Former customers of MF Global Holdings Ltd got some good news on Tuesday, as the bankruptcy trustee secured more assets and the CME Group Inc expanded a guarantee to speed the return of frozen funds.
Meanwhile, Jon Corzine, who has been publicly silent since resigning as MF Global's chief executive on Nov. 4, was asked to appear before Congress next month to explain how his futures brokerage, among the largest in the United States, collapsed into bankruptcy so fast.
Also on Tuesday U.S. Bankruptcy Judge Martin Glenn at a hearing in Manhattan approved the appointment of a bankruptcy trustee to oversee what remains of MF Global, wresting control from the remnants of its management team.
James Giddens, the trustee liquidating MF Global's broker-dealer unit, said he expects to soon recover $1.3 billion of assets from Bank of Montreal's Harris Bank unit, but these funds are not those missing from customer accounts.
Giddens still estimates the shortfall in customers' accounts at $1.2 billion - a figure the CME said on Tuesday was an overestimate. Giddens said the funds from Chicago-based Harris Bank will go toward repaying some customers who had feared the loss of more than 20 percent of their accounts.
CME, which was MF Global's first-line regulator, more than doubled the size of a fund to help expedite the return of client cash to $550 million from $250 million.
The Chicago exchange operator, which initially estimated the shortfall to be about $600 million, also said it is confident that recent reports of a more than $1 billion shortfall are "incorrect."
"With CME, we want to say in one word, 'finally!'" said John Roe, a spokesman for the Commodity Customer Coalition, which represents more than 7,000 former MF Global customers. "If they had done it on Oct 31, things would not have locked up."
MF Global filed for Chapter 11 protection on Oct. 31 after the New York-based company revealed it had made a $6.3 billion bet on European sovereign debt.
The revelation worried investors, credit rating agencies and trading partners, and resulted in a liquidity crunch.
James Kobak, a lawyer for Giddens, stood by the trustee's shortfall estimate at the hearing. "The apparent shortfall could go up. We hope it could go down as well. But that was the best information at the time."
The $1.3 billion of cash, securities and foreign currencies recovered from Harris would be pooled with $3.7 billion of other assets already under Giddens' control -- all segregated accounts in U.S. depositories -- for eventual distribution to customers, spokesman Kent Jarrell said.
The combined $5 billion total would be close to CME's initial $5.45 billion estimate for all MF Global segregated funds requirements, in theory leaving customers out less than 10 percent of what they might otherwise expect to recover. A $520 million disbursement from those funds is underway now.
Jarrell disputed the CME estimate for the amount of customer funds at MF. "We don't know whether that's the (final) number," he said. "We'll see what it is when this is all over and we've fully reconciled customer claims."
The CME's increased guarantee was aimed at quelling criticism that it has done too little to help customers with billions of dollars of cash stuck in MF Global accounts.
"The protection of our customers and the integrity of all futures markets continue to be our two chief concerns," CME Chief Executive Craig Donohue said in a statement.
CME said its $550 million guarantee would allow a return of $4 billion of the $5.5 billion meant to be held in segregated accounts, including all $2.5 billion at CME Clearing.
Experts have said customers should be first in line to recover funds from the bankruptcy, even if the missing customer cash is not discovered.
TRUSTEE TO PROVIDE OVERSIGHT
MF Global and JPMorgan Chase & Co, one of the company's main lenders, had asked Glenn to authorize the appointment of a trustee for the parent company. No one has yet been named to the role.
In approving the request, Glenn also authorized JPMorgan to pledge $26 million of collateral, up from $8 million, to keep MF Global operating in bankruptcy.
A trustee is often named to serve the bankruptcy estate's best interest, or when company executives are suspected of wrongdoing. Corzine, a former New Jersey governor and chief of Goldman Sachs & Co, has not been accused of wrongdoing.
Bradley Abelow, MF Global's chief operating officer, was also asked to testify on December 15 before the House Financial Services Subcommittee for Oversight and Investigations, along with Corzine and several top U.S. regulators.
Lawyers for Corzine and Abelow were not immediately available for comment.
Others invited to testify were Robert Cook, director of the U.S. Securities and Exchange Commission's division of trading and markets; Gary Gensler, who heads the Commodity Futures Trading Commission; and William Dudley, president of the Federal Reserve Bank of New York.
Gensler and SEC Chairman Mary Schapiro are also slated to appear on December 1 before the Senate Agriculture Committee, which oversees the CFTC.
Regulators are trying to determine what happened to the missing money, and whether MF Global may have mixed customer funds with its own, a major violation of industry rules. Federal prosecutors are also looking into the matter.
At Tuesday's hearing, Glenn approved the adoption of a parallel claims process for securities customers and commodities customers of the broker-dealer, MF Global Inc.
He declined to approve the creation of an official committee of commodities customers, but urged Giddens to keep those customers in the loop. "If there's 38,000 separate voices, they're going to drown each other out," Glenn said.
The judge also advised Giddens to make it a priority to focus on small claims "from people who are really suffering."
JPMorgan is also expected to soon announce it will pay 25 million pounds (US$39.1 million) for MF Global's 4.7 percent stake in the London Metal Exchange, making it that exchange's largest shareholder, two people familiar with the matter said.
An announcement could come this week. JPMorgan already has a 6.2 percent stake in the exchange. A sale could leave more money for MF Global creditors.
(1 British pound = US$1.563)
(Reporting by Nick Brown, Matthew Goldstein, Lauren Tara LaCapra, David Sheppard and Jonathan Stempel in New York; Christopher Doering in Washington, D.C.; and Melanie Burton and Douwe Miedema in London; editing by Carol Bishopric)