Had MF Global been resolved under Subchapter IV of Chapter 7 of the Bankruptcy Code (appropriately entitled "Commodity Broker Liquidation"), customers would have been put first, against the interests of the large bank creditors of MF Global. From the unambiguous Historical and Revision Notes in the US Code (emphasis ours):
SENATE REPORT NO. 95-989[Section 765] Subsection (a) of this section [enacted as section 766(h)] provides that with respect to liquidation of commodity brokers which are not clearing organizations, the trustee shall distribute [commodity] customer property to customers on the basis and to the extent of such customers' allowed net equity claims, and in priority to all other claims. This section grants customers' claims first priority in the distribution of the estate. Subsection (b) [enacted as section 766(i)] grants the same priority to member property and other customer property in the liquidation of a clearing organization. A fundamental purpose of these provisions is to ensure that the property entrusted by customers to their brokers will not be subject to the risks of the broker's business and will be available for disbursement to customers if the broker becomes bankrupt.
Some tough questions need to be asked to those who approved the last minute handing over of what was primarily a commodities broker into the hands of a trustee experienced only with securities brokers, and pursuant to SIPA legislation that does not afford protections first to the commodities customers. The entire model of customer protection under SIPA is that it establishes an insurance fund for securities customers. Because no such fund exists for commodities customers, they are put at an extreme disadvantage from the outset.
Who made the decision to throw MF Global into a SIPA liquidation? More to come...
"This section grants customers' claims first priority in the distribution of the estate."
ReplyDeleteThat may be true but there are other parties who are exempt from bankruptcy rules which allow them to collect before all other creditors.
Repo lenders and parties to derivative contracts are exempted from the “automatic stay” rule in bankruptcy.
From the official report from the US Financial Crisis Inquirey Commission:
"...under a 2005 amendment to the bankruptcy laws, derivatives counterparties were given the advantage over other creditors of being able to immediately terminate their contracts and seize collateral at the time of bankruptcy. (p. 48)"
http://www.golemxiv.co.uk/2011/12/plan-b-how-to-loot-nations-and-their-banks-legally/
Many thanks, Jim. That is excellent material.
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