On the hearing testimony by the CME Group’s Executive Chairman Terrence Duffy regarding Corzine’s knowledge of MF Global’s use of customer funds…

“I don’t know Mr. Duffy personally but I have friends who speak highly of him. I got the impression that he may have been muzzled by his attorney. That’s understandable because of the fear of liability for the CME.  

“He had a written statement for the Senate (Agriculture Committee) and he inserted new language (while speaking). It’s possible he said ‘I’m going to go ahead and stand up customers.’ And he did and we strongly support him.”

For more on Duffy’s testimony, see here and here.

“He very plainly said that he believes laws have been broken, that he was given information that Mr. Corzine knew about it. Of course, that makes sense. At least hundreds of millions of dollars were transferred out (of customer accounts) without” Corzine, MF Global Chief Operating Officer Bradley Abelow or Chief Financial Officer Henri Steenkamp “knowing about it? That would be crazy.

“One line of questioning that Congress began … is if what Duffy says is true, MF Global filed all segregation reports on Oct. 28 indicating they had $200 million in excess segregation. Then, they revised that when they went to bankruptcy saying ‘oh, that was a $200 million debit.’

“The fact is they sent out statements on Oct. 28 showing clients were in full segregation. If they knew that report was false, that’s 55,000 counts of mail fraud.”

Have you figured out why CFTC head Gary Gensler continues to push his ‘non participation’ as opposed to ‘recusal’ in his refusal to be involved in the MF Global investigation?

“We haven’t but it is very interesting. … I think, perhaps, because ‘recusal’ indicates there was some relationship” between himself and Corzine, his former boss at Goldman Sachs “that needs to be looked at. I think he just wants to indicate because of the appearance of impropriety he’s choosing not to participate…

“It’s interesting he’s choosing that language, I agree.”

What about the CFTC’s strengthening of Rule 1.25? I guess it puts tighter limits on how firms can use customer funds. But would it have made any difference in the MF Global actions if it had been passed earlier?

“One thing, obviously, is they wouldn’t have been able to use customer funds to back their repo-to-maturity trade. But that doesn’t mean they wouldn’t have engaged in them on a proprietary basis on the broker-dealer side.

“With customer funds being moved around as they are, you could have only ratcheted up so much trading by backing trades with customer funds. So, I’m not convinced (the strengthened rule) would have stopped the collapse of MF Global or stopped the shortfall of funds. It all depends on where that money ended up.

“As Congress pointed out, the CFTC knew there was a problem. Within a few weeks of MF Global going down, they closed that avenue of trading.

“However, it doesn’t really stop the problems with FCMs. In a zero interest rate environment they have to accept additional market risk to make any money.  

“Getting customer funds out of repo-to-maturity transactions is a good thing. But if the direction the CFTC moves is towards closing down all the ways FCMs can invest customer funds, it will actually precipitate more bankruptcies. You’ll have customers unwilling to post additional collateral trade because they’re worried the FCM will lose it, steal it, whatever. So, there will be less customer funds to deal with more risk and they can’t make any money because interest rates are negative. It will be just a matter of time before some (other firm) blows up.”

Anything else?

“We’ve been able to get 72 percent (of customer funds) back. Our understanding from the trustee was that it wouldn’t be anywhere near that percentage until 2012.

“We’re happy we’ve been able to push the process this far but still have to close the 28 percent gap. We want to do that as quickly as possible.

“We need everyone in the industry – not just people who had money at MF Global but everyone who has a futures account and is at risk of this happening again – to contact their (legislators) and attorney general to get them involved and keep the pressure up.

“That will help make sure that MF Global customers get their money back. You can’t prevent a guy from robbing a bank. But you can put things in place to ensure the bank doesn’t close its doors and hold onto your money while they try to find out what’s missing.”