WASHINGTON, Dec.8- Commodity Futures Trading Commission (CFTC) Commissioner Jill Sommers testified before the House Committee on Agriculture this morning on the examination of the MF Global bankruptcy. Former MF Global CEO Jon Corzine will testify later today in the same hearing.
The Commission voted Sommers as the Senior Commissioner regarding MF Global matters after CFTC Chairman Gary Gensler's non-participation from the investigation. She testified along will the Trustee for the liquidation of MF Global, James Kobak, Jr.
During members’ questioning, Sommers said she did not see red flags in MF Global’s actions until the weekend before its bankruptcy, the eighth largest in U.S. history. Neither Sommers nor Kobak could give a timeline on when customer funds could be returned in full.
“I understand the severe hardship this bankruptcy has caused for customers of MF Global,” she said. “These customers correctly understood the risks associated with trading futures and options, but never anticipated that their segregated accounts were at risk of suffering losses not associated with trading.”
The CFTC is expected to propose policy changes after the MF Global investigation in a “lessons learned” manner, Sommers said. The loss of commodity customers’ funds is unprecedented, even in the recent, large bankruptcies of Lehman Brothers and Refco.
“We need to get to the bottom of what happened with MF Global as quickly as possible in order to restore a confidence that has been greatly shaken,” said Ranking Member Collin Peterson (D-Minn.) “We cannot let one company succeed in undermining an industry that has operated safely for customers for decades.”
A final rule of the Dodd-Frank Act approved last week prevents futures commission merchants (FCMs) from investing customer funds in sovereign debt, which is believed to be the case with MF Global. CFTC initially proposed the rule in October 2010, but the Commission deferred consideration after objection from large financial firms, including MF Global.
“An FCM cannot take money out of a segregated account, invest it, and then return the money to the segregated account at some later time,” Sommers said. She added that CFTC regulation 1.25 has never allowed a firm to treat customer funds in this manner.
Sommers said the rule, regulation 1.25, does not apply to the investments MF Global may have made because the CFTC does not regulate the broker dealer side of MF Global. Formerly an FCM, the firm became a broker dealer after Corzine began as CEO.
“The firm became a broker dealer, started participating in riskier business and jeopardized a bunch of customer accounts,” Peterson said.
“Given what happened here, we should be talking about strengthening Dodd-Frank, not weakening it,” he said. “Three big financial firm bankruptcies over a three year period is not a track record that should be extended.”
The hearing will continue with testimony from former CEO Jon Corzine. To view witnesses’ full testimony, go to http://agriculture.house.gov/hearings/hearingDetails.aspx?NewsID=1485#Testimony
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