Synopsis of MF Global Insolvency Proceedings

November 14, 2011

Seward & Kissel LLP is pleased to provide a brief synopsis of the MF Global insolvency proceedings, a description of what to expect in the coming weeks, and an outline of steps that clients can take to ensure that their rights and assets are adequately protected.

Commencement of the MF Global Insolvency Proceedings

On October 31, 2011, MF Global Holdings Ltd and one of its subsidiaries, MF Global Finance USA Inc. (together, the “Chapter 11 Debtors”), filed voluntary petitions for chapter 11 relief (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). The Chapter 11 Debtors continue to operate their businesses and manage their properties as debtors-in-possession.

On October 31, 2011, the United States District Court for the Southern District of New York appointed a trustee (the “Trustee”) for the liquidation of another affiliate, MF Global Inc. (“MFGI”), under the Securities Investor Protection Act of 1970 (“SIPA”). MFGI is currently being wound down and will not be conducting business or undergoing reorganization. The SIPA proceeding of MFGI (the “SIPA Case”) is separate and distinct from the Chapter 11 Cases, and different claims and distribution schemes will be established in respect of each case. With respect to its business as a future commission merchant, MFGI is subject to Subchapter IV of Chapter 7 of the Bankruptcy Code which governs the liquidation of a commodity broker. It should be noted that the great bulk of MFGI customers maintained commodities accounts with the firm that are not eligible for SIPA insurance.

Transfer of MFGI Customer Accounts

The Trustee, in coordination with the CFTC, the Securities Investor Protection Corporation (“SIPC”), and the Chicago Mercantile Exchange, obtained emergency Bankruptcy Court approval for a bulk transfer of approximately 17,000 customers’ commodities accounts with open commodities positions, including $1.55 billion in collateral. The U.S. Commodity Futures Trading Commission (the “CFTC”) has estimated that, at the close of business on November 1, 2011, MFGI had a shortfall in customer segregated funds of approximately $633 million, or approximately 11.6% of the funds required to be segregated.1 Consequently, the Trustee has retained approximately 40% of the collateral associated with those accounts. Those customers whose accounts have been transferred may be required to post additional collateral with their transferee Futures Commission Merchant (“FCM”).2 The Trustee has asserted that the court-authorized bulk transfer represented the “maximum relief available under the law and the circumstances.”

While earlier reports by the Trustee had invited customers interested in transferring their commodities accounts to contact MFGI, the Trustee’s most recent update indicates that the Trustee “must treat all customers equally and fairly and doe[s] not have the authority to make [individual] transfers.” Nonetheless, the Trustee has invited customers who would like to transfer positions without collateral to e-mail their requests to A number of MFGI commodity customers who liquidated their open trading positions and hold only cash in their accounts have filed a motion in the SIPA Case seeking the Bankruptcy Court’s authorization to withdraw up to 85% of their funds, asserting that bankruptcy law requires that they receive treatment at least equal to that afforded the customers whose accounts were transferred pursuant to the Court’s bulk transfer order. A hearing on this motion is scheduled to be held on November 22, 2011.

Additionally, the Trustee has reported that those commodities customers of MFGI who deposited certain kinds of non-cash property may instruct the Trustee to return such property so long as the instructions are received by November 15, 2011. The “specifically identifiable property” to which this applies includes, but is not limited to, (a) securities that are not short-term obligations deposited as margin in respect of open commodity contracts, (b) fully-paid, non-exempt securities held in accounts in which there were no open contracts as of October 31, 2011, and (c) any cash or other property deposited to make or take physical delivery on a futures or options contract. Most types of customer cash will not qualify as “specifically identifiable property” eligible for return under these expedited procedures.

MFGI Claims Procedures

To the extent that accounts with MFGI are not transferred or assets in transferred accounts remain at MFGI, the Trustee will establish a claims process whereby customers will be able to assert claims in respect of the positions and cash trapped in their accounts. In addition to identifying and marshalling the assets of MFGI in order to maximize the estate, the Trustee will need to determine the amount of each customer’s claim entitlement. It is anticipated that the Trustee will liquidate most or all available assets to cash for ultimate distribution to customers. The Trustee has stated that distributions to commodities customers will not exceed the pro rata shares of each customer’s claim to the amount of funds segregated for commodities customers. To the extent that customers’ pro rata shares of those segregated funds produces a shortfall, those customers will have unsecured claims against the general assets of MFGI.

Under Subchapter IV of Chapter 7 of the Bankruptcy Code, customers with claims arising from their commodities accounts will be entitled to a pro rata share of available customer assets before payment to any secured creditors of MFGI. The pool of customer assets may include claw back of amounts withdrawn by customers within 90 days of the October 31, 2011 filing date. Only customers with MFGI securities accounts will be entitled, to the extent that distributions from the pool of customer property fail to fully satisfy their claims, to an additional distribution from SIPC of up to $500,000, including up to $250,000 for cash in the account.

The Trustee has stated that he will be filing a motion in the Bankruptcy Court to establish expedited claims procedures, though the details surrounding those procedures have yet to be announced. It is anticipated that once an expedited claims process is approved, customers will be required to submit claims within 30 to 45 days. Commodities and securities customer claimants should receive claim forms and filing instructions from the Trustee once the claims procedures have been established and must return the completed forms by the deadline.

The Trustee is purportedly working with regulators to determine an appropriate process for closing out open positions. The Trustee has also filed a motion with the Bankruptcy Court seeking to establish protocols to address requests for funds sent in error to MFGI bank accounts, including misdirected wire transfers intended for MFGI customers whose accounts have been or will be transferred.

Requests for Additional Information

General information regarding the SIPA Case, including updates posted by the Trustee, is available online at For information concerning individual commodities accounts, including account balances or whether an account has been transferred, customers can send an e-mail message to, indicating their name, MF Global account number, office code and contact details.

If you require any further information regarding MF Global, the SIPA Case or claims that you may have against MFGI or any of its affiliates, please feel free to contact your primary attorney at Seward & Kissel LLP.


* This Client Update is not legal advice. Should you wish legal advice with respect to the matters discussed herein, please contact us.

1 Section 4d(a)(2) of the Commodity Exchange Act (the “Act”) required that MFGI segregate all customer property, including cash and securities, apart from its own assets. While MFGI was permitted to commingle customer property in a single account, the Act also prohibited MFGI from using the assets of one customer to margin the positions of another customer. The reported shortfall has since been estimated at $593 million.

2 Though the vast majority of customer accounts at MFGI were commodities accounts, the Trustee has reportedly identified approximately 400 security accounts that were active at MFGI. The Trustee has thus far been unable to find a broker-dealer to accept the transfer of those accounts.