The CFTC has confirmed that its Division of Enforcement is investigating MF Global, Inc. for possible violations of the Commodity Exchange Act, or CEA and/or CFTC regulations. Scott D. O’Malia, a CFTC Commissioner, stated certain Dodd-Frank rules should be reexamined in light of the MF Global bankruptcy.
Mr. O’Malia believes the CFTC must reconsider the proposal that would limit investments of segregated customer funds. According to Mr. O’Malia, it is premature to conclude that this proposal is the solution to the MF Global problem. At this time, the CFTC has not identified the cause of the segregation shortfall, and any action that the CFTC takes cannot be the solution until it has greater clarification on what caused the problem.
In the statement, Mr. O’Malia also noted another proposal that the CFTC should re-examine is the segregation of swaps customer funds. That proposal purports to offer greater protection to swaps customers, by permitting such customers to move their positions and collateral notwithstanding a shortfall. In order for the proposal to actually deliver such protection, the proposal relies on the CFTC actively intervening in insolvency proceedings to facilitate transfer of customer positions and collateral in the face of a shortfall, even if such action brings the CFTC into conflict with the trustee. The CFTC has not actively intervened in such a manner in MF Global, and so it is questionable whether the CFTC would so intervene in the future.
Finally, Mr. O’Malia noted MF Global was a clearing member at multiple clearing organizations and one of the main proponents of lower capital requirements for swaps clearing. In light of MF Global’s demise, Mr. O’Malia believes the CFTC should revisit the open access discussion, to ensure that clearing organizations are able to diversify their membership without introducing risk.
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