MF Global, one of the world's leading broker/dealer firms
entered into insolvency proceedings in both the US and the UK on 31
October 2011. US entities MF Global Holdings Ltd. and MF Global
Finance USA Inc. filed voluntary petitions for relief under Chapter
11 of the US Bankruptcy Code in the Bankruptcy Court for the
Southern District of New York. Also on 31 October, the US
Securities Investor Protection Corporation ("SIPC")
initiated the liquidation of MF Global, Inc. a jointly registered
futures commission merchant and broker-dealer, under the Securities
Investor Protection Act ("SIPA"). The US District Court
for the Southern District of New York entered an order granting
SIPC's request for SIPA protections for customers of MF Global,
The UK subsidiary, MF Global UK Limited, was placed into a new
special administration regime for investment banks, the first
company to enter this regime. Under the special administration
regime the special administrators' objectives are to ensure the
return of client assets as soon as is practicable, to engage with
exchanges, clearing houses and other authorities, and the winding
up of the company for the benefit of creditors.
The US entities generally attributed their Chapter 11 filing to
current global economic insecurity and the resultant instability of
financial markets. They cited certain precipitating factors as
triggering their present bankruptcy filings, including increased
net capital requirements relating to European sovereign debt,
contraction of propriety principal activities resulting in net
losses for the most recent ended fiscal quarter, and MF Global
being downgraded to junk status by various rating agencies which
sparked an increase in margin calls in certain of its
The position of MF Global UK Limited clients and MF Global, Inc.
clients who have placed funds and other assets with either entity
will depend on the basis on which those assets are held, including
whether the funds are held as client money under the UK Financial
Services Authority rules or customer property under the SIPA rules,
as applicable. MF Global UK Limited has also been declared to be in
default by LCH Clearnet Ltd., the London Metal Exchange and several
other UK exchanges and clearing houses.
Being declared in default brings into play wide-ranging powers
belonging to the relevant body to manage the default in the least
disruptive manner to the market. Clients of MF Global UK Limited
looking to transfer positions to another broker will need to engage
with the relevant clearing house and/or exchange as well as the
relevant broker to effect the transfer. In practice, the margin
covering the positions is unlikely to be transferred at the same
time as the positions themselves, and so it is likely clients will
need to provide cover to the replacement broker to cover their
positions. Clients can choose which positions to transfer but the
exchange can close out untransferred positions.
In the US, the SIPC proceeding is in its relatively early stages
and is complicated by what the US Securities and Exchange
Commission and Commodity Futures Trading Commission have described
as "possible deficiencies in customer segregated futures
accounts held at [MF Global, Inc.]" In the immediate term, US
customers are dealing with a variety of scenarios that include
failed transfers of assets and futures positions from MF Global,
Inc. to other broker-dealers and failed settlements of outstanding
securities trades. Ultimately, the scope of customer's rights
will be determined through the SIPC proceeding and are likely to be
communicated in the coming days and weeks through a series of
notices and protocols issued by the SIPC trustee.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A commentary on the UK Supreme Court judgment in the joined cases of Rubin and another v Eurofinance SA and others and New Cap Reinsurance Corporation (in liquidation) and another v A E Grant and others  UKSC 46, which has been anxiously awaited by the UK's restructuring and insolvency community.
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