MF Global Holdings, Ltd. was one of the world's leading brokers in markets for commodities and listed derivatives, providing clients with access to more than 70 exchanges globally. The firm was a leader by volume on many of the world's largest derivatives exchanges. MF Global was also an active broker-dealer in markets for commodities, fixed income securities, equities, and foreign exchange. It was one of 20 primary dealers authorized to trade U.S. government securities with the Federal Reserve Bank of New York. Headquartered in the United States, the firm had operations in Australia, Canada, Hong Kong, India, Japan, Singapore, the United Kingdom, and other countries. In mid-2011, the firm reported total assets of $45.9 billion. In the second quarter of 2011, MF Global reported total revenues of $611.2 million. Of this, $364.7 million (60%) was commissions and trading fees, $122.2 million (20%) was interest income (primarily net interest earned from customer margin funds held by the firm), and $116.8 million (19%) was attributable to principal transactions or proprietary trading for the firm's own account. Although customer brokerage accounted for about 80% of MF Global's revenue, the firm's "strategic plan" called for a shift to an investment banking business model, in which proprietary trading and market making would become the principal sources of earnings. It appears that market concerns over proprietary trading losses related to European sovereign debt in the fall of 2011 ultimately sparked both customer withdrawals and, separately, demands that MF Global post additional margin to cover risks from the firm's trading positions. These sudden, pronounced demands for liquidity, which the firm could not meet, led to the misuse of customer funds and drove the firm into bankruptcy, according to the investigation by the bankruptcy trustee. In the words of the trustee, "the simultaneous occurrence of a customer 'run on the bank' and unwinds of repo counterparty and proprietary positions within a three-day timeframe overwhelmed the Firm ... The speed at which events transpired was beyond management's predictions—the worst—case scenario played out in the span of only a few days." The trades that led to losses, and market fears over losses, accompanied by large margin calls that strained MF Global's liquidity stemmed from complex trades related to European sovereign debt. (Please see Figure B-2 for details of the increased margin calls.) These trades focused on debt from Ireland, Italy, Portugal, and Spain, all of which had begun experiencing severe financial distress. In October 2011, the firm published a fact sheet disclosing that it held $6.4 billion in sovereign debt of five European countries, and that this position was financed through repurchase agreements. (A repurchase transaction, or repo, involves sale of a security with an agreement to buy it back later at a higher price. It is economically equivalent to a loan.) According to the bankruptcy trustee's investigation later, MF Global's exposure to sovereign European debt "was more than four and a half times MF Global's total equity, a level that was orders of magnitude greater than the relative exposure at other, larger financial institutions." Some press reports suggested that the position was profitable to the extent that the interest rate MF Global paid on these repos was lower than the rate paid by the sovereign bonds. If the cost of financing the bond position rose, MF Global would take a loss. In a sense, this is what happened: creditors insisted that MF Global post higher collateral against the position, either because the perceived credit risk of the bonds had increased or because MF Global's own credit rating had been downgraded (which happened on October 24, 2011). The markets appear to have taken a pessimistic view of MF Global for some time prior to the bankruptcy. Its stock price, which started 2011 at about $8 per share, began to decline in May and fell below $4 on October 3. On Monday, October 24, 2011, Moody's downgraded MF Global's long-term debt to Baa3, the rating just above junk bond status. The next day, the stock price fell by 48%, from $3.55 to $1.86. On Friday, October 26, Standard & Poor's placed MF Global on "credit watch negative," meaning that a downgrade might be forthcoming. On October 27, Moody's cut MF Global's credit rating to junk status. By that time, the press was reporting that some banks were refusing to deal with MF Global and that efforts were underway to sell the firm. Over that weekend, MF Global notified the Commodity Futures Trading Commission (CFTC) that more than $900 million in customer funds were unaccounted for, making a merger impractical and blocking a mass transfer of customer futures accounts to stable futures commission merchants (FCMs). On Monday, October 31, 2011, MF Global filed for bankruptcy. Subsequent to the bankruptcy, a $1.6 billion shortfall in customer funds was identified by the bankruptcy trustee. This consisted of a $900 million shortfall for domestic U.S. accounts trading both commodities and securities and a $700 million shortfall related to trading by customers on foreign exchanges. Following a lengthy bankruptcy investigation to track missing customer funds, customers received some of their missing funds in installments. As of June 4, 2013, the bankruptcy trustee announced that U.S. futures customers had received 89% of their missing funds, and that he anticipated that figure should reach 94% once certain legal agreements were acted upon. However, for futures customers overseas, or who had had accounts set up in which to trade on foreign exchanges, the figure was significantly lower, with only 18% of their missing funds returned as of June 4, 2013. The trustee estimated, however, that anticipated legal agreements should allow distributions for these customers trading on foreign exchanges to ultimately reach 84%-91% of their original customer funds. After investigations into the failure and the missing customer funds by the two bankruptcy trustees, the CFTC, Securities and Exchange Commission (SEC), and Department of Justice, no criminal charges have been filed against MF Global or any of its officers. However, the CFTC on June 27, 2013, filed a civil lawsuit naming as defendants MF Global Inc., the futures commission merchant; MF Global Holdings Ltd., the parent holding company; the former Chief Executive Officer (CEO) Jon Corzine; and the former Assistant Treasurer Edith O'Brien. In addition, bankruptcy trustee Louis Freeh, the trustee for the holding company, has filed a civil lawsuit on behalf of the estate against Corzine, former Chief Operating Officer (COO) Bradley Abelow, and former Chief Financial Officer (CFO) Henri Steenkamp. The defendants filed a motion to dismiss the lawsuit on July 22, 2013. There are numerous other private lawsuits against the firm, its directors, and officers still pending. The CFTC seeks monetary penalties against the defendants and a ban from the futures industry. The CFTC complaint alleges, among other charges, that, "as liquidity stresses increased in 2011, Corzine directed the firm to explore using customer funds." The CFTC also charges that O'Brien "directed, approved, and/or caused multiple unlawful transfers from customer segregated accounts." Relying partly on internal recorded telephone calls, including by Corzine and by O'Brien, the CFTC complaint paints a picture of officers within the firm increasingly desperate to cover the firm's overdrafts and collateral calls to keep it from collapsing, and increasingly willing to dip into customer funds to do so. It will likely take months or years for the numerous civil lawsuits to be resolved or settled out of court. The failure of a brokerage does not necessarily expose customers to loss. Both futures and securities law and regulation provide safeguards to protect customer funds. Securities brokers regulated by the Securities and Exchange Commission are subject to a net capital rule—they must cease operations before their assets fall below the level that allows customer claims to be met. In addition, broker-dealers must belong to the Securities Investor Protection Corporation (SIPC), which provides an insurance scheme whereby customers of failed broker-dealers may receive up to $500,000 from the SIPC fund. Please see Figure A-1 for a detailed chart showing the complex web of regulatory oversight of MF Global by both regulators and self-regulatory organizations. There is no analog to SIPC in futures markets regulated by the CFTC. Instead, there are strict rules about the use of customer funds (in addition to net capital rules). Section 4d(a)(2) of the Commodity Exchange Act (CEA) requires that customer funds received by a FCM to margin, guarantee, or secure a customer's futures contracts be held in segregated accounts, and not be commingled with the funds of the FCM itself, nor used to guarantee the trades or contracts of any person other than the customer. Thus, any MF Global losses related to its own proprietary trading should not have affected customers. The shortfall of segregated customer funds is a rare event and represents a breakdown of the system. "This has been a significant blemish on the industry's reputation," said Dan Roth, president of the National Futures Association (NFA), an industry-funded self-regulatory organization. Moreover, customers were taken off guard because, as FCM bankruptcy is usually handled, they reasonably expected that their accounts would be transferred to another FCM, and that they would be able to access their funds. Customers expected this based on historical precedent and a feature of the bankruptcy code. Derivatives contracts, which include futures, are "qualified financial contracts" under bankruptcy law. This means futures contracts are not subject to the "automatic stay" that freezes other assets held by a bankrupt firm. One purpose of this exemption is to enable customers to avoid premature liquidation of futures positions whose value depends on often volatile movements of underlying commodities, as that could cause them to incur losses.