CME Group plays old-school Chicago politics | FT Alphaville

CME Group plays old-school Chicago politics

In case you missed it, last night Jon Corzine was artfully thrown under what looked like a bomb-strapped bus being driven by the Chicago Mercantile Exchange, with no Keanu Reeves in sight.

Terry Duffy, chief executive of CME group, told the Senate hearing on MF Global that the former New Jersey governor “was aware” that money had gone missing from customer accounts.

From Duffy’s opening statement, via Congressional Quarterly:

MF Global’s segregation report for Thursday, October 27th, which was delivered to CME on Friday the 28th, also stated that MF Global remained in full compliance with segregation requirements. In fact, it showed that the firm held $200 million in excess segregated funds.

On Sunday, the CFTC informed us that they were aware of a draft segregation report for the close of business on Friday, October 28th, which showed more than a $900 million shortfall in required segregation….

… DUFFY: After receiving this information, CME remained at MF Global while MF Global attempted to identify funds that could be transferred into segregation to reduce or eliminate the discrepancy. A CME auditor also participated in a phone call with senior MF Global employees, wherein one employee indicated that Mr. Corzine knew about the loans that it had made for the customer — from the customer segregated accounts.

CME Group has provided this information and the names of these individuals to the Department of Justice and the CFTC for investigating these matters….

On Monday, October 31st, the day the SIPC trustee took over, MF Global revised its segregation report for Thursday, October 27th, indicating that the alleged $200 million in excess segregated funds should have been reported as a deficiency of $200 million.

ROBERTS: Is there anything else about this conversation you believe important for this committee to know?

DUFFY: No, sir. I was just asked to raise my right hand and tell the whole truth, so I’m telling you what I know.

Yowzers.

Now, this doesn’t automatically suggest Corzine was being disingenuous when he told the House hearing last week that he didn’t learn of the missing money until Sunday October 30, as the sale to Interactive Brokers collapsed.

Duffy says that a third hand source told him that Corzine “knew about the loans that it had made for the customer” — but when? At the time the loans were made, or on Sunday evening? It’s unclear. Also, we suppose there’s a difference between knowing of the loans using customer money and knowing they weren’t paid back immediately?

But it does raise more questions:

— why didn’t Duffy mention this before (he said he found out on Saturday), so that the Senate could have asked Corzine?
— who is this MF Global employee?
— what authority did they have?
— when did they say Corzine first knew about the missing funds?
— was this corroborated by anyone else?
— what follow-up questions did CME ask?
— can CME substantiate these claims?

And frustratingly, Duffy didn’t expand much further. Corzine clearly has more questions to answer and he needs to find his notes. But Duffy should’ve been more helpful. Some excerpts from questioning, again via Congressional Quarterly:

ROBERTS [(R-Kansas)]: Thank you, Madam Chairwoman.

Mr. Duffy, we’ve spent a lot of time here today. We probably should have had you on first. You have sort of tossed a bomb here right in the middle of who we’re trying to find out who is responsible, who has the responsibility, who has the authority.

So senior MF Global employees told one of your auditors — you were about ready to give us the name of that auditor. Why don’t you just supply that to the committee, if you might? I think you were going to turn to one of your attorneys, and we’ll leave it at that, unless that jeopardizes any ongoing investigation. We’ll let you decide that with law enforcement.

October 31, Governor Corzine was well aware of loans that MF Global had made to other MF Global affiliates. Is that correct?

DUFFY: Sir, I am reporting back to you everything that I know that was told to me. I was not there, sir, but we in our interviews with our employees, our employee told us that they were on a phone conversation with this particular person at MF Global, that Mr. Corzine was aware of the loans that were being made.

ROBERTS: Did that employee indicate which MF Global affiliates the MF Global customer segregated account funds were transferred to?

DUFFY: Not to my knowledge. I don’t know that. I believe what they were trying, if I recall the e-mail, it was something of $175 million loan that was made to a European affiliate of MF Global, if I’m understanding it correctly, if I remember correctly.

ROBERTS: Did they indicate when those loans were made?

DUFFY: I don’t recall when they were made. I believe it was in the last couple of days prior to bankruptcy.

ROBERTS: Did this individual indicate when Governor Corzine became aware of those loans? Or did he order them to occur?

DUFFY: All’s I am — was told was that Mr. Corzine was aware of the loans that were made.

We think the $175m refers to money transferred by MF Global to a European affiliate via JP Morgan, which the New York Times reported on 28 November. Hopefully we’ll find out soon enough — Bloomberg reported Tuesday afternoon that MF Global’s trustee said the actions of JPM in the days prior to the brokerage’s collapse “are likely to be the subject of investigation.” JP Morgan closed down 2.3 per cent on Tuesday and — like the S&P 500 average — are down slightly on Wednesday.

Still around $1bn of customer money remains unaccounted for. Time for another hearing, we think.

Related links:
Confusion Follows Claim That Corzine Knew of Funds Transfer – DealBook
CME chief alleges Corzine aware of transfers – FT
Corzine Defends His Actions at MF Global – DealBook