Client Asset Protection

MF Global Inc. (MF GIobal) is registered as futures commission merchant (FCM) with the Commodity Futures Trading Commission and as a broker-dealer (broker-dealer) with the Securities and Exchange Commission. It is also a member of the New York Stock Exchange (NYSE) and other U.S. securities exchanges, and of the Financial Institution Regulatory Authority (FINRA and collectively with the NYSE and other exchanges, the self regulatory organizations or SROs). The protection of its customers funds is MF Globals paramount concern. In this regard, the key components of the futures and securities regulatory regimes with which MF Global must comply are risk-based margining, capital and the segregation of customer funds.
This document will provide a summary of the protections available to our Commodities Futures and Options and Securities customers of MF Global Inc.
In this document: Risk-based margining Capital Segregation of customer funds Futures Securities Reporting requirements SIPC FDIC

Risk-Based Margining

To reduce the risk of loss or default, exchanges and clearing firms set customer margin high enough to assure that the will be sufficient net equity available in a customers account for most anticipated price movements. Margin requirements for customers at most exchanges are computed in accordance with the so-called Standard Portfolio Analysis of Risk (SPAN) algorithm. This takes into account historical and implied price volatilities as well as current and anticipated market conditions, including worst case scenarios. Although margin is not the only means for assuring contract performance, it represents a primary safeguard. MF Global maintains an aggressive risk management program and, if it deems necessary, will require a customer to post margin in excess of the minimum customer margin required by an exchange. As an FCM and broker-dealer, MF Global is subject to the greater of the CFTC or SEC capital requirements. Specifically, SECs Uniform Net Capital Rule (Rule 15c3-1), requires a brokerdealer that is also registered as futures commission merchant to maintain adjusted net capital equal to or above the greater of its requirement under paragraph (a)(1)(ii) of Rule 15c3-1, or the aggregate of 8% of customer and non customer maintenance margin requirements. Rule 15c3-1 protects clients by requiring MF Global to maintain a positive balance sheet and to meet certain

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Capital

capital-to-equity ratios in order to continue operating. Under this rule, the SEC and self-regulatory organizations (SRO) must be kept informed of MF Globals net worth and could take actions to protect clients if the firm faced a substantial drop in its net worth. The rule also prevents MF Global from paying dividends to its shareholders or making payments to affiliates in any way that would rapidly and negatively affect the firms net worth. (a) Capital Charge. Capital charges at broker-dealers are determined in a conservative manner. As a general matter, they are determined using (i) U.S. generally accepted accounting principles, with some variations specific to broker-dealers; and (ii) then imposing further reductions to net equity pursuant to a haircut method, pursuant to which the market value of assets owned by a broker-dealer is discounted for purposes of determining regulatory capital. Non-financial and illiquid assets are treated as worthless for purposes of regulatory capital compliance. (b) Capital Withdrawals. The Net Capital Rule imposes substantial limitations on MF Globals ability to withdraw its capital to pay dividends or otherwise in ways that might benefit its shareholders or affiliates at the expense of its customers or other creditors. MF Global would be required to notify the SEC if any such withdrawal (either alone or aggregated with all withdrawals over the previous 30 days) exceeds certain specified percentages of the firms excess net capital (20% to 30%, depending on the circumstances). MF Global would be required to obtain the SECs approval before any withdrawal that would leave MF Global with net capital of less than 25% of its total haircuts taken on its proprietary positions.

Segregation of Customer Funds

Probably the cardinal safeguard of both futures and securities customers funds required by the relevant provisions of the Commodity Exchange Act, the Securities Exchange Act of 1934 and the rules and regulations of the CFTC and the SEC is that they be segregated from the funds of the FCM/ broker-dealer and may not be used to meet any obligations of the FCM/ broker-dealer. A brief description of these provisions is set forth below.

Futures

For All Futures Customers of a U.S. FCM Trading U.S. Futures or Options:
Section 4d(a)2 of the Commodity Exchange Act provides that a U.S. FCM must keep all money, securities and property of its customers used to margin their futures or options trades on U.S. exchanges and all monies accruing to its customers as a result of such trades segregated from the funds of the FCM. CFTC Regulations 1.20 to 1.30 provide specific requirements for the handling of customer funds.

For U.S. Futures Customers of a U.S. FCM Trading Non-U.S. (Foreign) Futures or Options:
CFTC Rule 30.7(a) provides that a U.S. FCM must maintain in a separate account or accounts money, securities or property in an amount at least sufficient to cover or satisfy all of its current obligations to U.S. customers trading foreign futures or options. This formulation allows an FCM to employ a risk-based analysis in determining the secured amount required to be set aside. For this purpose, MF Global employs a method that is permitted by the CFTC. The account(s) must be denominated as the foreign futures or foreign options secured amount and may not be commingled with the money, securities or property of the FCM nor be used to secure or guarantee the obligations of the FCM.

For Non-U.S. Futures Customers of a U.S. FCM Trading Non-U.S. (Foreign) Futures or Options:
Although CFTC Rule 30.7(a) does not require that money, securities or property of non-U.S. customers trading non-U.S. futures or options be held in separate secured amount account(s), CFTC Rule 30.7(b) permits a U.S. FCM to do so. At this time, MF Global Inc. does maintain funds of its foreign customers trading foreign futures or options in a separate secured amount account in the same manner and employing the same risk-based analysis used for U.S. customers. Such funds are segregated from the funds of the FCM and may not be used to secure or guarantee the obligations of the FCM.

Securities

For All Securities Customers of a U.S. broker-dealer

The SECs Customer Protection Rule. Rule 15c3-3 (the Customer Protection Rule) of the Securities Exchange Act of 1934 Act (1934 Act) is the SECs customer protection rule which details the procedures that a broker-dealer must observe to protect any of its customers assets that the broker-dealer holds. In general, the Rule prohibits broker-dealers from using customer assets as working capital by ensuring that the funds that the broker-dealer holds as a result of its customer business are used only to finance customer liabilities and not to finance its proprietary positions. There are two main principles of customer asset protection: (1) possession and control of customer securities by the broker-dealer, and (2) the maintenance of a required deposit in a special reserve bank account. (a) Possession and Control of Securities Under the Rule, a broker-dealer must promptly obtain and thereafter maintain physical possession or control of all customer fully-paid and excess margin securities. The determination of the specific securities that are required to be in a broker-dealers possession or control must be made daily as of the preceding day. (b) Special Reserve Bank Account Under Rule 15c3-3, broker-dealers are required to deposit cash or qualified securities (e.g., a security issued by the United States, or a security in which the principal and interest are guaranteed by the United States) with a bank (or banks) in a Special Reserve Bank Account for the Exclusive Benefit of Customers (the reserve account). The reserve account is required to be separate from any other bank account of the broker-dealer. Under the Rule, the broker-dealer must perform a weekly calculation in accordance with the formula set out by the Rule (the reserve formula) and deposit cash or qualified securities equal to the amount required under the reserve formula.

Reporting Requirements

MF Global must meet extensive reporting requirements that allow clients and regulators to monitor its financial position. MF Global must provide clients with audited financial information annually and with unaudited information semi-annually. Regulators receive these reports as well, plus monthly FOCUS (Financial and Operational Combined Uniform Single) reports that provide a capsule view of MF Globals financial position. These reports include an overview of the firms net capital, monthly net profit and loss, various financial statements, a net capital computation and a computation of the firms special reserve bank accounts. Since the firm is required to maintain adequate net capital at all times, regulators must be able to obtain information on MF Globals capital position on a daily basis.

SIPC

The Securities Investor Protection Corporation (SIPC) is a non-profit membership corporation created pursuant to the Securities Investor Protection Act of 1970. SIPC has two primary purposes: (i) establish and administer procedures for the liquidation of failed broker-dealers that are SIPC members; and (ii) to provide limited financial protection, to be paid out of SIPCs funds, to securities customers of such failed broker-dealers. In the event of a liquidation of a broker-dealer, all customer property held by the broker-dealer for securities transactions is returned to the customers of the broker-dealer on a pro rata basis to the extent of each customers net equity claim against the broker-dealer. To the extent that this distribution does not satisfy a customers claim, the Securities Investor Protection Corporation (SIPC) will provide insurance coverage for customers with unsatisfied claims in an amount up to $500,000, subject to a limit of $250,000 for a claim for cash.

FDIC

MF Global Inc. holds customer segregated funds not required to be deposited with a U.S. or foreign clearing organization to margin open positions in one or more banks whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC). Each account is properly designated as a customer omnibus account. In the event a bank in which MF Global maintains a customer omnibus account fails, FDIC rules provide that each customer whose funds are held in such an account is entitled to insurance in an amount up to $250,000 (less any other deposits the customer may have at that bank). 12 CFR 330.5.

Please be aware that this description of various legal requirements is for general informational purposes only and is not intended as legal advice from MF Global. The rules governing futures and securities trading and the treatment of customer funds are complex and customers should always consult their own legal counsel in such matters.

Disclaimer: Approved for distribution in the United States. Please be aware that this description of various legal requirements is for general informational purposes only and is not intended as legal advice from MF Global Inc. The rules governing futures and securities trading and the treatment of client funds are complex, and clients should always consult their own legal counsel in such matters. In addition, the Securities Investor Protection Corporation (SIPC) does not protect assets that are not securities, such as commodities or foreign exchange and futures contracts. Trading in financial instruments may involve significant risk of loss. Nothing contained herein should be considered as an offer or the solicitation of an offer to sell or to buy any financial instruments.
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