The top U.S. futures regulator said he was not participating in the investigation of MF Global Holdings Ltd, the brokerage that filed for bankruptcy last week, so he would not become a distraction.

I chose to not participate in these potential or possible enforcement matters, Gary Gensler, chairman of the Commodity Futures Trading Commission, told a conference hosted by the Securities Industry and Financial Markets Association, or SIFMA, on Monday.

Gensler has had close ties to MF Global's former chief executive, Jon Corzine. Both worked at Goldman Sachs Group Inc at the same time and held prominent positions, and both left the investment bank in the late 1990s.

We have excellent career staff at the CFTC that handle these matters ... and I didn't want my participation in any way to be a distraction, he said, adding he made the decision well before Republican Senator Charles Grassley on Friday publicly called on Gensler to recuse himself.

U.S. regulators have launched an investigation into MF Global as they search for more than $600 million in missing customer money. Reuters reported on Friday that Gensler would not participate in the inquiry.

MF Global's risky trades on European debt helped trigger its collapse. The broker's exchange regulator, CME Group Inc, has said it did not properly segregate customer funds from its own, a violation of futures market brokerage rules that leaves client funds vulnerable.

Gensler said financial institutions should be allowed to fail from time to time, adding that segregation of funds is a core foundation of futures markets at every minute of every day.

TIGHTER RULES FOR USE OF FUNDS

MF Global's missing customer funds, meanwhile, could give new life to a proposed rule revision from the CFTC that would virtually eliminate brokers' ability to invest their clients' excess margin, or collateral for future trades, in corporate notes, bonds and commercial paper.

The brokers, known as futures commission merchants, such as MF Global, are permitted to keep the proceeds of such investments. Corzine was among those this year who lobbied against the revision, and it has stalled at the CFTC.

I'm hopeful that now we can move forward on the rule revision for brokers, Gensler told reporters on the sidelines of the conference on Monday.

The CFTC proposed the tighter rules for use of customer funds last year.

The proposed revision of Rule 1.25 of the Commodity Exchange Act also would impose a limit on the amount of customer margin that can be invested in municipal bonds, agency securities, money-market funds and municipal securities, and would eliminate repo transactions made with an affiliate.

(Additional reporting by Jed Horowitz in New York; Editing by Phil Berlowitz, Gerald E. McCormick and Tim Dobbyn)