After MF Global Collapse, CFTC Approves Client-Funds Rule

(December 6, 2011) — Following the collapse of MF Global, derivatives regulators in the United States have approved restrictions on how brokers can invest customer funds.

The new MF Global rule, named after the collapsed brokerage firm that allegedly used millions of dollars of customer money, reflects a greater longing by regulators to curb risk-taking on Wall Street 

The Commodity Futures Trading Commission (CFTC) voted 5-0 to curb how brokers invest clients’ margin in money market funds, banning investments in foreign sovereign debt and in-house transactions. In addition, the rule prevents a complex transaction that allowed MF Global to essentially borrow money from its own customers. Commission Chairman Gary Gensler called the new rule “critical for the safeguarding of customer money.” He said: “I believe there is an inherent conflict of interest between parts of a firm doing these transactions.” 

“This rule is necessary to restore confidence,” added Mark Wetjen, the newest CFTC commissioner.

Meanwhile, according to Reuters, Senator Richard Shelby, a top Republican on the Senate Banking Committee, has criticized the CFTC’s handling of MF Global’s meltdown, asserting that its chief is “evading” questions about his position in overseeing the company.

MF Global filed for bankruptcy protection in late October. It had made large bets on European sovereign debt under the leadership of former New Jersey Governor John Corzine, MF Global’s CEO and the former CEO of Goldman Sachs. Questions have been raised over the company’s use of customer money in its proprietary trading accounts. The firm has been under investigation over the issue of customer fund use by the Federal Bureau of Investigations, the CFTC, and the Securities and Exchange Commission (SEC).