Court of England and Wales. The first application (i) relates to U.S. 

treasury bills transferred by MFGI to MFGUK in respect of which MFGl claims were transferred 

subject to CFTC Rule 30.7, and (ii) seeks directions as to, among other things, (a) the legal basis 

on which such treasury bills were transferred to MFGUK and (b) whether MFGl has a 

proprietary interest and/or client asset claim and/or client money claim in relation thereto. A 

substantive trial on this application is not expected until the second quarter of2013 at the 

earliest. The second application seeks directions as to whether a client's client money 

entitlement in respect of an open position is to be valued by reference to the market value at the 

date of pooling or by reference to liquidation value. A substantive hearing in relation to this 

application is not expected until the third quarter of2012. 
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The Special Administrators have stated that they continue to pursue the recovery of 

approximately $400 million from MFGI in relation to segregated client assets and monies and 

house assets and monies of MFGUK held by MFGL 

General creditor claims: In relation to non-segregated assets, the Special Administrators 

state in the Six Month Report that they have now received approximately $1.2 billion of nonsegregated assets. They state that in excess of 90% of non-affiliated monies outstanding as at 

April 30, 2012 were held with five entities (reduced to four as at May 30, 2012) and they 

continue to work with these institutions regarding the return of additional amounts. The Special 

Administrators state that they are unable to provide a reliable estimate of total unsecured 

creditors at this time, and material uncertainties remain as to the ultimate quantum of realization 

of non-client assets and the quantum of claims and contingent claims. The Special 

Administrators therefore state that they are currently unable to estimate the likely recovery for 

unsecured creditors. 

I. Claims Filed by the Debtors. 

The claims tiled by the Debtors or their non-debtor affiliates under their control generally 

pertain to cost allocation for administrative expenses and smaller intercompany receivables. 

FinCo and Holdings Ltd. filed protective claims for funds loaned to MFGI (which were 

subsequently transferred to MFGUK) to the extent such loans pertained to margin for the RRTM 

transactions or may be recoverable by FinCo or Holdings under various legal theories. 

The Unregulated Debtors' activities with MFGUK primarily were related to foreign 

exchange and derivative product trading governed by ISDA Master Agreements." After the 

" Although the following claims are shown in U.S. Dollars, all claims submitted against entities in administration 

in the United Kingdom are required to be converted into ORP at the relevant exchange rate on the debtor's petition 

date. In relation to USS. the relevant exchange rate on the October Petition Date was $1.61411£. 
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October Petition Date, these agreements were terminated and the Debtors have worked with 

MFGUK to calculate their respective obligations under the terminated agreements. 

The Debtors filed seven general unsecured claims totaling $28.9 million against MFGUK 

and one client asset/general unsecured claim with an estimated value between $124.5 million and 

$242 million, which are detailed in the chart below. In addition, FinCo and Holdings Ltd. each 

filed a protective claim for $293 million for advances made to MFGl that were subsequently 

transferred to MFGUK and may be recoverable by FinCo or Holdings Ltd. Non-debtor MF 

Global Intellectual Properties Kft ("MFG IP"), a Hungarian subsidiary whollY-O\\11ed by 

Holdings Ltd., also filed a claim against MFGUK. 

Debtors' Claims Against MFGUK 

Claimant Class of Claim Amount 

Holdings Ltd. General Unsecured $3,988,608 

Holdings Ltd. General Unsecured $293,000,00076 

Holdings USA General Unsecured $277.804 

FinCo General Unsecured $293,000,00077 

FinCo Client Asset/General $124,480,000 - $241,920,000 

Unsecured 

Capital General Unsecured $4,979,060 

FX Clear General Unsecured $17,099,086 

MFGIP General Unsecured $770,966 

Holdings Overseas General Unsecured $1,410,172 

Holdings Europe General Unsecured $354,780 

Total $446,360,476 - $563,800,476 

On May 3, 2012, the Special Administrators notified FinCo iliat its claim had been 

rejected in full. In accordance with the relevant rules relating to the special administration of 

See Annex' 6 for an explanation of ISDA. 

76 Each of the claims filed by Holdings Ltd. and FinCo were filed to protect potential claims for the recovery of 

funds loaned by Holdings Ltd. and FinCo to MFGI and then were subsequently transferred to MFGUK. The Trustee 

did not include both claims in the total listed in this chart. 

77 Supra note 76. 
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MFGUK, FinCo had 21 days to appeal against such rejection or it would lose its right to object. 

Accordingly, on May 24, 2012, FinCo lodged an appeal against the rejection of its claim. The 

initial hearing in respect of such appeal is scheduled to be heard in August 2012. 

III. MF GLOBAL UK SERVICES LIMITED ("UK SERVICES") 

UK Services is a wholly-owned subsidiary of Holdings Europe and an indirect subsidiary 

of Holdings Ltd. On October 31, 2011, Richard Fleming, Richard Heis and Michael Pink of 

KPMG were appointed as joint administrators of UK Services, which provided employee and 

pension services in relation to the UK operations. On December 19,2011, Blair Nimmo of 

KPMG was appointed as an additional administrator of UK Services with the role of primarily 

and independently acting on behalf of UK Services in relation to the negotiation of a 

management agreement with the Special Administrators ofMFGUK. The Debtors have not filed 

any elaims against this entity. 

IV. MF GLOBAL FINANCE EUROPE LIMITED ("FINANCE EUROPE") AND MF 

GLOBAL MFG OVERSEAS ("MFG OVERSEAS") 

Total number of claims filed against Finance Europe 

bv the Debtors and their Non-Debtor Affiliates: 3. 

Total Value of Those Claims: $346,717,352.00. 

As a result of the Holdings Ltd. and FinCo bankruptcy filings and the subsequent 

administrations and filings of affiliates in the United Kingdom and Asia, the directors ofMFG 

Overseas and Finance Europe determined that those entities were likely to become insolvent due 

to a lack ofliquidity, uncertainty as to the value of their assets, and their respective liabilities that 

would become due and payable. Consequently, the boards of directors resolved to appoint 

Richard Fleming, Richard Heis and Michael Pink of KPMG as administrators (the 

"Administrators") for both entities on November 2,2011. 
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Finance Europe is a wholly-owned subsidiary of Holdings Ltd. It was registered in 

England and Wales and its principal purpose was to provide financing services to the MF Global 

Group. 

Potentially the most significant asset of Finance Europe is a loan of $250 million made to 

MFGUK. The Administrators have, however, stated in their reports that the terms of the loan 

provide for subordination of all payments under the loan. According to the Administrators, 

Finance Europe's claim for the unpaid loan amount ranks behind amounts payable to unsecured 

creditors of MFGUK. 

Total number of claims filed against MFG Overseas 

by tbe Debtors and tbeir Non-Debtor Affiliates: 3. 

Total Value ofTbose Claims: $5,815,380.00, 

MFG Overseas is a wholly-owned subsidiary of MF Global Holdings Overseas Limited 

("Holdings Overseas") and an indirect subsidiary of Holdings Ltd. MFG Overseas acted 

principally as an investmeut holding company for the MF Global Group's assets in Asia and 

Canada. 

The below chart sets forth claims filed by the Debtors against Finance Europe and MFG 

Overseas. 

Claims Against Finance Europe and MFG Overseas 

Claimant Debtor Class of Claim Amount 

Holdings Ltd. Finance Europe General Unsecured $34,224,652 

Holdings Overseas Finance Europe General Unsecured $299,309,693 

Holdings Europe Finance Europe General Unsecured $13,183,008 

Total $346,717,353 

Holdings Ltd. MFG Overseas General Unsecured $75,000 

Holdings Overseas MFG Overseas General Unsecured $5,713,600 

MFGlobal MFG Overseas 

Clearing Services General Unsecured $26,780 

Limited 

Total $5,815,380 
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A. Creditors' Committees of MFG Overseas and Finance Europe 

Holdings Ltd., by virtue of its direct claims and the claims of non-debtor affiliates, as set 

forth in the chart above, controls all three seats on the creditors' committee for Finance Europe 

and MFG Overseas. The Trustee, through the creditors' committee, continues to aid the 

Administrators and provide input on the development of a strategy for the recovery of assets and 

the flow of funds up to Holdings Ltd. The Administrators continue to provide timely 

informational updates with respect to the posture ofthe subsidiary asset sales and the 

Administrators continue to consult with the Trustee on important decisions. 

The Administrators are currently adjudicating intercompany claims and working with the 

Trustee to ensure a rapid distribution offunds after the liquidation of various assets held by their 

estates. The Trustee and his advisors are seeking to develop a strategy for interim distributions 

with the Administrators, which is likely to be through the establishment of a company voluntary 

arrangement." The Trustee also is working with the Administrators to develop a strategy in 

relation to the final distribution of assets. 

In addition, the Trustee and the Administrators have entered into an agreement with the 

Committee, allowing the Committee "observer" status on the creditors' committees of Finance 

Europe and MFG Overseas. This arrangement will facilitate the flow of information to the 

Committee and their advisors from the Administrators, provided they execute an appropriate 

non-disclosure agreement. 

On February 22, 2012, thc Trustee and the Administrators entered into a Cross-Border 

Insolvency Protocol to facilitate the coordination of the proceedings in relation to each estate, 

and to enable the Trustee and the Administrators to cooperate efficiently, effectively, and 

78 A company voluntary arrangement is a binding scheme or alTangement between creditors under supervision of 

an independent supervisor that must be approved at meetings of creditors and members. 
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expeditiously in the administration of their respective estates in the best interests of all of the 

creditors of each estate and other potential stakeholders. 

MF GLOBAL GROUP ENTITIES IN THE REST OF THE WORLD 

I. AUSTRALIA 

Total Number of Claims filed Against Australian Entities 

by the Dehtors and their Non-Debtor Affiliates: 4. 

Total Value of Those Claims: $1,389,905.00. 

The MF Global Group's Australian operations were performed by three entities, two of 

which were operationally active as of the October Petition Date. MF Global Australia Limited 

('"MFG Australia"), a wholly-owned subsidiary ofMFG Overseas, was a regulated entity that 

provided derivatives brokering and clearing services. BrokerOne Pty Limited was a whollyowned subsidiary of MFG Australia that was operationally inactive at the time of administration. 

MF Global Securities Australia Limited ("MFG Securities Australia"), another wholly-owned 

subsidiary of MFG Overseas, was a regulated entity that provided securities brokerage services. 

As of September 30. 2011, MFG Overseas' balance sheet reflected a book value for its 

equity investment in MFG Australia at £20.3 million, and a book value for its equity investment 

in MFG Securities Australia at £3.2 million. The Australian entities are currently in 

administration proceedings and in the process of liquidation. Chris Campbell. Vaughan 

Strawbridge and Dayid Lombe, of Deloitte, were appointed administrators of the three Australian 

entities on November 1,2011. The administrators taken conirol oCthe Australian entities 

and all of their operations with immediate elTecl, accordance with tbe Corporalio/lS Act 2001 

(Oh) (Act). 

An official claims bar date has not been established by the administrators. The below 

chart details the claims filed by the Debtors against the Australian entities. 
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Claims Filed by the Debtors Against the Anstralian Entities 

Claimant Debtor Class of Claim 

Holdings Ltd. MFG Australia General Unsecured 

Holdings Ltd. MFG Securities General Unsecured Australia 

Holdings USA MFG Australia General Unsecured 

Holdings USA MFG Securities General Unsecured Australia 

Total 

II. CANADA 

Total Nnmber of Claims Filed Against this Entity 

by the Debtors and their Non-Debtor Affiliates: 5. 

Total Value of Those Claims: $1,216,100. 

Amount 

$726,226 

$139,628 

$523.132 

$919 

$1,389,905 

MF Global Canada Co. ("MFG Canada") was an indirect, wholly-owned subsidiary of 

MFG Overseas. MFG Canada was a regulated Canadian broker-dealer that mainly placed orders 

for commodity futures and options contracts on behalf of its clients. The majority oflhose 

orders were executed and cleared by MFGI. MPG Canada also served as the clearing agent for 

trades ofMFGI that were made on the Bourse de Montreal Inc. and TCE Putures Canada. As of 

September 30. 2011. MFG Overseas' balance sheet reflected the book value for its equity 

investment in MFG Canada at £ 1.6 million. 

On November 4. 2011, KPMG Inc. (Canada) was appointed as trustee in bankruptcy. To 

date, MFG Canada clients have received an 80% distribution from the estate. Substantially all of 

the Canadian client claims protected by the Canadian Investor Protection Fund -- defined as 

those clients with balances less than C$5 million -- either have been settled in full or paid in 

substantial part. 
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The trustees tor MFG Canada established May 10,2012 as the bar date for filing client 

claims, although all creditors were encouraged to submit claims by this date. At this time, the 

Trustee cannot estimate the potential distribution the Debtors may receive on account of these 

filed claims. In addition to the claims held by the Debtors (as set forth in the below chart), MFG 

IP has a claim against MFG Canada. 

Claims Held Against MFG Canada 

Claimant Class of Claim 

Holdings Ltd. General Unsecured 

Holdings USA General Unsecured 

MFGIP General Unsecured 

Capital General Unsecured 

FX Clear General Unsecured 

I Total 

III. HONG KONG 

Total Number of Claims Filed Against These Entities 

by the Debtors and their Non-Debtor Affiliates: 4. 

Total amount of those claims: $1,180,965. 

Amount 

$676,049 

$396,916 

$21,676 

$94,832 

$26,627 

$1,216,100 

The MF Global Group's Hong Kong operations were perfom1ed by two entities: MF 

Global Holdings HK Limited ("Holdings HK"), which is a wholly-owned subsidiary ofMFG 

Overseas, and MF Global Hong Kong Limited ("MFG UK"), which was a regulated entity and a 

member of the Hong Kong Futures Exchange Limited and the Stock Exchange of Hong Kong 

Limited. MFG HK's principal activity was providing brokerage services to its customers. 

On November 2, 2011, Patrick Cowley, Fergal Power and Lui Yee Man were appointed 

joint and several provisional liquidators of Holdings HK and MFG HK. The initial meeting of 

creditors took place on March 22, 2012, and was attended by the Trustee's financial advisors. 

The Debtors were elected as one of the five members of the committee ofinspcction for 
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Holdings HK. The Debtors were one of nine creditors that expressed interest in sitting on the 

MFG HK committee of inspection; however, the committee is limited to seven members. The 

provisional liquidators have submitted an application with the Hong Kong court seeking, among 

other things, court approval for the Debtors to be included on the committee. This process takes 

four to eight weeks and the court has not yet set a hearing date on the application. 

The Debtors filed four general unsecured creditor claims totaling $1.18 million against 

Holdings HK and MFG HK. The Trustee is unable to determine the likelihood of a recovery 

because the recoveries from these entities are highly dependent upon distributions received from 

other affiliates on account of intercompany claims. Below is a chart that details the Debtors' 

claims against Holdings HK and MFG HK. 

Claims Against Holdings HK and MFG HK 

Claimant Debtor Class of Claim Amount 

Holdings Ltd. MFGHK General Unsecured $114,902 

Holdings Ltd. lloldings HK General Unsecured $403,525 

Holdings USA MFGHK General Unsecured $ 408,716 

Holdings USA Holdings HK General Unsecured $253,822 

Total US$1,180,965 

IV. INDIA 

Total Number of Claims Against This Entity 

by the Debtors and their Non-Debtor Affiliates: 7. 

Total Value of Those Claims: $832,541.00. 

The MF Global Group's Indian operations are comprised of four principal elements 

discussed below. As of September 30, 2011, MFG Overseas' balance sheet reflected a book 

value for its Indian operations at £14.8 million. 

MF Global Sify Securities India Pvt. Limited C'MFG Sify") is a registered broker-dealer 

that offered institutional equity offerings and retail brokerage and research. MFG SifY is ajoint 
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venture between MFG Overseas and Sat yam Infoway Limited (now known as SifY Technologies 

Limited) in which MFG Overseas owns 70.15% of the equity. MFG Sify had two operating 

subsidiaries: (i) MF Global Commodities India Pvi Limited, a wholly-owned subsidiary that 

provides brokerages services in the Indian commodities market, and (ii) MF Global Middle East 

DMCC, a wholly-owned subsidiary that is a trading and clearing member of the Dubai Gold & 

Commodities Exchange. 

MF Global Centralised Services India hi. Limitcd ("MFG Centralised Services") is a 

wholly-owned subsidiary ofMFG Overseas, and is a trading and clearing member of the Dubai 

Gold & Commodities Exchange. 

MF Global India Pvt. Limited is also a wholly-owned subsidiary that acts as a broker f()r 

other companies of the MF Global Group and receives commissions for trades performed by 

customers of MFG Centralised Services on overseas transactions. 

MFG Overseas owns 74.99% ofMF Global Finance & Investment Services India Pvi. 

Limited ("MFG F&I"), which offers lending services against securities, property and gold. 

MFG F&I is registered with the Reserve Bank ofIndia as a non-deposit, non-banking financial 

company. 

On March 26,2012, the Administrators agreed to the terms of a sale ofMFG Overseas' 

share holdings in the Indian operations with Phillip Capital Group. MFG Overseas anticipates 

realizing an influx of funds from the proceeds of the sale depending on tax issues. The sale is 

subject to regulatory approval of the purchaser. 

The Debtors' books and records show intercompany receivables due from the Indian 

affiliates as set forth in more detail in the chart below. 
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Intercompany Receivables Owed to the Debtors 

Claimant Debtor Class of Claim Amount 

Holdings Ltd. MFG Sit)' General Unsecured $695,197 

Holdings Ltd. MFG Centralised General Unsecured $51,247 Services. 

Holdings USA MFGSify General Unsecured $45,110 

Holdings Ltd. MFG Middle East General Unsecured $20,047 DMCC 

Holdings USA MFG Sit)' General Unsecured $45,11 0 

Holdings USA MFG Middle East General Unsecured $13,950 DMCC 

FX Clear MFG Middle East General Unsecured $2,653 DMCC 

Total $8~~ 

V. IRELAND 

MF Global Clearing Services Limited ("MFG Clearing"), a wholly-owned subsidiary of 

MFG Overseas, was created to provide clearing services for The Bank of New York Mellon. As 

of September 30, 2011, MFG Overseas' balance sheet reHected a book value for its equity 

investment in MFG Clearing of £17,073. This entity is currently dormant and the Debtors do not 

anticipate realizing any value upon its dissolution. 

VI. JAPAN 

Total Nnmber of Claims to be Filed Against this Entity 

by the Debtors and their Non-Debtor Affiliates: 4. 

Total Value of Those Claims: $739,777. 

MF Global FXA Securities Limited ("FXA Securities"), a wholly-owned subsidiary of 

MFG Overseas, was a regulated entity engaged primarily in the cash equity brokerage business 

and OTC margin foreign exchange business. On November 1, 2011, FXA Securities was placed 

under administration by the Financial Services Authority, the Japanese regulatory agency with 

oversight responsibility for FXA Securities. As of September 30, 2011, MFG Overseas' balance 

sheet reHected a book value for its equity investment in FXA Securities at £28.5 million. 
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FXA Securities entered liquidation following an extended sales process that failed to gain 

final approval from the Japanese Financial Services Authority. The deadline for filing general 

unsecured claims against FXA Securities is June 13,2012. As set forth in the chart below, the 

Debtors and MFG IP intend to file a total of four generallIDsecured creditor claims totaling 

$739,877 against FXA Securities. The Debtors anticipate receiving a full recovery on account of 

its unsecured claims. The below chart details the Debtors' and MFG IP's claims against FXA 

Securities. 

Claims Against FXA Securities 

Claimant Class of Claim Amount 

Holdings Ltd. General Unsecured $227,065 

Holdings USA General Unsecured $470,219 

Capital General Unsecured $6,644 

MFGIP General Unsecured $35,849 

Total $739,877 

In addition, the Administrators have indicated that they anticipate receiving a distribution 

on account ofMFG Overseas' equity based on a current projected cash surplus after liquidation 

costs, 

VII. MAURITIUS 

Total Number of Claims Against this Entity 

by the Debtors and their Non-Debtor Affiliates: 1. 

Total Value of Those Claims: $ 55,400. 

MF Global Mauritius Pvt Ltd C'MFG Mauritius''), a wholly-owned subsidiary ofMFG 

Overseas, was an lUlIegulated entity engaged in brokering and trading activities. As of 

September 30, 20 II. MFG Overseas' balance sheet reflected a book value for its equity 

investment in MFG Mauritius at £683,824, 
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MFG Mauritius has not yet entered liquidation proceedings. Holdings Ltd. has general 

unsecured creditor claims totaling $55,400 against MFG Mauritius. Holdings Ltd. anticipates 

receiving a full recovery on accotmt of its unsecured claims. In addition, the Administrators 

have indicated that they currently anticipate receiving a distribution on account of MFG 

Overseas' equity based on a current projected cash surplus after liquidation costs. It is 

anticipated that a distribution on account of equity to MFG Overseas ultimately will benefit 

Holdings Ltd. 

VIII. SINGAPORE 

Total Number of Claims Filed Against this Entity 

by the Debtors and their Non-Debtor Affiliates: 3. 

Total Value of Those Claims: $ 26,514,373. 

MF Global Singapore Pte. Limited ("MFG Singapore"), a wholly-ovmed subsidiary of 

MFG Overseas, was a regulated broker-dealer that engaged in exchange traded and OTC 

derivative transactions. As at September 30, 2011, MFG Overseas' balance sheet reflected a 

book value for its equity investment in MFG Singapore at £58.6 million. 

On November 2, 2011, Chay Fook Yuen, Bob Yap Cheng Ghee and Tay Puay Cheng of 

KPMG were appointed provisional liquidators of MFG Singapore. A meeting of creditors was 

held on May 28, 2012. The Trustee was awarded a seat on the committee of inspection. As set 

forth in the chart below. the Debtors and non-Debtor affiliates filed tln'ee general unsecured 

creditor claims totaling approximately $26.6 million against MFG Singapore. At the creditors' 

meeting, the liquidators provided a statement of MFG Singapore's affairs, and distributions are 

highly dependent upon recoveries from claims MFG Singapore has made against other former 

affiliates. At this time, the Trustee does not know the potential distribution the Debtors may 

receive on account of these claims. 
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Claims Against MFG Singapore 

Claimant Class of Claim Amount 

Holdings USA General Unsecured $1,219,597 

FinCo General Unsecured $25,000,000 

MFG!P General Unsecured $294,776 

Total $26,514,373 

IX. TAIWAN 

The MF Global Group's interest in Taiwan is comprised of direct and indirect equity 

interests held in two Taiwanese entities: MF Global Futures Trust Co. Ltd. ("MFG FTE"), in 

which Holdings Ltd. has a 67% direct ownership interest, and Polaris MF Global Futures Co. 

Limited ("Polaris"), a publicly traded Taiwanese broker-dealer that is II % owned by MFG 

Overseas." 

MFG FTE is a regulated entity and one of Taiwan's first fund managers. MFG FTE is 

not the subject of an insolvency proceeding. As at March 31, 2012, MFG FTE had a net asset 

position of $8 million. MFG Singapore acted as broker to MFG FTE and, as a result, owes 

approximately $7.2 million in margin to MFG FTE. MFG Singaporc also acted as broker to 

Polaris and, as a result, the Trustee has been advised that MFG Singapore owes Polaris 

approximately $24 million in margin. Pursuant to a court order restricting repayment of 

segregated funds to affiliates, payment of margin to MFG FTE and Polaris was held up by the 

provisional liquidators ofMFG Singapore. By order dated May 25, 2012, the prior Singapore 

court order was clarified to allow payment, as appropriate, to affiliates of MFG Singapore, 

including MFG FTE and Polaris. and the Trustee understands that MFG Singapore is in the 

process of approving an interim distribution to MFG FTE and Polaris. The Trustee is seeking to 

79 Effective April I, 2012, Polaris merged with Yuanta Futures with MFG Overseas maintaining its approximately 

11 % ownership share in the surviving entity, Yuanta Polaris Futures Co. Ltd. 
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sell or liquidate MFG FTE. The timing of any direct or indirect realization by the Debtors 

remains subject to approval by Taiwanese regulators and may be contingent upon all Taiwanese 

customers of MFG Singapore and its Taiwan branch receiving the balance of their segregated 

funds from MFG Singapore. 

Polaris had recently traded in the TWD33 per share range, valning MFG Overseas' stake at 

approximately $29 million. As of September 30, 2011. MFG Overseas' balance sheet reflected a 

book value for its equity investment in Polaris at £9.99 million. KPMG Taiwan has been 

instructed to manage the sales process. As with MFG FTE, any sale and realization remains 

subject to negotiation with the Taiwanese regulators, assuming all Taiwanese customers arc 

made whole for their segregated funds claims. 

MISCELLANEOUS ISSUES 

I. RECOVERY OF TRADING CLOSE-OUT VALUATION 

The Trustee and his advisors, in conjunction with the Debtors' employees. have worked 

diligently to recover funds owed to the Unregulated Debtors as a result of the termination of 

master derivative agreements and the underlying transactions. As a result, the Debtors have been 

able to recover in excess of $25 million for the Unregulated Debtors from such contract 

terminations. 

n. RECOVERY OF TAX REFUNDS 

The Trustee believes that potential federal and state tax refund revenues are likely to 

come into the FinCo and the Subsequent Debtors' estates that may be in excess of $30 million. 

Pre-petition, FinCo and the Subsequent Debtors applied to the Internal Revenue Service for a 

refund of taxes paid in fiscal year 2009 based on losses from 2011 that could be carried back and 

applied to the 2009 fiscal year. 
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The Internal Revenue Service is nearing completion of an audit of FinCo and the 

Subsequent Debtors and continues to review potential refunds for tlscal years 2007-2011. 

Although the Trustee does not have a tinite date as of yet as to when these funds will come into 

the FinCo and the Subsequent Debtors' estates, he is hopeful the funds will come into these 

estates in 2012. 

III. SALE OF DE MINIMIS ASSETS 

On March 22, 2012, the Trustee tiled a motion for entry of an order, pursuant to 

Bankruptcy Code sections 105, 363 and 365, to: (i) establish procedures for the sale or disposal 

of de minimis assets and (ii) authorize the Trustee to (a) pay related fees and (b) assume, assume 

and assign, or reject related executory contracts or unexpired leases (the "De Minimis Sales 

Motion"). The Court held a hearing to consider the De Minimis Sales Motion on April 12, 2012 

and entered an order granting the motion later that day. 

Since the entry of the order granting the De Minimis Sales Motion, the Trustee has 

engaged in one de minimis asset sale, as a result of which two computer servers were sold to IT 

Asset Management Group for $146.640. Oracle America, Inc. ("Oracle") tiled a limited 

objection and reservation of rights because these machines had previously been used to run 

Oracle software. The Trustee and Oracle resolved the issues raised in the limited objection and 

the Court entered an order authorizing the sale. The Trustee has received the funds from this 

sale. 

At this time, no other de minimis asset sales are being contemplated by the Trustee. 
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[v. INSURANCE 

This section of the Report examines the insurance programs maintained by Holdings Ltd. 

as of the October Petition Date.") Although Holdings Ltd. maintained several types of insurance 

through multiple carriers, this section focuses on the two lines of coverage that have been the 

subject of most of the insurance litigation since the October Petition Date: (i) the professional 

liability, or "errors and omissions," policies (the "E&O Policies") issued by MFGA and certain 

third-party excess insurers, and (ii) the directors & ofticers policies (the "D&O Policies") issued 

by various insurance companies. for the policy period May 31. 2011 to May 31, 2012 (the 

"Policy Period"). 

A. MFG Assurance 

MFGA is a wholly-owned, Class 1, captive insurance subsidiary of Holdings Ltd., 

domiciled in Bermuda 'and regulated by the Bennuda Monetary Authority. The Bermuda 

Monetary Authority requires MFGA to maintain a balance of appropriately skilled, experienced. 

and qualified individuals who can apply infonned and independent judgment to MFGA's 

governance." Since the commencement of the Chapter 11 Cases, the BemlUda Monetary 

Authority has increased its regulatory interest in MFGA, with specific regard as to whether 

MFGA is continuing to honor its policy obligations. MFGA's primaIY responsibility is to 

maintain the E&O Policies. 

so The statements made in this section ofthe Report are not intended to be and cannot be relied upon as an 

interpretation or determination of the meaning. scope or definition of any term, passage or account of any of the 

insurance programs or policies described herein. No infOlmation provided in this section should, can or will serve 

as a legal opinion or detennination of any ··c1aim." as the term claim is used in either the Bankmptcy Code or the 

insurance policies themselves. No one should consider that these are the actual tenns and conditions provided in all 

or any of the insurance policies. This Report is not intended to be relied upon as an insurance policy or legal advice. 

81 Section 5.0. BMA Insurance Depamnent. Guidance Note #12. Corporate Gowrnance (2005), 

http://www.bma.bmluploaded!l27-Corporate ~ Governance. Mar OS.pdf (last visited, May 19. 2012). 
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B. The E&O Policies 

For the Policy Period, Holdings Ltd. entered into thirteen E&O Policies with MFGA --

one primary policy and twelve excess policies -- providing a total of$120 million in aggregate 

limits of coverage. Holdings Ltd. purchased four additional excess layers of coverage providing 

an additional $30 million in aggregate limits above the MFGA-issued layers. Therefore, 

Holdings Ltd. had $150 million in aggregate limits of coverage under the various E&O Policies 

during the Policy Period." The E&O Policies are "claims made" policies, which provide 

coverage for claims actually made against the insurecf3 during the applicable policy period, 

subject to certain extensions and other terrns set forth in the policies. 

MFGA fully reinsured the entire $120 million "tower" ofE&O coverage through various 

third-party reinsurance carriers, with the sole exception ofthe self~insured primary layer 

providing $7.4 75 million in coverage, with no aggregate limits, in excess of a $25,000 retention 

(similm' to a deductible). Under the primary E&O Policy, the first $25,000 ofloss arising from 

each single claim is borne by the insured or individual insured, as the case may be, and MFGA 

covers the next $7.475 million of such loss, without recourse to reinsurance. Loss from any 

single claim in excess of$7.5million is insured by MFGA up to an aggregate limit of$120 

million, subject to third-party reinsurance policies that mirror the coverage of the MFGA 

policies. Other third-party carriers directly insured Holdings Ltd. against loss (rom a single 

claim exceeding $120 million, up to $150 million. 

For the primary E&O Policy described above, the total premium owed by Holdings Ltd. 

for the Policy Period was $8,479,959, payable in 12 monthly installments of $706,663.25. For 

82 Refer to Exhibit C for a depiction ofthe E&O Policy tower. 

" Italicized temlS used in this section of the Report shall have the meaning ascribed to them in the definitions 

contained in the E&O Policies, which definitions, in some cases, are provided in this Report. 
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the excess E&O Policies, the total premium owed by Holdings Ltd. was $3,866,793, payable in 

12 monthly installments of $322,232.75. Holdings Ltd. made its last monthly installment 

payments to MFGA in September 2011. MFGA has fully paid to its third-party reinsurers all 

premium amounts due for the entire Policy Period. 

C. Substantive Provisions of the MFGA E&O Policies, 

The E&O Policies cover Holdings Ltd. and its subsidiaries, both domestically and 

abroad, as well as their directors, otlicers and employees for their actual or alleged acts, errors or 

omissions while in the perfonuance of services provided by Holdings Ltd. and its subsidiaries. 

Specifically, subject to certain exceptions listed therein, thc E&O Policies provide: 

The insurer shall pay on behalf of the insured for all loss arising 

out of a wrongfiil act which gives rise to a claim tirst made against 

an insured by a third party during the policy period (or discovery 

period. if applicable) and reported in wTiting to the insurer 

pursuant to the terms of this policy. 

To properly understand the above language. a breakdown of the defined terms is 

necessary. The E&O Policies define the insurer as MFGA. The insureds include the insured 

entity -- Holdings Ltd. and its subsidiaries -- and the individual insureds. Individual insureds is a 

broad-ranging group of employees and persons atliliated with Holdings Ltd. and its subsidiaries, 

including but not limited to: 

(i) Any past, present or future natural person under a contract of 

employment (be it full time, prui-time or temporary. or be it 

written or implied) with the insured entity; 

(ii) Any past, present or future natura! person working under the 

direct control and supervision of the insured entity; 

(iii) Any past, present or future director or officer when 

performing acts within the scope of the usual duties of an 

employee of the insured entity or while acting as a member of a 

committee duly elected or appointed by resolution of the Board of 

Directors of the insured entity to perform specific, as distinguished 
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from general, directorial acts on behalf of the insured entity . .. ; 

and 

(v) Any past, present or future natural person compensated by the 

insured by wages, salaries, commissions or any other form of 

payments in respect of consultancy services. 

The E&O Policies define Loss as follows: 

(i) defense costs; and/or 

(ii) damages, aggravated damages as permitted by law, judgments 

(including pre/post judgment interest), restitution orders of a 

compensatory nature, claimant's costs, co-defendant's costs. legal 

costs and expenses awarded against any insured; and/or 

(iii) settlements negotiated with the insurer's consent (such consent not 

to be withheld unreasonably); and/or 

(iv) awards of punitive, exemplary and multiple damages (where 

insurable by law). Enforceability of this paragraph shall be 

governed by such applicable law which most favors coverage for 

plmitive, exemplary and multiple damages; and/or 

(v) awards of any referee, arbitrator, the Financial Services 

Ombudsman or any other ombudsman appointed by the Secretary 

of State for Trade and Industry or similar regulator or by any selfregulatory organization or by any recognized professional body by 

whose rules the insured is bound, 

in respect of any claim under the policy. 

However, Loss shall not include: 

(a) taxes, unless such taxes form part of an award of damages to a 

third party; 

(b) wages, salaries or other remuneration of any insured; 

(c) the cost of complying ",ith any settlement for or award of nonmonetary relief; or 

(d) principal, interest or other monies accrued or due (either now or in 

the future) but not yet paid to the insured as a result of any 

loan, lease or extension of credit 
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Under the above defInition and other tenns of the E&O Policies, Loss other than d~fense 

costs and certain other incidental costs generally arises only upon a determination by a tribunal, 

referee, arbitrator or some other appointed official granting a monetary judgment or award 

against an insured, or upon a final settlement of a claim entered with MFGA's consent. 

A Wrongful Act is the alleged or actual act, error or omission that leads to a claim, In the 

E&O Policies, Wronf?,fid Act means: 

Any actual or alleged act, error or omission by fhe insured, or by 

any other person for whose act, error or omission fhe insured is 

legally responsible, arising out of the provision of, or failure to 

provide the services. For the avoidance of doubt, the teml "act, 

error or omission" as used in the foregoing, shall include, but not 

be limited to any: 

(i) breach of duty, breach of trust (including, but not limited 

to, breach of constructive trust) breach of fiduciary duty, 

neglect, elTor, misstatement. misleading statement, 

misrepresentation, libel, slander, omission or breach of 

warranty of authority; or 

(ii) breach of any statute enacted anywhere in ilie world 

(including any statutory provisions and/or any rules or 

regulations made by any regulatory body or authority 

thereunder, and including any award of any referee, 

arbitrator, the Financial Services Ombudsman or any other 

ombudsman appointed by the Secretary of State for Trade 

and Industry or similar regulator or by any self-regulatory 

organization or by any recognized professional body by 

whose rules the insured is bound); or 

(iii) other breach of a duty to a third party which is 

actionable at law in tort, or actionable in delict or quasidelict in respect of Scotland. 

To be clear, a claim under the E&O Policies is far different than a "claim" under 

Bankruptcy Code section 10] (5). ;\ claim under Bankruptcy Code section 101 (5) is defined as 

the: 
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(A) right to payment, whether or not such right is reduced to 

judgment, liquidated, unliquidated, fixed, contingent, matured, 

unmatured, disputed, undisputed, legal, equitable, secured, or 

unsecured; or 

(B) right to an equitable remedy for breach of performance if such 

breach gives rise to a right to payment, whether or not such right to 

an equitable remedy is reduced to judgment, fixed, contingent, 

matured, unmatured, disputed, undisputed, secured, or unsecured. 

11 U.S.C. § 101(5). Under the plimary E&O Policy, claim means: 

(i) any suit or proceeding, including allY civil proceeding, third 

party proceeding, counter claim or arbitration proceeding, or a 

regulatory proceeding brought by any person or entity against an 

insured for monetary damages or other relief, including nonpecuniary relieffor a specified wrongful act; 

(ii) any \'Witten demand from any person or entity seeking 

monetary damages or other relief, including non-pecuniary relief, 

from an insured for the results of any specified wrongful act; 

(iii) any of1icial investigation, examination, inquiry or other similar 

proceeding at which an individual insured of the insured entity's 

attendance is required provided such official investigation, 

examination, inquiry or other similar proceeding is directly related 

to an alleged wrongful act of such individual insured or the insured 

entity in their capacity as such: 

(1) once such individual insured is identified in writing by 

such investigating authority as a person against whom a 

civil, criminal, administrative, regulatory or arbitration 

proceeding for monetary, non-monetary or injunctive relief 

which is commenced by: (a) service of a complaint or 

similar pleading; (b) return of an indictment, information or 

similar document (in the ease of a criminal proceeding); or 

(c) receipt or filing of a notice of charges may be 

commenced: or 

(2) in the case of an investigation by a regulatory or a 

similar government authority, after the service of a 

subpoena upon such individual insured." 

84 This language appears only in (he primary policy, The MFGA excess layers say "in the case of an investigation 

by the SEC or a similar state government authority. after the service of a subpoena upon such individual insured." 
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The different definitions of claim under the £&0 Policies, on the one hand, and under the 

Bankruptcy Code, on the other hand, as well as the definition of loss under the E&O Policies, 

have led to significant confusion among some customers ofMFGI. 

D. The D&O Policies. 

Holdings Ltd, maintained a D&O insurance progran1 during the Policy Period comprising 

twenty-one primary and excess D&O Policies with a total aggregate limit of $225 million." 

These policies provided what is commonly known in the insurance industry as Side A, Side B, 

and Side C coverage. Side A coverage provides officers and directors of Holdings Ltd. and its 

subsidiaries with coverage for Loss" arising from Claims made against those directors and 

oftlcers for Wrongful Acts except when and to the extent that Holdings Ltd. has indemnified 

those directors and officers. Therefbre, to the extent Holdings Ltd. or its subsidiaries do not 

indenmify the oftlcer or director, the D&O Policies cover such Loss. Side B coverage (provided 

under the D&O Policies by part (B)(I) of the coverage grant) reimburses Holdings Ltd. or its 

subsidiaries for losses that Holdings Ltd. or its subsidiaries paid on behalf of Insured Persons. 

Side C coverage (provided under the D&O Policies by part (13)(2) of the coverage grant) 

provides entity coverage to Holdings Ltd. or its subsidiaries limited to Loss arising from 

securities claims as defIned by the policies. 

The Side A coverage does not have a deductible. The Side B coverage and Side C 

coverage each have a $2.5 million retention by Holdings Ltd. and its subsidiaries. The first ten 

layers ofthe D&O Policy tower provide $150 million in aggregate limits as to types of coverage 

(Sides A, B and C). The next four layers -- which provide coverage for losses arising from a 

85 Refer to Exhibit D for a depiction of the D&O Policy tower. 

86 Bold terms used in this section of the Report shall have the meaning ascribed to them in the definitions 

contained in the D&O Policies, which delinitions, in some cases, are provided in this Report. 
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single claim from $150 million to $200 million -- provide $50 million in Side A coverage to 

officers and directors. The top two layers -- aggregate coverage from $200 million to $225 

million -- provide Side A coverage exclusively for the benefit ofIndependent Directors. 

E. Substantive Provisions of the D&O Policies. 

As amended by the endorsements, the insuring agreements in the primary D&O 

Policy, entered into by Holdings Ltd. and U.S. Specialty Insurance Company ("U.S. Specialty"), 

state: 

(A) The Insurer will pay to or on behalf of the Insured Person 

Loss arising from Claims first made during the Policy Period or 

Discovery Period (if applicable). against the Insured Persons for 

Wrongful Acts, except when and to the extent the Company has 

paid such Loss to or on behalf of the Insured Persons as 

indemnification or advancement. 

[a 1 The insurer will pay. to or on behalf of the Insured 

Persons, Pre-Claim Inquiry Costs or Liberty Protection 

Costs arising from Pre-Claim Inquiries first received by 

the Insured Persons during the policy period or the 

Discovery Period (if applicable). except when and to the 

extent that the Company has paid such Pre-Claim Inquiry 

Costs or Liberty Protection Costs to or on behalf of the 

Insured Persons as indemnification or advancement. 

(B) The Insurer will pay to or on behalf of the Company Loss arising 

from: 

(1) Claims tirst made during the Policy Period or the Discovery 

Period (if applicable) against the Insured Persons for Wrongful 

Acts. if the Company has paid such Loss to or on behalf of the 

Insured Persons as indemnification or adva11Cement. and/or 

[a 1 the Insurer will pay, to or on behalf of the 

Company, Pre-Claim Inquiry Costs or Liberty 

Protection Costs arising from Pre-Claim Inquiries first 

received by the Insured Persons during the Policy Period 

or the Discovery Period (if applicable), if the Company has 

paid snch Pre-Claim Inquiry Costs or Liberty Protection 

Costs to or on behalf of the Insured Persons as 

indemnification or advancement. 
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(2) Securities Claims first made during the Policy Period or the 

Discovery Period (if applicable) against the Company for 

Wrongful Acts. 

Putting the terms used in the primary D&O Policy into industry terminology, Insuring 

Agreement (A) is the Side A coverage, Insuring Agreement (B)(I) is the Side B coverage, and 

Insuring Agreement (B)(2) is the Side C coverage. 

The excess layers contain a "following form" provision that provides the same coverage 

as the primary layer. MFGl's customers have withdrawn most of their litigation as it relates to 

the D&O Policies because the D&O Policies have a priority of payment provision, which states: 

If the Insurer is obligated to pay Loss, including Defense Costs. 

under more than one INSURING AGREEMENT, whether in 

connection with a single Claim or multiple Claims, the Insurer will 

first pay any Loss payable under INSURING AGREEMENT (A) 

and, if the Insurer concludes that the amount of all Loss. including 

Defense Costs. is likely to exceed the Insurer's Limit of Liability, 

the Insurer shall be entitled to withhold some Of all of any Loss 

payable under INSURING AGREEMENT (B)(I) or (8)(2) to 

ensure that as much of tile Limit of Liability as possible is 

available for the payment of Loss under INSURING 

AGREEMENT (A). If no Loss is payable under INSURING 

AGREEMENT (A). or if the Insurer's obligations under 

INSURING AGREEMENT CA) have been satisfied, then, subject 

to the Insurer's Limit of Liability as set forth in Item 3 of the 

Declarations, the Insurer will pay such Loss as it is required to pay 

under INSURING AGREEMENT (B)(1) or (B)(2) in such manner 

and. in the event of multiple Claims, appOliioned among such 

Claims as tile Named Corporation shall direct in wTiting. 

This priority of payment provision provides priority to the Side A coverage (Insuring 

Agreement (A) over the Side 8 (Insuring Agreement (8)(1» and Side C (Insuring Agreement 

(8)(2» coverages. Therefore. under the D&O Policies, officers and directors receive payments 

prior to Holdings Ltd. or its subsidiaries should they both file claims against the policies. 
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F. Insurance-Related Litigation. 

On February 3, 2012, the Trustee and MFGA served notice that they had entered into a 

stipulation, which they sought to have approved by the Court,R7 pursuant to which the Trustee 

and MFGA sought, in the most expeditious and cost-effective way, to allow MFGA to advance 

d~fense costs and otherwise meet its financial obligations under the E&O Policies. This resulted 

in four objections, all from customers ofMFGI.88 

By separate motion, on February 8, 2012, U.S. Specialty moved the COllli to lift the 

automatic stay to allow U.S. Specialty to advance defense costs and otherwise meet its financial 

obligations under its D&O Policy with Holdings Ltd89 This resulted in three responses from 

customers ofMFGI.9o 

The Court conso lidated these matters and held a hearing on April 2, 2012 to determine 

whether the automatic stay should be lifted to allow the payment of defense costs of the 

individual insureds under either the D&O Policies or the E&O Policies or both. On April 10, 

2012, the Court issued its opinion, which overruled the various objections and allowed an initial 

"soft cap" of $30 million of defense costs to be paid by MFGA and U.S. Specialty, to be 

apportioned as those insurers saw fit. 91 

Among those who objected to the stipulation to allow MFGA to perfoml under the E&O 

Policies were Sapere Wealth Management LLC, Granite Asset Management, and Sapere CTA 

" Docket No. 409. 

" DocketNos.416,417,419,42L 

89 Docket No. 428. 

9D Docket Nos. 477. 482, 484. 

9. Docket No. 619. 
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Fund L.P. (collectively, "Sapere,,)92 Sapere has appealed93 the Court's decision94 to lift the 

automatic stay to allow MFGA and U.S. Specialty to pay defense costs out of their respective 

policy proceeds. Sapere also sought a stay pending appeaL which this Court denied in a written 

opinion.95 After a hearing on May 22, 2012, the District Court like'.'1se denied Sapere's request 

for a stay pending appeal because, among other reasons, there was not a substantial likelihood 

that Sapere would succeed on its appea\'% Sapere continues to prosecute the appeal ill1d ha~ 

recently agreed to a briefing schedule with all parties involved. 

V. LITIGATION 

A. Administration of the Chapter 11 Estate 

On December 11,2011, Sap ere filed a motion with the Court requesting that the Debtors' 

estates be administered pursuill1t to Bankruptcy Code sections 761-767 ("Subchapter IV"), the 

Commodity Broker's Liquidation subchapter, ill1d the Part 190 Regulations." In addition. Sapere 

sought authorization to conduct a Bankruptcy Rule 2004 investigation ofthe Debtors. Sapere's 

motion alleged, without support, that the Debtors stole customer funds from MFGI ill1d asserted 

that the Debtors were commodity brokers. Based on the belief that the Debtors were commodity 

brokers, Sapere argued that MFGI's customers were entitled to receive priority treatment for the 

alleged $1.6 billion in "missing" customer funds. 

n Docket Nos. 416.417. 573, 574. 

93 Docket No. 657. Sapere Wealth Management. LLC.. el aI., v. Freeh" et al. Case No 12 Misc. ]43 (KBF). 

94 Docket Nos. 619 and 652. 

95 Supra note 93. 

"" Sapere Wealth Management. LLC., et al .• v. Freeh,. et al. Case No 12 Misc. 143 (KBF) (Docket No. 17). 

97 Docket No. 278. 
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Objections to the motion were filed by the Trustee and the Committee." Those 

objections asserted. among other things, that while Subchapter IV is applicable to the liquidation 

of commodity brokers in cases under chapter 7 of the Bankruptcy Code, the Debtors' cases were 

administered under chapter 11 of the Bankruptcy Code and, therefore, Subchapter IV was not 

applicable to the Debtors' cases. Furthermore, the Trustee argued that Rule 2004 discovery was 

premature because the Trustee was still conducting his own investigation. The SIP A Trustee 

filed a statement agreeing that Rule 2004 discovery was not warranted at that time and noted 

that, although it did not appear that the Debtors had sutllcient assets to pay the alleged shortfall 

ofMFGI's customers, it was the SIPA Trustee's responsibility to recover the "missing" assets." 

A hearing on the motion was held on January 19, 2012. during which the Court heard oral 

argument. On February 1,2012, the Court filed a memorandum opinion and order denying (he 

motion in its entirety, finding that Sapere failed to allege any specific facts supporting its motion 

and that there was no legal basis to administer the Debtors' cases pursuant to Subchapter IV. 11)0 

In addition, the Court held that Sapcre needed to first show that the De blors' cases should be 

converted to chapter 7 (reliefthey had not requested in their motion) and then establish that the 

Debtors were commodity brokers. The Court found that conversion of the cases was not 

warranted and that the Debtors were not commodity brokers. 

On February 15, 2012, Sapere filed a notice of appeal.!O! On March 30, 2012, Sapere 

filed a motion seeking direct certification of its appeal to the Second Circuit Court of Appeals. 

98 Docket Nos. 339, 341. 

99 Docket No. 358. 

11)0 Docket No. 400. 

10J Docket No. 46l. 

102 Docket No. 603. 
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The Trustee filed an objection to the motion for certification on April 13, 2012 and the 

Committee filed ajoinder to the Trustee's objection. l03 In his objection, the Trustee argued that 

the Court correctly found that the relief sought in the motion had no basis in law and, 

accordingly, the motion did not satisfy the standard for certification of an interlocutory order, 

namely, that the appeal "involves a controlling question oflaw as to which there is no controlling 

law in the circuit." On April 25, 2012, the Court filed a memorandum opinion and order denying 

Sapere's request for certification of its appeal."" 

On May 11,2012, the District Court docketed the Sap ere appeaL lOS Sapere filed its brief 

on June 1,2012. 

B. Corporate Personhood 

On February 6, 2012, Adam Furgatch ("Furgatch"), a cllstomer ofMFGI, filed a motion 

requesting that the Debtors' estates be administered pursuant to Bankruptcy Code sections 523 

and 507.106 The motion, citing to Citizens United v. Federal Election Commission, 558 U.S. 50 

(2010), contended that corporate parents and subsidiaries are "persons" as such tem1 is defined in 

the Bankruptcy Code. Therefore, Furgatch argued, MFGI is entitled to receive "domestic 

support" from its parent, Holdings Ltd., which obligations are granted priority status under the 

Bankruptcy Code. Objections to the motion were filed by the Trustee and the Committee. 107 

Those objections asserted, among other things, tl1at there is no basis in law or fact for the 

application of Bankruptcy Code section 523(a)(5) to corporate entities such as the Debtors and 

103 Docket Nos. 632, 639. 

'" Docket No. 655. 

105 In re MF Global Holdings Ltd.. el al .• Case No 12-ev-03757(JMF). 

'06 Docket No. 424. 

107 Docket Nos. 479, 481. 
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MFGI. The SIP A Trustee also filed a statement agreeing with the points of authority contained 

in the Trustee's objection. lOS A hearing on the motion was held on March 6, 2012, during which 

the Court heard oral argument from Furgatch's counseL Following the hearing, the Court filed a 

memorandum opinion denying the motion in its entirety. toO 

On March 20, 2012, Furgatch filed a motion for leave to appeaL'lO The Trustee filed an 

objection to the motion for leave to appeal on April 3, 2012.111 In his objection, the Trustee 

argued that the Court correctly found that the relief sought in the motion had no basis in law and, 

accordingly, the appeal was frivolous and did not satisfY the standard for appeal of an 

interlocutory motion, namely, that the appeal "involves a controlling question oflaw as to which 

there is substantial ground for difference of opinion." As of the date of this Report, the District 

Court has not granted Furgatch leave to appeal. 

C. Miscellaneous Litigation 

Various parties, including customers ofMFGI, former employees of the MF Global 

Group and shareholders of Holdings Ltd., have commenced litigation in multiple districts 

throughout the United States both pre- and post-bankruptcy. Actions tiled pre-petition against 

the Debtors have been stayed pursuant to Bankruptcy Code § 362. Actions filed post-petition, 

which arose out of the collapse of the MF Global Group, generally do not name the Debtors as 

parties or are stayed as to the Debtors. A significant number of the customer actions filed postpetition have been consolidated in the Southern District of New York in the case Joseph 

to8 Docket No. 485. 

109 Docket No. 526. 

liD Docket No. 579. 

111 Docket No. 607. 
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Deangelis v. Jon Corzine. et aI., C'.A. No. I: 11-07866. Attached as Exhibit E is a chart detailing 

the various litigations. 

VI. CONGRESSIONAL HEARINGS AND TESTIMONY 

Since the October Petition Date, Congress has invited many people associated with the 

Debtors whether pre-petition or post-petition, tangentially or directly -- to appear and testily 

before it. The below chart details the hearings held before Congress, and those who appeared as 

witnesses during those hearings. Attached as Exhibit F is the Trustee's witness statement 

submitted prior to his testimony. 

Date Committee Title ofT-Tearing Witnesses 

12/8/20 II House Agriculture Examination of MF Jon Corzine Committee Global Bankruptcy 

Senate Robert Hupfer Agriculture, Investigation into the 

12i13/2011 Nutrition and MF Global Jeffrey Hainline 

Forestrv Bankruptcy Panel I Dean Tofteland 

Committee C,J.Blew 

Senate 

Agriculture. Investigation into the Jon Corzine 

12113/2011 Nutrition and MFGlobal Henri Steenkamp 

Forestry Bankruptcy Panelll Bradley Abelow 

Committee 

Senate 

Agriculture, Investigation into the Terrence DuffY 

12/13/2011 Nutrition and MFGlobal James Giddens 

Forestry Bankruptcy Panel III Jill Sommers 

Committee 

Oversight and 

Investigations Jon Corzine 

121I5/2011 Subcommittee of Collapse ofMF Bradley Abelow the Honse Global 

Financial Services 

Committee 

----'---

112 All of the witness statements associaled with the chart below are available upon request to the Trustee at 

mfglobalinfo@mofo.eom. 
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Oversight and 

Investigations 

2/2/2012 Subcommittee of Collapse ofMF Michael Roseman 

the House Global: Part 2 Panel I Michael Stockman 

Financial Services 

Committee 

Oversight and 

Investigations Craig Parmelee 

2/2/2012 Subcommittee of Collapse of MF Richard Cantor the House Global: Part 2 Panel II James Gellert Financial Services 

Committee 

Oversight and 

Investigations Laurie Ferber 

3/28/2012 Subcommittee of The Collapse of MF Henri Steenkamp 

the House Global; Part 3 Panel! Christine Serwinski 

Financial Services Edith O'Brien 

Committee 

Oversight and 

Investigations Diane M. Genova 

3/28/2012 Subcommittee of The Collapse of MF Daniel J. Roth the House Global; Part 3 Panell! Susan M. Cosper Financial Services 

Committee 

Louis Frech 

Senate Banking, The Collapse of MF James Giddens 

4/24/2012 Housing and Global: Lessons Jill Sommers 

Urban Affairs Learned and Policy Robert Cook 

Committee Implications Richard Ketchum 

Terrence DuffY 

VII. THIRD PARTY INVESTIGATIONS 

Since his appointment, the Trustee has negotiated and cooperated with the various 

governmental agencies investigating the failurc ofthc MF Global Group, including the SEC and 

CFTC.ll3 In addition, the Trustee, on April 24, 20] 2, testified before Congress as to the lessons 

learned thus far from the collapse of the MF Global Group.'" 

Il3 Docket No. 538. 

114 See Exhibit F for the Trustee~s written statement to Congress prior to his testimony. 
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The Trustee also has commenced his own investigation into the Debtors' operation of 

their businesses and the facts and circumstances surrounding the Debtors' precipitous downfall 

as required by Bankruptcy Code section 11 06(a)(3), which provides, in pertinent part: 

(a) A trustee shall-

(3) except to the extent that the court orders otherwise, 

investigate the acts, conduct, assets, liabilities, and 

financial condition of the debtor, the operation of the 

debtor's business and the desirability of the continuance of 

such business, and any other matter relevant to the case or 

to the formulation of a plan; 

11 U.S.C. § 1106(a)(3). The investigation has included a review of internal documents, 

interviews with current and fonner employees, and discussions with third parties with knowledge 

of the situation.'1S 

As soon as practicable, the Trustee will file a statement with the findings of his 

investigation as he is required to do to meet his statutory and fiduciary duties under the 

Bankruptcy Code. '16 

II' Docket No. 653. 

116 Bankruptcy Code section II 06(a)(4) requires: 

(4) as soon as practicable-·-

11 USc. § 1106(a)(4). 

(Al file a statement of any investigation conducted under paragraph (3) 

of this subsection, including any fuct ascertained pertaining to fraud, 

dishonestyl incompetence, misconduct, mismanagement, or irregularity 

in the management of the affairs of the debtor, or to a cause of action 

available to the estate: and 

(8) transmit a copy or a summary of any such statement to any 

creditors' committee or equity security holders' committee, to any 

indenture tmstee, and to such other entity as the court designates: 
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CONCLUSION 

As detailed in this Report, the TlUstec has undertaken the wind-down of an extremely 

complex, global operation. Much of the TlUstee's time has been spent interacting with the SIP A 

TlUstee and worldwide administrators in order to understand what occurred in the final weeks 

leading up to the October Petition Date and figuring out what steps are necessary to maximize 

the value ofthe Debtors' estates. With in excess of $3 billion in claims tiled against fonner 

aftiliates, the potential recoveries for the Debtors' creditors will come primarily from recoveries 

on account of such claims. As a result, the TlUstee actively follows the proceedings respecting 

those entities and even participates on cert.ain ofthe creditors' committees around the world. 

Another potential source of value for the Debtors' estates is through litigation. The TlUstee's 

investigation into potential claims and causes of action is in its early stages, and as it progresses, 

details will be provided to the Court. 

Dated: New York, New York 

June 4, 2012 

MORRISON & FOERSTER LLP 

Lorenzo Marinuzzi 

Melissa A. Hager 

1290 Avenue of the Americas 

New York, NY 10104-0050 

TeL. 212.468.8000 

Fax: 212.468.7900 

bmiller@mofo.com 

lmarinuzzi@mofo.com 

mhager@mofo.com 

Attorneys for the Chapter 11 Trustee 
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ANNEXl 
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I. Principal or Proprietary Transaction is a transaction entered into by a broker/dealer to 

buy or sell a security for its OW11 account. 

2. A Long Position in a security, such as a stock or a bond, or equivalently to be long in a 

security, means the holder of the position owns the security. 

3. RTMs and RRTMs -- l.lnder the GMRA, MFGl agreed to sell to MFGUK various 

European sovereign debt securities, while simultaneously entering into an agreement to 

repurchase those securities from MFGUK (or securities considered equivalent thereto) at an 

agreed upon repurchase price, on a date falling immediately prior to the maturity date of those 

securities. This type of sale and repurchase agreement is commonly refelTed to as a repo-tomaturity -- or RTM -- from the point of view of the seller/repurchaser of the securities/equivalent 

securities (in this case, MFGI), and a reverse repo-to-maturity -- or RRTM -- from the point of 

view ofthe purchaserlreseller of the securities/equivalent securities (in this case, MFGUK). The 

initial Repo funding is usually less than the value of the securities (or collateral) by an amount or 

percentage agreed upon by the parties and included in the confinnation detailing the trade. This 

is known as the initial margin or "haircut." The initial margin protects the buyer against a drop 

in the value of the collateral, illiquidity of the collateral and counterparty credit risk. In a classic 

Repo transaction, the initial margin is transfelTed to the buyer (or supplier of cash). The margin 

level for Repos varies according to the underlying collateral and is usually detennined based on 

the credit-rating of the security posted as collateral. For example, an investment grade sovereign 

bond (e.g., UK or Germany) might require a 0-2% haircut. while a non-investment grade bond 

may require a 15% haircut. The market value of the collateral is maintained through the posting 

of "variation margin." Variation margin gets its name because the level of additional margin 

varies with the value of the collateral -- the seller will be required to post additional margin if the 
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collateral decreases in value and the buyer will return margin if the mark-to-market value of the 

collateral increases in value. Potential liquidity risks existed because if the value ofthe collateral 

underlying the repurchase agreement decreases -- whether because of market conditions or 

because of issuer-specific concerns -- MFGI was required to post variation margin to maintain 

the value of the collateral held by the Exchanges. If the value of the collateral became 

permanently impaired -- for example, if the issuer of the bonds or other securities posted as 

collateral defaulted on its obligations -- MFGI would still have the obligation to repurchase thc 

collateral at full value upon the expiration of the Repo. 

4. Margin Reduction Trades are characterized as such because the new positions "offset" 

the existing trades. Brokers are not required to post margin for both long and short positions. As 

a result of the offsetting nature of such trades, the brokers' portfolio margin requirements are 

reduced. 

5. Hold-to-Maturity -- Under the HTM, Holdings Ltd. agreed to sell to the MFGI BID the 

HTM securities, with a simultaneous agreement of Holdings Ltd. to repurchase from the MFGI 

BID those sanle HTM securities at an agreed repurchase price, on an agreed date falling 

immediately prior to the maturity date of those securities. 

6. ISDA The International Swaps and Derivatives Association (ISDA) is a trade 

organization of participants in the market for over-the-counter derivatives. ISDA has created a 

standardized contract (the ISDA Master Agreement) used by counterparties that enter into 

derivatives transactions. 

7. Stock/Bond Borrow and Stock/Bond Loan are fue different sides to a "securities 

lending" transaction. Securities lending is used in the securities markets for specific pennitted 
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purposes, which include facilitating (i) settlement of a trade, (ii) delivery of a short sale, (iii) 

financing a security, or (iv) a loan to another borrower who is engaging in one of the 

aforementioned permitted purposes. 

The principal reason for borrowing a security is to cover a sbort position. Short-sellers 

are required to deliver the security they sold short. Thus, unless the short-seller holds a long 

position in the security, ofa "covered" position, the short-seller will have to borrow the security. 

At the end of the securities loan transaction, the borrower is required to retlm1 an equivalent 

security to the lender. Equivalent in this context means completely interchangeable. 

8. Intercompany Payable refers to a margin payment made from one affiliate of the MF 

Global Group to another affiliate under a Repo that is to be repaid upon maturity, provided that 

no default occurred under the Repo prior to such maturity date. Upon a default. the posted 

margin may be utilized by the non-defaulting party to cover costs associated with unwinding 

closing out the Repo, thereby reducing the Intercompany Payable. 
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EXHIBIT A 

SUMMARY OF CLAIMS 

78277.172AGRIC-48812 with DISTILLER

Jurisdiction / Entity No. of Claims Filed Amountl17 or To Be Filed 

Australia 4 $1,389,905 

Canada 5 $1,216,100 

Hong Kong 4 $1,180,965 

India 7 $832,541 

Japan 4 $739,777 

Mauritius 1 $55,444 

Singapore 3 $26,514,373 

United Kingdom 

MFGUK 10 $446,360,476 - $563,800,476 

Finance Europe 3 $346,717,352 

MFG Overseas 3 $5,815,380 

United Kingdom Sub-total 16 $798,893,208 - $916,333,208 

United States 68 $2,317,765,096 

Total 112 $3,148,587,409 - $3,266,027,409 

'" This chart provides a summary by jurisdiction of the claims filed or to be filed by the Debtors and their non-debtor affiliates against their form

This chart does not include an estimated value for unliquidated claims filed or to be filed against former affiliates or non-debtor third parties. 
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EXHIBITB 

CORPORATE ENTITY CHART 
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226 

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EXHlBlTC 

E&O POLICY TOWER 

78277.176AGRIC-48812 with DISTILLER

Total Aggregate Limit - $150MM 

f 

\ 

*MFG Assurance Company Limited is MF Global Holdings Ltd.'s wholly-owned captive insurance company domiciled in Bermuda 

and regulated by the Bermuda Monetary Authority 

n"'us DOES NOT REFLE;.CT ACTUAL TERMS_AND CONDIHONS. THIS IS Nqr INTENDED TO BE RELIED UPON AS AN INSU_RANCE POl-ICY 

Q8 
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EXHIBITD 

D&O POLICY TOWER 

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$25MM- { Independent 

Director 

Liability 

$50MM- { Side A 

Only 

$150MM -

Side A, 

B&C 

Total Aggregate Limit = $225MM 

PLEASE NOTE: THIS DOES NOT REFLECT ACTUAL TERMS AND CONDITIONS. 

THIS IS tiQ1.INTENDEO TO BE RELIED UPON AS AN INSURANCE POUCY OR LEGAL ADVICE, 
230 

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Item Case Titlell8 Case No. Court Nature of Class ,Action 

No. Alleged 

Claims'" 

1. DeAngelis v. Corzine]20 ll-civ-7866 SONY I C Y I 

I 

2. Accomazzo v, Corzine Il-civ-8467 SONY C Y 

3. Sapere CTA Fund. L.P, v, Corzine ll-civ-9114 SONY C N 

4. Henning-Carey Proprietary Trading, LIC 12-civ-3231 SONY C Y 

v, Corzine 

5. lvfarcin v, Corzine 12-civ-0499 SONY C Y 

I 

6. Wacker v, Corzine 12-civ-0705 SONY C Y 

7. Andrews v, Corzine 12-civ-0661 SONY C Y 

8. Paradigm Global Fund L Ltd. v, Corzine 12-civ-0740 I SONY C Y 

9. Paradigm Global Fund 1, Ltd. v, MFG 12-civ-2471 SONY C Y 

Assurance. Ltd, 

10. Tee v, Corzine 12-civ-0195 SONY C Y 

II. Summit Trust Co, v. Corzine 12-civ-0087 SONY C Y 

12. P terce v, Corzine 12-civ-3588 SONY C Y 

I 

118 The following chart is provided for informational purposes only, The inclusion of these cases is not, and should not be. construed as an admission of the 

the claims asserted against the defendants, All Debtors fully reserve all defenses, setoffs and counterclaims in conneclion with the actions listed herein, 

us HC' an MF Global Inc. customer complaint; !ISH a securities claim. 

120 Item numbers 2·23 in the above chart have been consolidated with item number I. DeAngelis p, Corzine. Case No. II·civ·7866, 

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Item 

No. 

Case 

13.1 Klinker v. J.P. Morgan Chase Co. 

14.1 Varner. Jr. v. Corzine 

15.1 Kennedy v. Corzine 16.1 Context Partners Fund, L.P. v. Corzine 

17.1 Rodriguez v. Corzine 

Case No. Court 

12-civ-3589 SONY 

12-civ-1722 SONY 

12-civ-1982 SONY 

11-civ-8888 SONY 

II-civ-8815 SONY 

Jr. as Trustee v. Corzine 11-civ-8823 SONY 

Espinoza v. Corzine ll-civ-7960 SONY 

20. Double D Trading, LLC v. Corzine 

21. IBEW Local 990 Pension Fund v. Corzine 

22. Teamsters Local Union No. 35 Pension 

Fundv.Dan 

23. Arvelo v. Corzine 24. Untitled 

25.1 In re MF Global Holdings Ltd, Investment 

Litigation 

ll-civ-8271 ll-civ-8401 

12-civ-I782 

12-civ-3884 

12-md-2338 

MOL No. 2338 

SONY SONY SONY SONY SONY 

MOL 

Nature .of I Class A

Alleged 

Claims"9 

C Y C Y 

C Y 

S Y 

S Y S S S S 

Overall Case 

No. for cases 

transferred by 

MDL2338 

Multi District 

Proceeding 

now 

effectively 

concluded 

Y 

Y 

Y 

Y 

NA NA 

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Item Case Title'" Case No. Court Nature of Class 

No. Alleged Claims!l9 

26. Butler, Jr. v. Corzine 653074/2011 New York County Unknown (no N 

Supreme Court complaint); 

dormant 

27. McHugh v. MF Global Holdings USA, 12-civ-0284 SDNY Employee N 

Inc. I claim 

28. Rifjice v. MF Global Holdings USA, Inc. ! 11-civ-0671 I SDNY I Employee N 

i i claim 

29; Caiascibelta, Liquidating Trustee v. MF I Case No. 09-14301, Bankr. D.N.J. 

I 

Fraudulent N 

Global I A.P. No. 11-01220 conveyance 

30. Ripes v. MF Global 13-148 E OJ209 II AAA (Chicago) N 

31. Ceko v. MF Global Holdings, Ltd. 121 10 CH 25758 Cook County N 

Circuit, II. 

32. Thielmann, et. al. v. MF Global Holdings, I A.P. No. 11-02880 Bankr. SDNY I WARN Y LTD, etal. I (MG) 

33. Ivan Schertzer v. Jon NFA 12-ARB-17 NFA Customer N 

claim 

121 This adversary proceeding was filed but never served on the defendants. 
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EXHIBIT F 

TRUSTEE'S WITNESS STATEMENT 
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STATEMENT OF LoUIS J. FREEH 

BEFORE THE UNITED STATES SENATE 

COMMITTEE ON BANKING, HOUSING & URBAN AFFAIRS 

APRIL 24, 2012 

Chairman Johnson, Ranking Member Shelby. and Distinguished Members of the 

Committee: 

My name is Louis J. Freeh and 1 am appearing before you today in my capacity as 

the Chapter II Trustee of MF Global Holdings Ltd. and five of its subsidiaries. 

On October 31, 2011. MF Global Holdings Ltd. and MF Global Finance USA 

Inc., referred to generally as "Finco", filed for bankruptcy under Chapter II of the 

Bankruptcy Code. Upon the commencement of the bankruptcy cases, the debtors 

operated as debtors-in-possession. Shortly thercafter. on November 7. 2011, the Office 

of the United States Trustee fbnned a creditors' committee representing the unsecured 

creditor constituency of the Chapter II debtor entities. Without any possibility of 

rehabilitation, the debtors and the creditors committee jointly tiled a motion to appoint a 

Chapter II Trustee. That motion was approved by the Court, and 1 was named as the 

Chapter II Trustee. My appointment was approved by the Bankruptcy Court effective as 

of November 28,2011. 

On December 19,2011, three additional MF Global cntities that are each indireet 

subsidiaries of the Chapter II parent filed for bankruptcy. 1 was subsequently appointed 

the Chapter II Trustee of those entities as well. In addition, on March 2, 2012, MF 

Global Holdings USA Inc., a direct subsidiary of the parent holding company debtor, 

filed fbr bankruptcy protection. On March 8, 2012 J was also appointed Chapter II 

Trustee of that estate. As is evident from this brieftimeline, we are in the early stages of 
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this bankruptcy proceeding, and there is still much information to be learned about the 

facts and circumstances that led to the collapse of MF Global. 

My duties as a Chapter II Trustee are set forth in Section 1106 of the Bankruptcy 

Code and include the obligation to investigate the acts, conduct, assets, liabilities and 

financial condition of the debtor, among other things. Unlike the SIP A Trustee, who is 

charged primarily with the return to customers of their investment property, the 

responsibility of the Chapter 11 Trustee is to maximize the value of the estate for the 

benefit of its creditors. 

Upon my appointment on November 28, 20 I L I began to assemble a team of 

legal advisors and financial consultants with extensive experience in bankruptcy matters, 

as it was widely believed that these proceedings were likely to be among the most 

complex bankruptcy matters in recent memory. We immediately began to assess the 

Debtors' state of affairs. Investigations into the collapse of MF Global were already 

being conducted by the CME, the SEC, the CFTC, and the SIPA Trustee, and at least two 

federal prosecutors' offices .. Customcrs ofMF Globallnc., the US broker dealer, had 

already commenced litigation against certain officers and directors of the broker dealer as 

well as those of the parent holding company debtor. 

Even before the commencement of my appointment, the Debtors were faced with 

a number of expansive requests for documents and information and my tearn immediately 

immersed its elfin a process that had already been unfolding for several weeks, in an 

dTort to learn what documents were in my possession, how records were maintained, and 

where files were kept. All of this was critical to our ability to fulfill our obligations as 

Chapter II Trustee. 
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These difficulties were exacerbated by the fact that what had once been operated 

as one large MF Global world-,vide organization suddenly became fragmented, virtually 

overnight. Separate proceedings were commenced for individual MF Global entities, 

most notably the SIPA proceeding here in the US and the UK administration (the UK 

equivalent of a US bankruptcy proceeding) of the UK broker dealer, which proceed 

independently from one another. The MF Global entities suddenly found themselves 

'without access to global systems previously utilized by the entire group of companies, 

because certain entity-wide systems such as accounting and email systems were owned 

and controlled by individual MF Global companies. 

With these difficulties, the Chapter 11 debtors had been able to assemble some 

materials before my appointment. I needed, hO\,iever, to ascertain what documents, files, 

information, and materials were the property of the Chapter 11 parent, versus property of 

the SIPA estate, the UK broker dealer estate, or perhaps jointly ovmed by a Chapter 11 

debtor and another estate. My advisory team was required to review thousands of pages 

of e-mails, documents and other files to detelwine (1) what those materials said, (2) 

whether the materials were responsive to any request by any governmental agency or the 

SIPA Trustee, and (3) whether any protectable corporate privilege existed. I then needed 

to implement a process to produce as quickly as we could documents requested as part of 

the investigations, but also in a manner that did not unnecessarily result in a broad waiver 

of any existing privilege. To do otherwise at this very early stage potentially could have 

been contrary to my obligations as Chapter 11 Trustee. Ultimately, these issues were 

resolved and the process moved forward expeditiously. 
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Although none of the entities for which I serve as Chapter 11 Trustee are 

regulated entities, the concerns of customers are nonetheless important to me and my 

advisors. With a backdrop of allegations of missing customer funds, the Bankruptcy 

Judge, the Honorable Martin Glenn, directed that my team perfonn an analysis of the 

approximately $25 million held in a cash collateral accOtmt owned by Fineo to detennine 

whether that cash included misappropriated MF Global Inc. customer property. 

Thereafter, my advisors poured through account data and transaction documents covering 

more than $3.5 billion in cash transfers, including transfers from accounts held by MF 

Global Inc. My advisors intervicwed and met with employees ofMF Global Inc. and 

advisors retained by the SlPA Trustee in order to ensure that an appropriate investigation 

had been conducted in preparing the report. Upon completing the analysis, which was 

shared with the SIPA Trustee. we concluded with no disagreement from the opinion of 

the SIP A Trustee that the cash collateral account did not include misappropriated or 

misdirected customer funds. 

Therc has been a great deal of publicity regarding thc shortfall in customer 

property. Without in any way diminishing the importance of the SIPA Trustce's 

obligation to locate and recover customer property. the Bankruptcy Code requires me to 

attempt to recover for the benefit of the creditors of the Chapter 11 estates monies that 

were obtained by the parent from third party lenders and investors and routed to the US 

broker dealer or elsewhere. In particular, and by way of example, during the month of 

October, 2011, in excess of$1 billion in cash was transferred from MF Global Holdings 

Ltd. and Finco to MF Global Inc. In addition, a substantial portion of the net proceeds 

from the $650 million ofMF Global bonds sold in 2011 to investors by MF Global 
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Holdings Ltd. had been transferred to MF Global Inc. Just as the SIP A Trustee is 

analyzing and investigating the whereabouts of funds and property entrusted by 

customers to the US broker dealer, so too my team must investigate the whereabouts of 

funds loaned to the US broker dealer for which the Chapter 11 estates remain liable to 

creditors and investors. 

In furtherance of my duty to investigate the affairs of the Chapter 11 debtors for 

which I serve as Trustee, my advisors and I meet regularly with our creditors committee 

as well as with representatives of the SIP A Trustee and the representatives of the foreign 

affiliates. These meetings are important for each of the estates to gather and share 

information with one another to facilitate a timely investigation of the facts and 

circumstances leading up to the bankruptcy and to dctelmine where the assets of the 

various estates may be located. 

The representatives orthe SIPA Trustee and my advisors often speak daily, have 

engaged in information sharing calls at least weekly, and are currently discussing 

coordinated efforts to assist one another in the administration of our respective estates. 

have found this cooperation to be invaluable, if not essential, to my ability to satisfy my 

fiduciary obligations as a Chapter 11 Trustec. I strongly believe that the interests of all of 

the various estates are bcst served by cooperating and sharing information to uncover 

precisely what led to the collapse ofMF Global. No one estate has all of the information, 

but together, the puzzle pieces can be put together. 

To be clear, the trustees and foreign administrators can and likely will assert 

different lcgal arguments to suppOli their claims to property located throughout the 

world. The bankruptcy court and perhaps other courts will make those legal 
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detemlinations. But the ultimate legal disputes that may arise should not serve as a 

baITier to sharing the eritical facts to tell the world what led to the collapse. 

Notwithstanding that we are operating under the supervision ofthe court, however, it is 

clear even at this early stage that the competing, and perhaps at times conflicting, 

obligations and duties of the two Trustees and various foreign administrators has and will 

continue to have the effect of extending the length of time necessary for all of the estates 

to conduct their investigations; to detelTl1ine the value and location of assets; and 

ultimately to make distributions to customers and/or creditors. 

At the present time, the Chapter 11 debtors employ approximately 15 nonexecutive individuals, most of whom had been employed by one of the debtors prior to 

the commencement of the bankruptcy cases. They, along with the remaining senior 

executives, continue to provide invaluable support in reconciling the debtors' books and 

records, closing open trades at the unregulated entities, the preparation of tax returns, and 

assisting in understanding the many complex pre-petition transactions between and 

among the various MF Global entities. 

In conversations about retaining these individuals and the knowledge they 

possess, I've discussed at various times the possibility of establishing a retention 

program. To be clear, no formal program was ever created for senior executives, nor was 

any motion ever tiled with the eourt for approval in connection with any retention 

program for senior executives. 

As we continue our investigation, we will be filing a report with the Bankruptcy 

Court on or before June 4, 2012. Mindful of this impending deadline, we have filed with 

the Bankruptcy Court a motion seeking authority to issue subpoenas for the production of 
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documents and examination of witnesses on a shortened timetable. That motion will be 

heard on April 25. 2012. We remain hopeful that parties will be cooperative during this 

investigation, but a foruml process will be utilized as necessary. 

It is important to note that the transparency of the bankruptcy process mandates 

that the work performed by the Chapter 11 Trustee is closely monitored by the Office of 

the United States Trustee and supervised by the United States Bankruptcy Court. 

I fully intend to fulfill my legal obligations as Chapter 11 Trustee as timely and 

transparently as I can responsibly do so, recognizing that all of my, and my professionals, 

actions must be consistent with the duties and obligations set forth in the Bankruptcy 

Code. 
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Hational Grain and Feed Association 

The Honorable Gary Gensler 

Chairman 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Dear Chairman Gensler: 

April 2, 2012 

The demise ofMF Global has shaken the confidence of many futures market participants with 

regard to the safety of segregated customer funds. Many NGF A-member companies continue to struggle 

to recover their funds and property. 

The NGFA respectfully submits the following preliminary recommendations as first steps to 

begin re-establishing confidence among futures market participants and to help safeguard customer funds. 

However, it is extremely important that these types of changes designed to enhance reporting, 

transparency and accountability, with recommendations we believe should be relatively easily 

implemented - are not the end of efforts to ensure that another MF Global-type situation never recurs. 

The NGFA's MF Global Task Force continues its work to examine various models for 

segregating and safeguarding customer funds; to explore the viabilitv and costs of extending insurance 

coverage to commodities accounts; and to analyze potential changes to the U.S. bankruptcy code to 

provide customers with needed protection, especially to protect customer segregated funds from being 

swept into liquidation proceedings and to ensure that "safe harbor" rules under the bankruptcy code aren't 

used to preclude retrieving customer funds. We expect to issne additional recommendations in these 

areas soon. In all these efforts. our bedrock principle will be: 

"Customers Corne First" 

TI,e preliminary recommendations of the NGF A are as follows: 

The CFTC should require daily reporting of segregated fund positions by FCMs to both their 

Self-Regulatory Organization (SRO) and to the CFTC. 

The CFTC should require daily reporting of segregated fund investments by FCMs, detailed by 

maturity and quality, to both their SRO and to the CFTC. 

The CFTC should conduct a formal review of FCM investment options for customer funds, with 

a view to whether the Commission shonld further limit allowable investments only to very safe 

instruments. 
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The CFTC should require reporting by FCMs to their SRO and to the CFTC of significant 

changes in investment policies or holdings. 

• FCMs should be required to provide greater transparency to customers of where customer funds 

are invested, potentially achieved through means such as posting on the CFTC web site, FCM 

web sites and/or publication in a customer "prospectus." 

The CFTC and SROs should enhance monitoring ofFCM reporting. Both regulators should 

conduct more detailed and more frequent audils, and unannounced spot checks ofFCMs. 

To assign accountability and to aid in establishing that fraudulent activity has occurred in the 

event customer t1.mds are misappropriated, CFTC should require the signature of two authorized 

principals of an FCM (e.g., CEO, CFO or other senior officers) to move funds out of segregated 

customer fund accounts to non-customer accounts. 

FCMs should be required to provide immediate notice to their SRO and to the CFTC if the firm 

moves more than some percentage, to be determined by the CFTC, of eXcess segregated funds to 

non-customer accounts. 

FCMs sbould be required by tbeir SRO to periodically certify policies and procedures to ensure 

the safeguarding of customer segregated accounts and compliance with applicable laws and 

regulations regarding such accounts. As part of all examinations by SROs, principals of FCMs 

must certifY that policies and procedures are adequate, effective and being observed by the FCM. 

At least annually, SROs should be required by CFTC to review policies and procedures to 

determine adequacy and compliance. 

A rigorous review by the CFTC of capital requirements for FCMs and broker-dealers needs to be 

conducted, with a view to scrutinizing the current practice of allowing double-counting of 

required capital when a finn operates as both an FCM and a broker-dealer. 

We appreciate the opportunity to share these recommendations with you, and we look forward to 

working with you to ensure that customer tunds truly are segregated and safe from future 

misappropriation. 

Sincerely, 

W1cd;t~ 

Matt Bruns 

Chair 

Risk Management Committee 

John Heck 

Chair 

Finance and Administration Committee 
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FrA 

June 14,2012 

Honorable Debbie Stabenow, Chairwoman 

Future:; Industry Assoc.iatkm 

Pcrml>ylvama 

Sm\~~ 600 

lC>()O{)··1~21 

Senate Committee of Agriculture, Nutrition, and Forestry 

328A Russell Senate Office Building 

Washington DC 20510-6000 

Re: Response to Bankruptcy of Ml'- Global Illc. 

Dear Chairwoman Stabenow: 

202.466,5460 

202.296.) W4 fnx 

w\liW.hltllrc:;indu"try.IJrg 

The Futures Industry Association ("FIN')! is pleased to submit this letter in response to your 

request for our evaluation of the current regulatory framework for the exchanged-traded 

derivatives markets established in the Commodity Exchange Act ("Act") and our 

recommendations on changes that would create stronger, safer markets and provide customers 

with greater protections. The bankruptcy of MF Global Inc. has been a personal tragedy for 

its thousands of customers who have suffered financially. It has also imposed a significant 

reputational cost on the exchange-traded markets generally, seriously damaging the 

confidence in the markets that is essential to their success. It is critical that the industry, 

working in coordination with Congress, the Commission and the several self-regulatory 

organizations ("SROs"), do everything it can to restore this confidence. 

As discussed in greater detail below, FIA has identified and recommended to the Commodity 

Futures Trading Commission ("Commission") and the several SROs, in particular, the 

National Futures Association ("NFA") and the Chicago Mercantile Exchange ("CME"), 

which serve as the designated self-regulatory organizations ("DSROs") for all FCMs, a 

number of amendments to the existing regulatory framework that will strengthen the 

protections afforded customers and customer funds and help restore confidence in the 

FIA is the leading trade organization for the futures, options and OTC cleared derivatives markets. It is 

the only association representative. of aU organizations that have an interest in the listed derivatives markets. Ilr;; 

membership includes the world's largest derivatives dearing finns as well as leading derivatives exchanges from 

more than 20 countries. As the principal members of the derivatives clearing organizations, our member firms 

playa critical role in the reduction of systemic risk in the financial markets. They provide the majority of the 

funds that support these clearinghouses and commit a substantial amount of their own capital to guarantee 

customer transactions. 

FIA's core constituency consists of futures commission merchants t'FC:tv1sH

)t and the primary focus of 

the association is the global use of exchanges~ trading systems and clearinghouses for derivatives transactions> 

FINs regular members, which act as the majority clearing members oflhe U.S. exchanges, handle more than 90 

percent of the customer funds held for trading on U.S. futures exchanges. 
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Honorable Debbie Stabenow 

June 14,2012 

Page 2 

markets. These recommendations have been well-received, and we are having productive 

discussions with the Commission and the SROs regarding their implementation. 

At this time, we have not identified any changes to the Act or the Bankruptcy Code that we 

believe are necessary to enhance protection of customers and customer funds. However, we 

continue to consider this issue, including evaluating proposals made by other market 

participants. We will advise you promptly in the event we detcnninc that legislative changes 

would be appropriate. 

We also note the recent publication of the Report of the Trustee's Investigation and 

Recommendations, which discloses greater details on the MF Global insolvency with 

recommended changes to prevent this sort of incident from reoccurring. FIA is pleased to 

report that several of its Initial Recommendations for Customer Funds Protection described 

below were adopted in the recommendations of tile Trustee. We continue to study the 

remaining recommendations of tile Trustee and will keep the Committee applized whether 

any of these additional recommendations may deserve further consideration. 

FIA's Initial Recommendations for Customer Funds Protection 

In January, FIA fonned a special committee, the Futures Markets Financial Integrity Task 

Force, to develop and recommend specific measures that could be implemented in the near 

tenn through both industry best practice and regulatory change to address the issues arising 

from the bankruptcy of MF Global. With the assistance of FINs Financial Management 

Committee, whose members include representatives of FIA member finns, derivatives 

clearing organizations and depository institutions, the Task Force released its Initial 

Recommendations for the Protection of Customer Funds on February 28, 2012 ("Initial 

Recommendations"), a copy of which is enclosed for your convenience. The Task Force 

concluded that, with the possible exception of the rules goveming the offer and sale for 

foreign futures and foreign options, the current regulatory franlework is fundamentally 

sound.2 The Initial Recommendations, therefore, are intended to enhance, not replace, the 

existing protections. 3 

The Initial Recommendations generally fell into three categories: (i) enhanced disclosure 

regarding customer funds protections; (Ii) enhanced reporting with regard to customer funds; 

and (iii) enhanced intemal controls. 

Enhanced disclosure regarding customer funds protections. The Task Force recognized 

that one of the more important services an FCM can provide its customers is to assure that 

these customers appreciate the limitations a~ well as the benefits of the customer funds 

protections set out in the Commodity Exchange Act and the Commission's rules. To address 

Our recommendations with respect to the foreign futures and foreign options rules are below. 

Several of the Initial Recommendations are similar to the recommendations in the Report of the MF 

Global Inc. Trustee's Investigation and Recommendatiolls issued Oil June 4, 2012 ('Trustee's Report"). 
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Honorable Debbie Stabenow 

June 14,2012 

Page 3 

those elements of the protections that are of immediate concern to customers, the FIA Law 

and Compliance Executive Committee prepared a memorandum setting out responses to 

frequently asked questions that FIA member firms have received from their customers. The 

Task Force determined that this document, which may be accessed on the FIA website, is an 

appropriate first step in providing customers critical information regarding customer funds 

protection.4 

Enhanced reporting with regard to customer funds. Commission rules currently require 

each FCM (i) to compute as of the end of each business day the amount of funds held, and 

required to be held, in segregation, and (ii) to maintain detailed records of the investment of 

customer funds held in accordance with Commission Rule 1.25. NFA has required those 

FCMs for which it is the DSRO to file a copy of each daily segregation calculation and a 

monthly report identifying the sectors in which the FCM invests customer funds, the amount 

of customer funds invested in each sector and the weighted average maturity of the assets held 

in each sector. However, this information has not been reported to the other DSROs or the 

Commission on a routine basis. 

In order to provide the Commission and all SROs with more up-to-date information on 

customer segregated funds, the Task Force recommended that the NFA reporting 

requirements be extended to all FCMs. Specifically, each FCM should be required to file 

with its DSRO its daily segregation calculation. Further, each FCM should be required to file 

twice monthly reports, as of each month-end and as of the 15th of each month (or the next 

business day), identifying: (i) the sectors in which the FCM invests customer funds; (ii) the 

amount of customer funds invested in each sector; and (iii) the weighted average maturity of 

the assets held in each sector. FIA understands that the CME and NF A, to the extent 

necessary, have adopted rules to implement these recommendations and expects that they will 

be approved by the Commission in the near future. 

Enhanced internal controls. The Task Force recognized that no rules can adequately protect 

customer funds unless the firms responsible for complying with those rules maintain strong 

internal controls.s The Task Force, therefbre, recommended that all FCMs document and 

implement policies and procedures regarding their internal controls. These recommendations 

reflect the best practices of those firms represented on the Financial Management Committee. 

Specifically, the Task Force recommended that: 

A copy of the Frequently Asked Questions available on the FIA website is also enclosed for your 

convenience. We view this document as a "living documene~ and will revIse the document as other questions are 

identified or as required by amendments to the Act or the Commission' s rules. In this regard. the Commission 

staff has asked us to prepare a question and answer that would expand on the risks associated with trading on 

foreign boards of trade. We expect to add this question and answer Shortly. 

As the Trustee's Report confirms, the lack of strong internal controls played a significant role in MF 

Global's bankruptcy. 
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Honorable Debbie Stabenow 

June 14,2012 

Page 4 

• The Commission propose a rule requiring each FCM to certify annually that there are 

(and have been since the last report) no material weaknesses in its internal controls 

regarding the computation of adjusted net capital and compliance with the provisions 

of the Act and the Commission's rules regarding the protection of customer funds. 

• The SROs require FCMs to document their policies and procedures that require an 

appropriate separation of duties among individuals responsible for compliance with 

the Act and the Commission's rules relating to the protection of customer funds, 

subject to appropriate oversight and review. 

• NFA consider whether it should develop an examination for chief financial officers of 

FCMs and other personnel responsible for compliance with the provisions of the Act 

and the Commission's rules relating to the calculation of the FCM's adjusted net 

capital and the protection of customer funds. 

• The SROs require each FCM to document its policies and procedures for valuing all 

securities held in the customer segregated account, including permitted investments 

under Commission Rule l.25, to assure that such securities are accurately valued and, 

in particular, are readily marketable and highly liquid. 6 

• The SROs require each FCM to document policies and procedures for selecting the 

depositories, including affiliates, with which the FCM deposits and maintains 

customer funds. 

• The SROs require each FCM to document its policies and procedures with respect to 

the FCM's determination of the appropriate targeted residual interest it maintains in 

the customer segregated account. 7 Such policies and procedures should be designed to 

reasonably assure that any withdrawals from the customer segregated account to the 

FCM's own account comprise the FCM's residual interest and will not result in a 

violation of the Act and the Commission's rules, or the FCM's targeted residual 

interest.s The FCM's chief financial officer or the chief financial officer's delegate 

must approve in writing any withdrawal fTOm the customer segregated account in 

FIA also recommended that the Commission amend Rule 1.25 to confirm that an FCM investing 

customer funds in accordance with the rule bears the risk of loss arising from any such investment and must use 

its own funds to restore the value of the customer segregated account. FlA believes that the responsibility of an 

FCM for losses incurred in connection with investments under Commission Rule 1.25 is clear and is implicit in 

the Act and the Commission' s rules. Nonetheless, because this question has been raised by certain customers, 

the Commission's rules should make this obligation explicit in order to remove any ambiguity. 

All such FCM funds are held for the exclusive benefit of the FClvI's customers while held in a customer 

segregated account. 

The Task Force believes that the Commission or DSRO should have authority to require an FCM to 

increase the amount of FCM funds held in segregation or to prevent an FCM fi'om withdrawing its residual 

interest only in careiully circumscribed circumstances and in accordance with carefully articulated objective 

standards. 
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Honorable Debbie Stabenow 

June 14,2012 

PageS 

violation of the policies and procedures, as well as any material change in the policies 

and procedures regarding the maintenance of the FCM's residual interest in the 

customer segregated account.9 

Foreign Futures and Foreign Options Secured Amount 

The Commission's foreign futures and options rules currently provide an FCM with greater 

flexibility in the manner in which it treats customers that trade on foreign boards of trade and 

the funds deposited by such customers to margin transactions on foreign boards of trade. For 

example: (i) foreign futures and foreign options customers are defined to include only those 

customers located in the US; (ii) only funds received fTom foreign futures and foreign options 

customers are required to be taken into account in calculating the foreign futures and foreign 

options secured amount in accordance with Rule 30.7; (iii) Rule 30.7 provides for an 

alternative calcnlation of the foreign futures and foreign options secured amount that does not 

assure protection of customer funds as fully as the net liquidating equity calculation that is 

used to determine the amount required to be segregated in connection with trading on US 

futures markets; and (iv) there is no limit on the amount of foreign futures and foreign options 

customer funds that may be held in permitted depositories outside of the US (although capital 

charges may apply). 

Providing such flexibility was reasonable in 1987, when the foreign futures and foreign 

options rules (part 30) were adopted. US participation in foreign markets was small and 

generally limited to commercial users. However, the international derivatives markets have 

changed significantly in the past twenty-five years. Although FIA understands that FCMs 

have generally adopted policies and procedures designed to provide protections to all 

customers trading on foreign boards of trade that are comparable to the protections afforded 

customers trading on US futures markets, the Task Force has recommended that the 

Commission publish for comment proposed amendments to the Part 30 rules that would: 

• revise the definition of a foreign futures and foreign options customer to include all 

customers, wherever located; 

• require all FCMs to calculate the foreign futures and foreign options secured amount 

using the net liquidating equity calculation; 10 

The Trustee's Report made a similar recommendation, FIA understands that both NFA and the CME 

have adopted rules to require the FCMs for which they are the DSRO to document their policies and procedures 

for detennining the appropriate targeted residual amount. Further, the CEO, CFO or, in the case of NFA, a 

tinancia! principal, would be required to approve in writing any withdrawal of a portion of the FCM's residua! 

amount, not for the benetit of customers, in excess of 25 percent of the residual amounl reflected in the FCM's 

most recent daily segregation calculation. Such wlitten approval would be required before tile withdrawal is 

made, followed by immediate notice to the FCM's DSRO, PIA fully supports these lUles. 

10 The Trustee's Report made a similar recommendation. 
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Honorable Debbie Stabenow 

June 14, 2012 

Page 6 

• hold funds deposited with the FCM for the purpose of trading foreign futures and 

foreign options in the US, except as reasonably expected to meet margin obligations 

on foreign boards oftrade;ll and 

• provide that, except as the Commission otherwise provides by order, only funds 

deposited or otherwise required to be held for the purpose of trading foreign futures 

and foreign options should be held in the foreign futures and foreign options secured 

amount. 

The Task Force further recommended that the Commission withdraw that portion of the 

Commission's September 30, 2003 order that authorizes firms that are subject to regulation by 

the FSA and have qualified for an exemption from registration as an FCM in accordance with 

Commission Rule 30.10 to offer their eustomers that meet the definition of an eligible 

contraet participant to opt out of the applieable UK segregations requirements. 

Conclusion 

We would welcome the opportunity to meet with you, Senator Roberts and your respective 

staffs at your convenience to discuss FIA' s recommendations in greater detail. 

FIA shares your commitment, and that of the Commission, the several SROs and all other 

industry participants, to understand fully the reasons underlying the bankruptey of MF Global 

Inc., the extent to which any shortcomings in the regulatory framework may have facilitated 

the conduct that led to its bankruptcy, and the appropriate regulatory response to such 

shortcomings. We look forward to working with you in this endeavor. 

Walter 1. Lukken 

President 

1I The appropriate excess is not amenable to a prescriptive rule, but will depend, for example, on the 

volatility from time-ta-time of the product.~ (raded, the type of collateml (cash or securities) deposited with the 

foreign broker. the time·zone in which the market is located, and the jurisdiction of the markets tmded. To the 

extent that a numerical standard is deemed necessary, the Task Force suggested that it should be no less than 50 

percent of the amount that an FCM is required to deposit with a foreign broker to maintain customer foreign 

futures and foreign options positions. This number is consistent with the provisions of Commission Rule 

1.l7(c)(5)(xiii)(C), which requires an FCM to take a tlve percent capital charge to the extent unsecured 

receivables with a foreign broker is greater than 150 percent of the current amount required to maintain futures 

and option positions in accounts with the foreign broker. 
AGRIC-48812 with DISTILLER

(251) 

QUESTIONS AND ANSWERS 

AUGUST 1, 2012 

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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Responses of Chairman Gary Gensler 

Ranking Member Pat Roberts 

1) It is my understanding that your staff feels they have gone as far as they can under the current 

bankruptcy regime by increasing collateral protection with the LSOC model the Commission adopted 

earlier this year. Is this correct? 

Response: Section 766(h) of the Bankruptcy Code requires that customer property be 

distributed on a pro rata basis, which limits the Commission's ability to provide for the 

individual segregation of customer collateral. The Commission cannot adopt regulations 

that would segregate collateral on an individual basis. The Commission adopted LSOC 

earlier this year, which enhanced the available protections for customer collateral for 

swaps. 

The Commission has directed staff to, among other things, consider the viability of 

adopting LSOC for futures customer funds. To that end, staff held a two-day customer 

protection roundtable in late February. At that roundtable, market participants discussed 

the benefits and disadvantages of adopting LSOC for futures. Participants largely 

acknowledged that the advantage would be enhanced protection for futures customers, 

while the disadvantage would be the risk and operating costs of adopting LSOC for 

futures, which could be greater in futures than in swaps. Given the issues identified at the 

roundtable, some markets participants requested that the Commission focus on 

implementing LSOC for swaps before further considering LSOC for futures. 

The Commission recently issued proposed rules to further enhance customer protections 

based on staff recommendations. The Commission looks forward to reviewing public 

comments on that rule making. 

2) We continue to hear from market participants, including NGFA today, that they want to be able to 

utilize tri-party custody arrangements for the cleared swaps and futures, much like Europe. Would this 

require legislative action, including a change to the Bankruptcy Code? 

Response: As I understand it, because of the pro rata distribution requirements, a triparty custody arrangement that would be expected to result in individualized protection 

for customers would not be permitted. 

3) If so, why haven't you asked Congress for this? Alii see you doing is approving initiatives the NFA has 

put in front of you. You have told this Committee you are in charge of the policy response to MF Global, 

despite being recused from the enforcement matters. If you are in charge, where is the response? If we 

need to do something why aren't you asking us? 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Responses of Chairman Gary Gensler 

Response: The Commission recently approyed a proposed rulemaking with enhancements 

to protections for futures customers and their funds. This proposal is about ensuring 

customers have confidence that the funds they post as margin or collateral are fully 

segregated and protected. 

It is the direct result of significant input from the public and market participants that the 

CFTC gathered throughout 2012, working with the Futures Industry Association, the NFA 

and the self-regulatory organizations. 

The proposal, which the CFTC looks forward to finalizing in 2013, would strengthen the 

controls around customer funds at futures commission merchants (FCMs). It also would 

set new regulatory accounting requirements that would provide stronger protections for 

customer money held by FCMs and would raise minimum standards for independent 

public accountants who audit FCMs. And it would provide regulators with daily direct 

electronic access to FCMs' bank and custodial accounts for customer funds. 

In addition, both the Commission and the relevant self-regulatory organizations (SROs; 

the NFA and the CME) have taken steps to improve the protections given to futures 

customer funds. These measures include improvements to the internal controls and 

transparency associated with customer funds held by futures commission merchants 

(FCMs). Commission staff hosted a public Roundtable on February 29 and March 1,2012 

to obtain input on customer protection issues from a broad cross-section of market 

participants, FCMs, clearing organizations and regulators. 

The Commission has been working closely with industry SROs, such as NFA, to implement 

improved protections for customer funds held with FCMs. NFA's Board of Directors 

appointed a Special Committee on the Protection of Customer Funds (Special Committee) 

to identify and recommend to the NFA Board rule amendments to enhance customer 

protection. The Special Committee's recommended amendments to NFA rules were 

approved both by NFA's Board and by the Commission. 

Specifically, NFA amended its rules regarding segregated funds to establish additional 

requirements for FCMs to enhance the safety and control of futures customer funds. The 

amended rules impose additional financial reporting requirements on FCMs regarding the 

holding and investment of futures customer funds. For example, NFA rules now require 

FCMs to have written policies and procedures regarding the maintenance of the FCM's 

residual interest in its customer segregated and Part 30 secured funds accounts. The 

FCM's policies and procedures must target an amount that the FCM seeks to maintain as 

its residual interest in these accounts and be designed to reasonably ensure that the FCM 

remains in compliance with segregation and secured amount requirements at all times. 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Responses of Chairman Gary Gensler 

Additionally, any FCM withdrawals in excess of 25 percent of the excess segregated or Part 

30 secured funds that are not for the benefit of customers must be pre-approved in writing 

by the FCM's senior management. Further, under NFA's amended rules, FCMs must file 

notice with NFA of any withdrawal of 25 percent or more of the excess segregated or Part 

30 secured amount funds that are not for the benefit of customers. 

Senator Kirsten Gillibrand 

1) I know you have used the CFTC's authority to take a number of steps to help improve oversight over 

the futures markets and customer funds in particular in the wake of MF Global and Peregrine's issues. 

In addition, to you anticipate making recommendations to Congress about more substantial steps that 

should be taken to address these issues and restore confidence in the futures market? 

Response: The Commission recently approved a proposed rulemaking with enhancements 

to protections for futures customers and their funds. 

This proposal is about ensuring customers have confidence that the funds they post as 

margin or collateral are fully segregated and protected. 

It is the direct result of significant input from the public and market participants that the 

CFTC gathered throughout 2012, working with the Futures Industry Association, the NF A 

and the self-regulatory organizations. 

The proposal, which the CFTC looks forward to finalizing in 2013, would strengthen the 

controls around customer funds at futures commission merchants (FCMs). It also would 

set new regulatory accounting requirements that would provide stronger protections for 

customer money held by FCMs and would raise minimum standards for independent 

public accountants who audit FCMs. And it would provide regulators with daily direct 

electronic access to FCMs' bank and custodial accounts for customer funds. 

In addition, both the Commission and the relevant self-regulatory organizations (SROs; 

the NFA and the CME) have taken steps to improve the protections given to futures 

customer funds. These measures include improvements to the internal controls and 

transparency associated with customer funds held by futures commission merchants 

(FCMs). Commission staff hosted a public Roundtable on February 29 and March 1,2012 

to obtain input on customer protection issues from a broad cross-section of market 

participants, FCMs, clearing organizations and regulators. 

The Commission has been working closely with industry SROs, such as NFA, to implement 

improved protections for customer funds held with FCMs. NFA's Board of Directors 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Responses of Chairman Gary Gensler 

appointed a Special Committee on the Protection of Customer Funds (Special Committee) 

to identify and recommend to the NFA Board rule amendments to enhance customer 

protection. The Special Committee's recommended amendments to NFA rules were 

approved hoth by NFA's Board and by the Commission. 

Specifically, NFA amended its rules regarding segregated funds to establish additional 

requirements on FCMs to enhance the safety and control of futures customer funds. The 

amended rules impose additional financial reporting requirements on FCMs regarding the 

holding and investment of futures customer funds. For example, NFA rules now require 

FCMs to have written policies and procedures regarding the maintenance of the FCM's 

residual interest in its customer segregated and Part 30 secured funds accounts. The 

FCM's policies and procedures must target an amount that the FCM seeks to maintain as 

its residual interest in these accounts and be designed to reasonably ensure that the FCM 

remains in compliance with segregation and secured amount requirements at all times. 

Additionally, any FCM withdrawals that are in excess of 25 percent ofthe excess 

segregated or Part 30 secured funds that are not for the benefit of customers must be preapproved in writing by the FCM's senior management. Further, under NFA's amended 

rules, FCMs must file notice with NFA of any withdrawal of 25 percent or more of the 

excess segregated or Part 30 secured amount funds that are not for the benefit of 

customers. 

2) In light of the events and MF Global and Peregrine - in particular, what appears to be nearly two 

years of outright fraud at Peregrine - do you believe the CFTC has adequate resources for oversight to 

police the futures markets? 

Response: Confidence in the futures and swaps markets is dependent upon a well-funded 

regulator and the CFTC is a good investment of taxpayer dollars. Its hardworking staff is 

just 10 percent more than what we had at our peak in the 1990s though the futures market 

has grown fivefold. The CFTC also is now responsible for the swaps market - eight times 

bigger than the futures market. 

The Commission's limited resources have historically not allowed for direct oversight of 

FCMs. There are 46 staff members, including 35 audit staff, on the CFTC's examinations 

team who oversee four SROs, which in turn have responsibilities for more than 4,341 

registered persons. In addition, agency responsibilities are expanding to include reviews of 

many new market participants. For instance, there are currently 115 FCMs, and staff 

estimates a similar number of swap dealers will ultimately register. More frequent and indepth risk-based, control-oriented examinations are necessary to assure the public that 

firms have adequate capital, as well as systems and procedures in place to protect customer 

money. Greater coverage by regulators -like having more cops on a beat - will improve 

the integrity and heighten the deterrent effect of the review process. 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Responses of Chairman Gary Gensler 

The President's FY2013 budget, following a similar request in 2012, asked for $308 million, 

investing in our technology and human resonrces, to better protect the public. 

The Dodd-Frank Act significantly expands the Commission's responsibilities. Market 

participants depend on the credibility and transparency ofwell-regnlated U.S. futures and 

swaps markets. Without sufficient funding for the CFTC, the nation cannot be assn red that 

the agency can adequately oversee these markets. 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Trustee James Giddens 

Ranking Member Pat Roberts 

1) At the time of the MF Global bankruptcy, did the Commodity Exchange Act's Rule 1.25 

contribute to the loss of MF Global customers' segregated funds via investment losses? Would 

the CFTC's changes to permitted investments under Rule 1.25 have changed the loss of 

customer funds? 

James W. Giddens, Trustee for the SIPA liquidation of MF Global Inc. 

There was a reference to the change in the nature of the permitted investments under Rule 1.25 

In the report ofthe Trustee's Investigation and Recommendations, filed with the u.s Bankruptcy 

Court for the Southern District of New York on June 4, 2012, but the investigation did not 

uncover any indication that the nature of the investments of MFGI customers' funds was a cause 

of the shortfall in customer funds. Accordingly, I do not believe that Rule 1.25 contributed to 

the loss of MF Global customers' funds via investment losses, nor do I believe that, had the 

amended rule been in effect prior to October 31, 2011, the shortfall would have been 

prevented. 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Commissioner Jill Sommers 

Ranking Member Pat Roberts 

1) Firms will have to register as swap dealers in early October. Currently pending are a proposed 

exemptive order and proposed guidance on the cross-border application of the CFTC's rules, with 

comments due by August 13th and 27th, respectively. Even with the exemptive relief, firms are being 

given little certainty and time with which to make major decision, such as which entity to register and to 

whom supervisory responsibilities should be assigned. Don't you find this problematic? 

Answer: Commission staff recently issued a Frequently Asked Questions document clarifying that, 

although the swap dealer registration regulations go into effect on October 12, under the final swap 

dealer definitional rule potential swap dealers will have until two months after the end of the month in 

which they surpass an $8 billion level of swap dealing to register. This means that the largest swap 

dealers will not have to register until December 31, and smaller swap dealers may have more time. 

Even with a December 31 deadline, however, I believe firms will not have sufficient time in which to 

make decisions regarding which entities to register or how they may have to reorganize their businesses 

to transfer their swap dealing activity to particular subsidiaries, affiliates, or departments for purposes 

of registration. I also believe it is problematic for firms to make decisions regarding whether to register 

as swap dealers before we have finalized critical rules such as capital and margin. The Commission may 

not complete work on those rules until early 2013, yet we have only extended the registration 

requirement until December 31, 2012. 
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Senate Committee on Agriculture, Nutrition & Forestry 

Examining the Futures Markets: Responding to the Failures of MF Global and Peregrine 

Financial Group 

Questions For The Record 

August 1, 2012 

Mr. Dan Roth 

Senator Kirsten Gillibrand 

1) In light of the NFA's role in overseeing Peregrine Financial, in hindsight were there 

indications that you believe the NFA could have or should have looked at to recognize 

the fraudulent practices being engaged in? 

NFA's Response: 

In our August 31st letter to Chairwoman Stabenow, NFA responded to purported 

"red flags" that were reported in the press or noted during the August 1st hearing 

entitled Examining the Futures Markets: Responding to the Failures of MF Global 

and Peregrine Financial Group ("PFG") before the U.S. Senate Committee on 

Agriculture, Nutrition, and Forestry. NFA's responses to the purported "red 

flags" are outlined below. 

• Bank confirmations sent to a PO Box. 

NFA's Response: NFA mailed bank confirmation requests for PFG's 

customer segregated funds account to a PO Box address. There is nothing 

suspicious about a bank using a PO Box to receive written confirmation 

requests. Communications sent to the street address of a financial 

institution employing large numbers of persons can easily get lost within 

the institution; as a result, it is not uncommon for major financial 

institutions to use PO Boxes for mail receipt to manage the high volume of 

mail received on a daily basis to ensure that it gets to the right place. 

• The auditor for PFG was a sole practitioner who operated out of her home. 

NFA's Response: According to NFA's records, Veraja-Snelling & Company 

signed the certified financial statements for PFG from 2006 through 2011 

that were submitted to NFA. Prior to 2006, NFA's records indicate that this 

firm had several related predecessor firms with multiple partners and 

offices in the Chicago Loop and suburbs. The CFTC imposes standards on 

firms that act as certified public accountants for FCMs, IBs and CPOs, 

which are set forth in CFTC Regulation 1.16. NFA (as well as the SROs) has 

always followed those standards when determining whether a CPA is 

qualified to prepare the annual certified report for an NFA Member. VerajaSnelling & Company is licensed in the State of Illinois and met the 
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qualifications of accountants pursuant to CFTC Regulation 1.16. The use 

of a long-standing auditor who met CFTC standards was not a red flag. As 

noted below, NFA is working with other SROs and the CFTC to raise the 

requirements for CPAs that prepare certified financial statements for FCMs. 

• According to a report from the Wall Street Journal, in the spring of 2011, NFA 

auditors were informed of a significant shortfall of around $200 million of 

customer funds in a Peregrine account. 

NFA's Response: Our investigation of this event is continuing, but at this 

point we have tentatively determined that on Friday May 13, 2011 at 2:08 

PM CST, an email purportedly from Hope Timmerman of US Bank to Susan 

O'Meara, Chief Compliance Officer at Peregrine, was copied to an NFA 

auditor. Attached to the May 13, 2011 email was a PDF document which 

contained alleged confirmations of both PFG's US Bank customer 

segregated and house accounts. The US Bank PFG segregated bank 

account balance was filled in with a hand-written balance of $7,181,336.36. 

This confirmation had the PO Box 706 address on it and also identifies the 

account as "Peregrine Financial Group Inc Customer Segregated Account" 

(#621011845) and asks for information as of NFA's audit date of March 31, 

2011. The email chain suggests that O'Meara had been corresponding with 

Timmerman and she had previously attached a copy of the confirmation 

template that NFA had completed with the PFG US Bank customer 

segregated account's information. 

On Monday May 16, 2011 at 1 :56 PM CST (the next business day), NFA 

received a two-page fax which was delivered via email. The first page 

purports to be on US Bank letterhead and contains the PO Box 706 

address, as well as a "US Bank, Cedar Falls IA" line across the top of the 

page. The cover page states that the two-page document is from Hope 

Timmerman, Asst. Relationship Manager, US Bank, Cedar Falls Iowa, and 

states that Timmerman's fax is 319-277-2106. The memo on the cover page 

states: 

"Re: Corrected Bank Balance Confirmation 

Attached please find the corrected copy of the Bank Balance 

Confirmation for the Peregrine Financial Group account #621 011845. 

Customer Segregated Account. 

Hope Timmerman" 

The second page of the fax contains all of the same information as the 

emailed confirmation - including the same PO Box, same signature 

authorization from the bank of Timmerman, same audit date, same 

signature authorization by PFG, and the same information that this was a 
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segregated account. The handwritten balance included in this confirmation 

was $218,650,550.96, which agreed to the balance ofthe purported bank 

statement provided by the firm to NFA as of March 31, 2011. 

During the time that NFA received both confirmations, NFA was in the 

middle of conducting on-site audit fieldwork of PFG. 

• Press reports stated that NFA was put on notice - in 2004 and again in 2009-

of PFG's fraud. Specifically, a New York Times article stated that in 2004 a 

PFG client sent a letter to NFA and the CFTC asking them to intervene to 

prevent the firm from misusing its customers' money. The article further 

states that five years later (2009), an anonymous tipster wrote to NFA asking it 

to review PFG's bank account information for accuracy. 

NFA's Response: NFA read these press reports and asked the reporter to 

see copies of these purported 2004 and 2009 communications, but he 

declined. Based on a search of NFA's records to date, NFA has found no 

record of receiving either the supposed 2004 letter or the supposed 2009 

anonymous complaint. 

a) If so, what measures could we take to ensure that such indications are 

appropriately reviewed and investigated to identify these issues earlier? One 

possible thought might be the use of a well-respected accountant - as I 

understand Peregrine's financial statements were audited by a small scale firm 

that appears to have had limited experience overseeing entities on the scale of 

Peregrine. 

NFA's Response: 

In NFA's July 30th letter to Senator Harkin and in NFA's August 1st testimony 

before the U.S. Senate Committee on Agriculture, Nutrition and Forestry, there 

are four key points that we have tried to make clear: 

• For our markets to thrive, customers must know that their funds are safe. 

• It is the job of the regulators to provide the public with the highest level of 

assurance possible regarding the financial integrity ofthe futures markets. 

• NFA followed standard and widely accepted auditing practices and 

procedures in the examinations of Peregrine. Those standard procedures 

failed in this case and simply were not good enough to penetrate the well 

of forged documents that were presented to NFA. Wasendorf fooled us 

and fooled us for longer than we would have liked. 
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• The time tested measures to monitor the safety of customer segregated 

funds have to be improved. 

We have to find better ways to do our job and have been developing proposals to 

do that since the demise of MF Global. NFA has adopted the following changes 

and initiatives to further safeguard customer funds: 

MF Global Rule-All FCMs are now required to provide regulators with 

immediate notification if they draw down their excess segregated funds 

(funds deposited by the firm into customer segregated accounts to guard 

against customer defaults) by 25% in any given day. Such withdrawals 

must be approved by a financial principal ofthe firm and the principal must 

certify that the firm remains in compliance with segregation requirements. 

Status: Rule has been approved by NFA and the CFTC and became 

effective September 1. 

FCM Transparency-All FCMs must file certain basic financial information 

about the firm with NFA and that information will be posted on NFA's web 

site. The information includes data on the FCM's capital requirement, 

excess capital, segregated funds requirement, excess segregated funds 

and how the firm invests customer segregated funds. Similar information 

regarding "secured amount funds" held for trading on foreign exchanges 

will also be displayed on NFA's web site. Status: Rule has been approved 

by NFA and the CFTC. Information will be displayed on NFA's web site by 

November 1. 

Electronic Confirmation of Segregated Bank Balances-NFA's switch to an 

e-confirmation process of segregated fund balances held in banks 

uncovered the fraud at Peregrine. NFA has since conducted econfirmations for all segregated bank accounts maintained by FCMs for 

which NFA is the DSRO as of June 29, 2012 and noted no violations of 

segregation requirements. NFA continues to utilize e-confirmations in its 

ongoing audits of the FCMs for which it is the DSRO. Status: Completed 

and ongoing. 

Granting Regulators Online. View-Only Access to Customer Segregated 

Accounts-All FCMs will be required to grant their Designated SelfRegulatory Organization online, view-only access to information on 

customer segregated bank accounts. SROs will be able to check balances 

in customer segregated bank accounts at any time without notice to either 

the FCM or the bank. Status: Rule has been approved by NFA's Board and 

is pending approval at the CFTC. We expect the rule to be approved and 

implemented this year. 
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Daily Confirmations from all Segregated Funds Depositories-NFA and the 

CME have committed to building a system that will provide for all 

depositories holding customer segregated funds on behalf of an FCM to 

report balances daily to SROs. The SROs will perform an automated 

comparison to the reports filed by the FCMs to identify any suspicious 

discrepancies. Status: This program will be fully operational in 2013. 

Raising the Standards for CPAs that Certify FCM Financial StatementsNFA is working with other SROs and the CFTC to raise the eligibility 

requirements for CPAs that prepare annual certified financial statements 

for FCMs. Status: Enhanced requirements will be addressed through 

CFTC and/or NFA rulemaking. 

Internal Controls Guidance-NFA, the CME and other SROs are developing 

more specific and more stringent standards for the internal controls that 

FCMs must follow to monitor their own compliance with regulatory 

requirements. Status: Proposals will be considered at NFA s November 

Board meeting. 

Insurance Study-The possibility of providing some form of insurance 

protections for futures customer accounts, whether based on a SIPC-type 

model or otherwise, has been discussed. Unfortunately, there has been no 

formal study of the issue or calculation of the costs since 1985. Status: 

NFA is committed to commission such a study either on its own or with 

other industry groups. 

Review of NFA Audit Procedures-A special committee consisting of NFA's 

public directors has commissioned an independent review of NFA's audit 

procedures in light of the Peregrine fraud. The study is being conducted 

by Berkeley Research Group, the same firm the SEC retained after the 

Madoff scandal. Status: The study will be completed by the end of 2012. 

The process of refining and improving regulatory protections is ongoing and the 

initiatives outlined above do not mark the end of our efforts. The MF Global and 

Peregrine customer losses are a painful reminder that we must continuously 

improve our surveillance, audit and fraud detection techniques to keep pace with 

changing technology and an ever-more-complicated financial marketplace. We 

know that we can never completely eliminate fraud, but we must continue to 

adopt rules and surveillance techniques to try to eliminate the possibility that this 

could happen again. We will continue to work with the CFTC, the industry and 

Congress to ensure that customers have justified confidence in the integrity of 

U.S. futures markets. 
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Senator Charles Grassley 

One of the things that continues to trouble me are reports that red flags were raised 

about Peregrine Financial, and those red flags were ignored. For instance, it's been 

reported that in March of 2012, a confirmation form was faxed directly from U.S. Bank to 

the National Futures Association showing there was about $7 million in the bank 

account deSignated for segregated customer money. Then shortly thereafter, either that 

day or the following business day, after finding out U.S. Bank had sent the confirmation, 

Mr. Wasendorf Sr. sent another confirmation showing there was approximately $220 

million in the account designated for customer money. 

1) Is this factual account accurate? Did U.S. Bank send a confirmation showing only 

about $7 million customer money in March of 2012? 

a) What did the National Futures Association do to follow-up on the contrasting 

confirmation reports? 

b) Did anyone from NFA call U.S. Bank to verify how much was in the account? 

If not, why not? 

NFA's Response: 

In letters to both Chairwoman Stabenow and Senator Harkin, NFA provided the 

following response to the purported red flag regarding a "corrected confirm" 

received in May 2011: 

Our investigation of this event is continuing, but at this point we have 

tentatively determined that on Friday May 13, 2011 at 2:08 PM CST, an email 

purportedly from Hope Timmerman of US Bank to Susan O'Meara, Chief 

Compliance Officer at Peregrine, was copied to an NFA auditor. Attached 

to the May 13, 2011 email was a PDF document which contained alleged 

confirmations of both PFG's US Bank customer segregated and house 

accounts. The US Bank PFG segregated bank account balance was filled 

in with a hand-written balance of $7,181,336.36. This confirmation had the 

PO Box 706 address on it and also identifies the account as "Peregrine 

Financial Group Inc Customer Segregated Account" (#621011845) and asks 

for information as of NFA's audit date of March 31, 2011. The email chain 

suggests that O'Meara had been corresponding with Timmerman and she 

had previously attached a copy ofthe confirmation template that NFA had 

completed with the PFG US Bank customer segregated account's 

information. 

On Monday May 16, 2011 at 1:56 PM CST (the next business day), NFA 

received a two-page fax which was delivered via email. The first page 

purports to be on US Bank letterhead and contains the PO Box 706 
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address, as well as a "US Bank, Cedar Falls IA" line across the top of the 

page. The cover page states that the two-page document is from Hope 

Timmerman, Asst. Relationship Manager, US Bank, Cedar Falls Iowa, and 

states that Timmerman's fax is 319-277-2106. The memo on the cover page 

states: 

"Re: Corrected Bank Balance Confirmation 

Attached please find the corrected copy of the Bank Balance 

Confirmation for the Peregrine Financial Group account #621011845. 

Customer Segregated Account. 

Hope Timmerman" 

The second page of the fax contains all of the same information as the 

em ailed confirmation - including the same PO Box, same signature 

authorization from the bank of Timmerman, same audit date, same 

signature authorization by PFG, and the same information that this was a 

segregated account. The handwritten balance included in this confirmation 

was $218,650,550.96, which agreed to the balance of the purported bank 

statement provided by the firm to NFA as of March 31, 2011. 

During the time that NFA received both confirmations, NFA was in the 

middle of conducting on-site audit fieldwork of PFG. 

NFA did not call U.S. Bank to look into the two different confirmations. 

With hindsight, I wish we would have followed up on it and possibly 

discovered PFG's fraud a year earlier. 

Your question makes reference to reports that red flags were raised about 

Peregrine. In our August 31st letter to Chairwoman Stabenow, NFA responded to 

purported "red flags" that were reported in the press or noted during the August 

1st hearing entitled Examining the Futures Markets: Responding to the Failures 

of MF Global and Peregrine Financial Group ("PFG") before the U.S. Senate 

Committee on Agriculture, Nutrition, and Forestry. NFA's responses to the 

purported "red flags" are outlined below. 

• Bank confirmations sent to a PO Box. 

NFA's Response: NFA mailed bank confirmation requests for PFG's 

customer segregated funds account to a PO Box address. There is nothing 

suspicious about a bank using a PO Box to receive written confirmation 

requests. Communications sent to the street address of a financial 

institution employing large numbers of persons can easily get lost within 

the institution; as a result, it is not uncommon for major financial 
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institutions to use PO Boxes for mail receipt to manage the high volume of 

mail received on a daily basis to ensure that it gets to the right place. 

• The auditor for PFG was a sole practitioner who operated out of her home. 

NFA's Response: According to NFA's records, Veraja-Snelling & Company 

signed the certified financial statements for PFG from 2006 through 2011 

that were submitted to NFA. Prior to 2006, NFA's records indicate that this 

firm had several related predecessor firms with multiple partners and 

offices in the Chicago Loop and suburbs. The CFTC imposes standards on 

firms that act as certified public accountants for FCMs, IBs and CPOs, 

which are set forth in CFTC Regulation 1.16. NFA (as well as the SROs) has 

always followed those standards when determining whether a CPA is 

qualified to prepare the annual certified report for an NFA Member. VerajaSnelling & Company is licensed in the State of Illinois and met the 

qualifications of accountants pursuant to CFTC Regulation 1.16. The use 

of a long-standing auditor who met CFTC standards was not a red flag. As 

noted below, NFA is working with other SROs and the CFTC to raise the 

requirements for CPAs that prepare certified financial statements for FCMs. 

• Press reports stated that NFA was put on notice - in 2004 and again in 2009-

of PFG's fraud. Specifically, a New York Times article stated that in 2004 a 

PFG client sent a letter to NFA and the CFTC asking them to intervene to 

prevent the firm from misusing its customers' money. The article further 

states that five years later (2009), an anonymous tipster wrote to NFA asking it 

to review PFG's bank account information for accuracy. 

NFA's Response: NFA read these press reports and asked the reporter to 

see copies of these purported 2004 and 2009 communications, but he 

declined. Based on a search of NFA's records to date, NFA has found no 

record of receiving either the supposed 2004 letter or the supposed 2009 

anonymous complaint. 

I see from your testimony before the House Agriculture Committee last week you take 

exception with some people implying the Peregrine fraud would have been uncovered 

sooner had government regulators been serving as the frontline regulators. Your quote 

was ''The suggestion that the fraud at Peregrine would have been uncovered more 

quickly if it had been government regulators has no rational basis in fact." 

It seems you have spent a fair amount of time trying to deflect blame in this whole 

matter. You have repeatedly cast this fraud by Mr. Wasendorf as elaborate or complex 

- which it wasn't. He was forging documents, plain and simple. And if auditors would 

have simply called the bank, it could have discovered there was a problern. 
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When Chairman Gensler testified before this committee a couple weeks ago, we at 

least heard from him an admission the system failed Peregrine customers here. But we 

really haven't heard any admission from NFA that NFA folks mishandled the oversight 

of Peregrine. I suppose that's because you're afraid such an admission will add fuel to 

the fire for those who don't think self-regulation works. 

I'm not passing judgment on self-regulation, and at this point, I don't think we need to 

change anything in the law. But our regulators need to enforce the laws that exist, and 

conduct proper oversight. That goes for the self-regulated organizations such as NFA, 

as well as the CFTC. 

2) Do you think NFA failed in its duty to properly oversee the activities of Peregrine 

Financial? Or are you satisfied with the fact it took NFA 20 years to uncover this fraud? 

I have noticed that the National Futures Association has patted itself on the back, and 

you even have in your written testimony, that "NFA's actions are what uncovered the 

fraud at Peregrine." 

But NFA didn't uncover this fraud for 20 years. So to say NFA's actions uncovered the 

fraud doesn't seem too reassuring to myself, or to the people who lost money from the 

Peregrine Financial collapse. 

NFA's Response: 

NFA followed standard and widely accepted audit procedures in our 

examinations of Peregrine. But to assure ourselves of that, a special committee 

of NFA's public directors commissioned an independent review of NFA's audit 

practices and procedures, and the execution of those procedures, in light of the 

Peregrine fraud. Berkeley Research Group, the same firm the SEC retained after 

the Madoff scandal, is conducting the review. The study will be completed by the 

end of 2012. 

NFA has not tried to deflect blame in this matter. Our written testimony 

submitted for the August 1st hearing before the U.S. Senate Committee on 

Agriculture, Nutrition and Forestry states the following: " •.. nothwithstanding it 

was NFA's actions that uncovered this fraud in our most recent exam, the simple 

fact is that Wasendorfs forgeries fooled us, and fooled us for longer than any of 

would like." Dan Roth's oral testimony further states that" ... those standard 

audit procedures just were not good enough. He beat us. He fooled us. He 

fooled us for far too long. We have to do better. " 

We are implementing better ways to monitor members for compliance, espeCially 

with regard to customer segregated funds, and are looking for even more ways to 

improve monitoring of firms for compliance with the rules. The process of 

refining and improving regulatory protections is ongoing and the initiatives 

outlined below do not mark the end of our efforts. The MF Global and Peregrine 
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customer losses are a painful reminder that we must continuously improve our 

surveillance, audit and fraud detection techniques to keep pace with changing 

technology and an ever-more-complicated financial marketplace. We know that 

we can never completely eliminate fraud, but we must continue to adopt rules and 

surveillance techniques to try to eliminate the possibility that this could happen 

again. 

MF Global Rule-All FCMs are now required to provide regulators with 

immediate notification if they draw down their excess segregated funds 

(funds deposited by the firm into customer segregated accounts to guard 

against customer defaults) by 25% in any given day. Such withdrawals 

must be approved by a financial principal of the firm and the principal must 

certify that the firm remains in compliance with segregation requirements. 

Status: Rule has been approved by NFA and the CFTC and became 

effective September 1. 

FCM Transparency-All FCMs must file certain basic financial information 

about the firm with NFA and that information will be posted on NFA's web 

site. The information includes data on the FCM's capital requirement, 

excess capital, segregated funds requirement, excess segregated funds 

and how the firm invests customer segregated funds. Similar information 

regarding "secured amount funds" held for trading on foreign exchanges 

will also be displayed on NFA's web site. Status: Rule has been approved 

by NFA and the CFTC. Information will be displayed on NFA's web site by 

November 1. 

Electronic Confirmation of Segregated Bank Balances-As mentioned 

earlier,NFA's switch to an e-confirmation process of segregated fund 

balances held in banks uncovered the fraud at Peregrine. NFA has since 

conducted e-confirmations for all segregated bank accounts maintained by 

FCMs for which NFA is the DSRO as of June 29, 2012 and noted no 

violations of segregation requirements. NFA continues to utilize econfirmations in its ongoing audits of the FCMs for which it is the DSRO. 

Status: Completed and ongoing. 

Granting Regulators Online, View-Only Access to Customer Segregated 

Accounts-All FCMs will be required to grant their Designated SelfRegulatory Organization online, view-only access to information on 

customer segregated bank accounts. SROs will be able to check balances 

in customer segregated bank accounts at any time without notice to either 

the FCM or the bank. Status: Rule has been approved by NFA's Board and 

is pending approval at the CFTC. We expect the rule to be approved and 

implemented this year. 
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Daily Confirmations from all Segregated Funds Depositories-NFA and the 

CME have committed to building a system that will provide for all 

depositories holding customer segregated funds on behalf of an FCM to 

report balances daily to SROs. The SROs will perform an automated 

comparison to the reports filed by the FCMs to identify any suspicious 

discrepancies. Status: This program will be fully operational in 2013. 

Raising the Standards for CPAs that Certify FCM Financial StatementsNFA is working with other SROs and the CFTC to raise the eligibility 

requirements for CPAs that prepare annual certified financial statements 

for FCMs. Status: Enhanced requirements will be addressed through 

CFTC and/or NFA rulemaking. 

Internal Controls Guidance-NFA, the CME and other SROs are developing 

more specific and more stringent standards for the internal controls that 

FCMs must follow to monitor their own compliance with regulatory 

requirements. Status: Proposals will be considered at NFA's November 

Board meeting. 

Insurance Study-The possibility of providing some form of insurance 

protections for futures customer accounts, whether based on a SIPC-type 

model or otherwise, has been discussed. Unfortunately, there has been no 

formal study of the issue or calculation of the costs since 1985. Status: 

NFA is committed to commission such a study either on its own or with 

other industry groups. 

3) NFA claims it was its request for Peregrine to move to this electronic reporting 

system that caused Mr. Wasendorfs fraud to unravel. However, while the NFA was 

asking Peregrine to move to this electronic system, NFA was not requiring every futures 

commission merchant it monitors to switch to this electronic system, correct? Or at 

least not as of a month or so ago? And in fact, your written testimony suggests there 

are still FCMs not using the electronic reporting, is that correct? 

a) How is it that you aren't requiring all FCMs to use this electronic reporting, 

given the events of Peregrine Financial? 

b) How is it that in 2011 the NFA was still using fax machines to verify the 

existence of billions of dollars in customer funds? 

NFA's Response: 

As general matter, prior to 2012, the process of confirming bank balances directly 

with the bank was based on written paper confirmation requests mailed to the 

bank with a paper response mailed directly to NFA from the bank. The 
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acceptance of a fax em ailed to NFA was an aberration and as I mentioned earlier, 

with hindsight, I wish NFA had followed up in this instance. 

In early 2012, NFA began using Confirmation.com in all FCM audits, for any banks 

that are part of Confirmation.com's network. In making this decision, NFA felt the 

generally accepted paper based confirmation process that we relied upon for 

years was labor intensive and could cause delays in the audit process. 

Immediately upon the uncovering of the Peregrine fraud, NFA agreed with the 

CME to perform an immediate confirmation of all customer segregated bank 

accounts as of June 29, 2012 for all of our FCM Members using the e-confirmation 

process. There were a handful of banks that were not Confirmation.com 

subscribers and NFA had to rely on paper confirmations for those. NFA 

completed the e-confirmation process for all segregated bank accounts 

maintained by FCMs for which NFA is the DSRO and noted no violations of 

segregations requirements. 

In order to make better use of technology, NFA's Board recently approved a rule 

that would require FCMs to provide online, view-only access to bank balances for 

customer segregated and secured amount accounts to the firm's DSRO. Under 

this rule, SROs will be able to check any customer segregated bank account 

balance for any FCM any time, without asking the firm or the bank, and compare 

those balances to the firm's daily segregation report. This rule is pending 

approval at the CFTC. We expect the rule to be implemented this year. We 

understand the CME will adopt the same rule. NFA and CME believe this is a 

strong first step in providing DSROs with the information needed to regularly 

confirm the amounts on deposit in segregated funds accounts. However, NFA 

and CME intend to expand this approach, once it is implemented, by building a 

system to receive daily reports from all depositories for customer segregated 

accounts, including clearing FCMs. The SROs will perform an automated 

comparison to the reports filed by the FCMs to identify any suspicious 

discrepancies. This program will be fully operational in 2013. 

(ckmrrestimonylPFG Questions Roth 08·01-12 Senate Hearing) 

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