Financial History Issue 118 (Summer 2016) | Page 40

When All Else Fails the senior-most officer of that FCM must approve that transfer. This is commonly referred to as the “Jon Corzine Rule.” Corzine was the CEO of MF Global at the time of its bankruptcy, and a large amount of funds had been transferred out of the segregated account. There are some key legal distinctions involving the failure of an FCM versus that of a stock brokerage firm. The insolvency of a stock brokerage firm is governed by the Securities Investor Protection Act and Section III of the US Bankruptcy Code. These laws provide the special SIPC insurance coverage noted above. An FCM’s bankruptcy is governed by Section IV of the US Bankruptcy Code and Part 190 of the CFTC regulations. Together, they deal with the pro rata treatment of the non-defaulting customers of the failed FCM. They also do not treat property of a customer that can be specifically identified as belonging to that customer. This is not the case for stock brokerage firms that fail. If a customer owns 100 shares of ABC, then he will receive back those 100 shares. On the other hand, if a customer deposits US Treasury bills to satisfy his margin requirements in a futures account, those government securities will be sold and converted to cash, with the customer receiving his pro rata share if a shortfall occurs Customer Protection in Global Markets The industry has learned quite a bit in recent years given these large FCM bankruptcies, but there is more to be done given that today’s markets are clearly global in nature. People living in the United States can now easily trade financial products on more than 35 non-US exchanges. Yet, the bankruptcy laws in those countries vary greatly from the US Bankruptcy Code, which has specific provisions dealing with the failure of a stock brokerage firm (Section III) and the failure of an FCM (Section IV). Outside the United States, many countries do not have laws protecting customers of failed financial firms. What is now urgently needed is for the G-20 countries to devise a plan to harmonize the bankruptcy laws of these countries so that customers of failed financial Bloomberg / Andrew Harrer continued from page 34 Jon S. Corzine, former chairman and CEO of MF Global, testifies before the House Financial Services Committee on December 15, 2011. US authorities were investigating whether MF Global intentionally tapped customer funds to cover the bankrupt firm’s margin payments on European government bond trades. firms are treated fairly, hopefully with similar, or approximately similar, results. Most of the focus since the financial crisis in 2008 has dealt with how OTC derivatives should be regulated. The G-20 countries are gaining ground on the promise they all made in Pittsburgh in September 2009 to have a more harmonized global regulatory system in place that regulates OTC derivatives. Now, they need to focus on protecting customers of failed financial firms in a more harmonized way.  Ronald H. Filler is a Professor of Law and the Director of the Financial Services Institute at New York Law School. He is a Public Director and Member of the Executive Committee of the National Futures Association, a Public Director and Chair of the Regulatory Oversight Committee (ROC) of SWAP-EX and a Board Member of Global Clearing & Settlement. Sources Commodity Exchange Act, 7 USC 1 ET SEQ. Filler, Ronald H. “The 7th Circuit and Sentinel — Five Times a Charm.” Futures & Derivatives Law Report. April 2016. Filler, Ronald H. “Are Customer Segregated/ Secured Amount Funds Properly Protected 38    FINANCIAL HISTORY  |  Summer 2016  | After Lehman?” Futures & Derivatives Law Report. November 2008. Filler, Ronald H. “Ask the Professor: What Is the Impact on MF Global From the Recent UK Supreme Court Decision Involving Lehman Brothers International (Europe)?” Futures & Derivatives Law Report. April 2012. Filler, Ronald H. “Energy Derivatives: Which Country (U.S. or U.K.) Provides the Best Customer Asset Protections to an Energy Trading Firm If Its Brokerage Firm/Counterparty Files for Bankruptcy?” The Energy Law Journal. Fall 2016. Filler, Ronald H. and Jerry W. Markham. Regulation of Derivative Financial Instruments (Swaps, Options and Futures). West Academic. 2014. Federal Deposit Insurance Corporation, at Securities Investor Protection Corporation, at US Bankruptcy Code, 11 USC 701–784. US Commodity Futures Trading Commission (CFTC) Rules 1.20–1.29, Part 22, Part 30 and Part 190, 17 CFR 1.20–1.29, Part 22, Part 30 and Part 190.