Six years later, after substantial restrictions on trading with customer funds were proposed in 2010 pursuant to Dodd-Frank, MF Global lobbied the CFTC through public comment letters and private meetings. Ultimately, the CFTC would choose to delay implementation of the reforms only months before MF Global's demise and bankruptcy.
Sweeping regulatory changes in the futures industry were made in the year 2000, including to CFTC Rule 1.25, which governs the ability of firms to invest customer segregated funds. But, an obscure CFTC letter from 1984 limited the ability of clearing firms to loan customer funds and securities outright, through what are called repurchase (or repo) contracts, unless the clearing firm had explicit permission from the customer. In 2003, the CFTC proposed a revision to the rule to eliminate these and other restrictions.
In the NFA's 2003 comment letter to the CFTC, archived on its website, it said, "NFA supports the proposed amendment to CFTC Rule 1.25 allowing [futures clearing firms] to engage in repurchase agreements with collateral deposited by customers. The safeguards included in the proposal...provide ample protection for customer deposited securities. The amendment provides greater flexibility, requires less paperwork, and reduces the burden on [futures clearing firms] and their customers." The NFA also argued, "it is not necessary to provide an opt-out mechanism...[which would be] costly and burdensome...without a corresponding regulatory benefit."
MF Global filed for bankruptcy on October 31, 2011 after $6.3 billion in risky bets on European debt (so-called repo-to-maturity trades) were required by regulators to be made public, leading to ratings downgrades of the firm. Other investment firms and banks then requested more collateral as insurance for trades they had made with MF Global, which were unable to be met.
While it is alleged that the $6.3 billion in European debt repurchase trades were conducted with MF Global's own firm money, it is unknown how an estimated $600 million in customer segregated funds went missing. If MF Global had lent customer cash or securities through repurchase contracts, it is possible a counterparty to the trade kept the cash or securities as collateral for other trades with MF Global.
Pursuant to the the Dodd-Frank bill signed into law on July 21, 2010, the CFTC proposed reforms to Rule 1.25 that would have limited investment in customer funds. In a letter to the CFTC, MF Global's general counsel, Laurie Ferber, formerly managing director Goldman Sachs, objected to many of the proposed changes, including what were to be severe restrictions on repurchase transactions, including those with customer funds and with affiliates of the firm.
Ms. Ferber's influence in futures regulation is substantial and spans over two decades. As general counsel to a commodity firm owned by Goldman Sachs, in 1991, she was able to secure a secret letter from the CFTC (made public only in 2008) that granted exceptions to limitations designed to curb speculation in commodity futures.
On July 20, 2010, Ms. Ferber, along with MF Global president and former Goldman Sachs CEO, Jon Corzine, appeared in two private meetings with high level CFTC officials, including another former Goldman Sachs CEO, Gary Gensler, to discuss the proposed rule changes. The same day, the CFTC announced in the Federal Register (footnote 4) that the proposed changes to Rule 1.25 governing customer funds would not be addressed and "may be subject to future [CFTC] rulemaking."
It was only three months later that MF Global would admit to regulators that over $600 million in customer funds could not be accounted for. Over $800 million in cash remains frozen in customer accounts, including those of bona fide hedgers, such as farmers and bread producers.
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