Bloomberg

People pass by MF Global signage on display at 60 East 53rd St., in New York, U.S., on Tuesday, Nov. 1, 2011. Photographer: Stephen Yang/ Bloomberg News

Ann Saphir and Jonathan Spicer Chicago and New York

MF Global Holdings failed to protect customer accounts by keeping them separate from its own funds, a top US exchange regulator said yesterday, another shock for commodity markets scrambling to contain fallout from the brokerage’s bankruptcy.

The revelation by the CME Group suggests Jon Corzine’s MF Global violated a central tenet of futures brokerages. It could erode confidence in a market that for decades has enjoyed a sterling reputation for safety.

MF Global could not account for a large amount of customer money that was supposed to be kept separate from other funds, sources said, and regulators are scrambling to review the broker’s accounts.

The cause of the shortfall – including whether the company pilfered client funds or merely cannot account for the money – was not clear.

Craig Donohue, the chief executive of Chicago Mercantile Exchange operator and regulator CME Group, said MF Global did not keep customer accounts separate from its own funds. Even if the client money could be accounted for, the regulator believes the firm broke the segregation rules.

Another regulator, the Commodity Futures Trading Commission (CFTC), voted to issue subpoenas to the firm, the Wall Street Journal reported.

Neither MF Global nor Corzine has been accused of any wrongdoing.

The New York Times reported late on Monday that federal regulators had discovered that hundreds of millions of dollars in customer money – supposed to be segregated and protected – had gone missing.

At the US Bankruptcy Court in Manhattan, MF Global lawyer Ken Ziman said all of the funds in the firm’s broker dealer were accounted for.

To management’s best knowledge, “there are no shortfalls” in brokerage accounts, said Ziman, as MF Global’s bankruptcy hearing began on Tuesday.

The collapse of the brokerage led by former Goldman Sachs boss Corzine sent shockwaves through commodity markets.

While MF Global began what could be a complicated process of liquidating customer positions, some customers feared that millions of dollars were tied up in bankruptcy. Others expected lawsuits, according to brokers, funds and lawyers.

“We do have a big problem with a hole in the segregation and that is a serious first-of-a-kind problem that we’ve ever seen here,” a source familiar with the CFTC said. “We’re trying to figure out what MF Global did with it and where is it.”

“We’re basically putting out fires,” said an MF Global employee. “Our customers are upset and we’re upset that they are upset.” A company spokeswoman declined to comment.

On Tuesday, the Investment Industry Regulatory Organisation of Canada announced the suspension of MF Global Canada. Trading in Australian agricultural futures and options on the ASX 24 platform resumed yesterday after being suspended following the collapse of MF Global, exchange operator ASX Limited said.

MF Global had $7.3 billion (R58.3bn) in customer assets at the end of August, CFTC data show. It was the eighth-largest US futures broker and had a big presence in commodity markets worldwide. It filed for Chapter 11 bankruptcy on Monday after failing to find a buyer.

Bets Corzine made on euro zone sovereign debt led to a plunge in the company’s stock last week and credit rating agencies cut its debt to junk. Its collapse over less than a week was reminiscent of, although smaller than, the fall of investment bank Lehman Brothers in 2008.

“I’m sure that customers of MF Global are not feeling very good right now and (are) madly investigating their rights and the facts of this case,” said Michael Greenberger, a former director at the CFTC. – Reuters