MEMORANDUM

For:

National Futures Association Board of Directors

From: Douglas Bry & Ernest Jaffarian CTA/CPO Representatives Date: Re: 13 February 2012 MF Global Issues and Proposals

The MF Global bankruptcy and its aftermath have created the potential for irreparable harm to the futures industry, a key component of the global financial system. National Futures Association (NFA) is in a unique position to take a leadership role helping to recover customer funds, restoring the publics trust and confidence, and implementing changes to further codify the already existing public policy that customer funds are sacrosanct.

What happened and just how bad is it?

Weve set out below some background and a summary of what led to, and has transpired in the wake of, the MF Global (MFG) bankruptcy, followed by four proposals that we think will help to resolve the major problems. Testimony of Daniel J. Roth, President of NFA, before the Committee on Agriculture, US House of Representatives, December 8, 2011: The recent demise of MF Global has dealt a severe blow to the public's confidence in the financial integrity of our futures markets. This is much more than an academic argument. Thousands of customers have suffered and continue to suffer from a breakdown in the regulatory protections they have come to expect. Their frustration with the situation is completely understandable. Reestablishing the public's confidence is essential to our futures markets, which, in turn, are an essential part of our nation's economy. Testimony of Terrence A. Duffy, Executive Chairman, CME Group Inc. (CME), before the House Committee on Financial Services Subcommittee on Oversight & Investigations, December 15, 2011: [T]he MF Global bankruptcy is unprecedented in that it is the first time (i) there has been a shortfall in customer segregated funds held by one of our clearing members as a result of the clearing members improper handling of customer funds and (ii) our clearing house was unable to transfer all customer positions and property in an FCM bankruptcy due to

missing customer funds in a segregated customer account under the control of the FCM. Indeed, this is the first time in the industrys history that a customer has suffered a loss as a result of a clearing members improper handling of customer funds.

Brief History of MF Global

MF Global Inc. (symbol: MFGLQ.PK) was spun off in 2007 as the brokerage component of The Man Group, successor to E D & F Man, a 230-year-old British physical commodity firm. Based in New York, MFG primarily acted as a Futures Commission Merchant (FCM) with 38,000 futures customers who had $6.2B in assets in 50,000 futures accounts.1 MFG was also a Broker Dealer with fewer than 400 securities accounts that had approximately $100M in assets. Jon Corzine, former Goldman Sachs CEO, and former New Jersey Senator and Governor, took over as CEO of MFG in March 2010 with the stated purpose of turning it into an investment bank that would take risk with the firms own capital. (Koppenheffer, Matt. Jon Corzine: The Wrong Man For The Job. The Motley Fool 16 December 2011.) The Financial Industry Regulatory Authority (FINRA) gave Mr. Corzine a waiver which allowed him to run MFG without a license, despite a 12 year absence from the industry. (Satter, Marlene. FINRA Gave Corzine Waiver To Run MF Global: Licenses expired, exgovernor did not retake mandatory exams. AdvisorOne 9 November 2011.)

Why MF Global Went Bankrupt

The problems at MFG stemmed from risky European sovereign debt investments, primarily in Spanish and Italian Bonds, made with firm capital. Since the position was leveraged, when the value of the bonds dropped there was a margin call. The leverage utilized by MFG was excessive. Jon Corzine testified to 30:1 leverage with firm capital before the House Agriculture Committee, and other sources have estimated the leverage to have been as high as 40:1. (Du, Lisa. A Closer Look at Leverage at MF Global and Jefferies. Business Insider 4 November 2011.) The full size of MFGs debt position is still unclear, but it disclosed a $6.3 billion dollar exposure to European sovereign debt during its Q3 earnings report, and it is possible the position was much greater, perhaps as much as $16.3 billion. (Ahmed, Azam. MF Global Bankruptcy Rattles Wall St. Firms. NYT Dealbook 31 October 2011.) Given the leverage, it would only take a small percentage decline in the value of the bonds to wipe out MFG. Thus in a time of financial crisis related to the very instruments he invested in, Corzine risked the future of MF Global on the European Financial Stability Facility and the European Central Bank standing behind the debt of Italy and Spain.
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Northfield Trading LP managed 18 client accounts which cleared MFG and totaled $31M, about 11% of Northfield's assets under management. Douglas Bry had two personal accounts at MFG and has filed claims to recover $97,541.56 in bankruptcy court. Neither Ernest Jaffarian nor Efficient Capital had any accounts at or direct business with MFG.

In the weeks leading up to MFGs collapse Jon Corzine repeatedly and vocally defended the leveraged European sovereign debt trade in the face of significant doubt expressed by various MFG executives and members of the MFG Board. (Ahmed, Azam, et al. A Romance With Risk That Brought On a Panic. NYT Dealbook. 11 December 2011.) Poor earnings reports and a drop in the value of the sovereign debt led to increased investor concern and brought more scrutiny, causing a selloff in MFGs stock from just below $9 a share in April to $3.55 on October 21. MFGs bonds also dropped in value. In the early morning hours of October 31, unable to raise sufficient capital to meet its obligations, and after a deal to sell to Interactive Brokers fell through, MFG reported to the CFTC a possible shortfall in customer funds, and filed for bankruptcy later that morning. (Protess, Ben, et al. Regulators Investigating MF Global For Missing Money. NYT Dealbook 31 October 2011.) Jon Corzine testified before the House Agriculture Committee and defended his actions by asserting that there had been no default of the sovereign bonds. (Protess, Ben. Corzine Defends His Actions at MF Global. NYT Dealbook 8 December 2011.) Even if the investments were permissible, taking a 30:1 or greater leveraged position with firm capital was a breach of MFGs fiduciary duty to its shareholders and its customers, and it was this excessive risk that brought MFG down.

A Note on CFTC Rule 1.25

Some accounts of the bankruptcy have blamed it on Commodity Futures Trading Commission (CFTC) Rule 1.25, which prior to 2000 limited FCM Seg Fund investments to US Treasury Instruments only. (Cohan, William. Tiny Rule Change Was At The Heart Of MF Global Failure. Bloomberg 15 November 2011.) The Commodity Futures Modernization Act of 2000 (and subsequent amendments) expanded the types of instruments in which Seg Funds could be invested, enabling FCMs to take more risk in pursuit of higher returns, always accompanied by the assurance that customer safety was not being compromised. The most recent amendment, passed on December 5th, 2011, after the bankruptcy, would have prohibited some of the specific Seg Fund investments made by Corzine, and it is somewhat telling that the implementation of it was delayed for over 18 months, purportedly due to Corzines lobbying efforts at the CFTC. (Brush, Silla, et al. CFTC Plans Vote on MF Rule to Restrict Use Of Client Funds. Bloomberg BusinessWeek 25 November 2011.) (Foley, Kevin. CFTC Adopts Final Rule On Investment of Customer Funds. Corporate and Financial Weekly Digest 9 December 2011.) While FCMs pursuit of higher returns with Seg Funds through amendments to Rule 1.25 may not have directly caused the MF Global bankruptcy, it was probably a contributing factor. The current version of Rule 1.25 is now commonly referred to as the MF rule in honor of Corzine. 3

Impact of the Bankruptcy on the Trading of MF Global Customer Accounts

The 50,000 customer accounts held by MFG represent a cross-section of people in the US and around the world, from farmers and ranchers who hedge their crops and herds, to oil producers and miners who use futures to lock-in prices and take delivery of physical commodities, to retirees and pension funds who invest in futures to diversify their portfolios. As soon as the bankruptcy was filed, the CME and all the other exchanges, both US and non-US, cut off all trading for MFG customers, exposing them to unlimited market risk. After an hour the CME instituted a 'liquidation only' order, pursuant to which some MFG customers were able to exit US positions only. With few exceptions MFG customers were not able to trade out of positions held on exchanges outside the US, which froze accounts pending bankruptcy proceedings under local law. It was not until four days after the bankruptcy filing, on November 4th, that MFG accounts first started being transferred out of bankruptcy court to a group of ten volunteer FCMs. The initial transfers included little or no cash, some included positions only, and many came with instant margin calls causing further problems and confusion for customers. By the time of the Third Bulk Transfer starting in early December, the mess was somewhat straightened out, and by the end of 2011 most customers had about 72% of the value of their US Seg Funds balance. (Cezary, Podkul. MF Global Trustee Breaks Down The Money Trail. Reuters HedgeWorld 6 February 2012.) Any claims for outstanding funds at MFG were due to be filed with the Bankruptcy Trustee by January 31st, and it is not known when the claims will be adjudicated.

Impact of the Bankruptcy on the Futures Industry

In addition to the 2,800 employees of MFG who lost their jobs and the 38,000 MFG customers directly impacted, a number of Commodity Trading Advisors (CTAs), Commodity Pool Operators (CPOs) and Introducing Brokers (IBs) have had to close their doors, trading volumes have declined (the Bankruptcy Trustee has estimated that 40% of all US futures trading activity came from MFG), and all industry participants have suffered the fallout from a loss of investor confidence. Current and prospective CTA, CPO and IB customers are asking if their money is safe, and in general, it appears that less excess cash is being left at FCMs, creating a tighter margin environment. It would be helpful for NFA to survey Association members to get a more complete picture of what the world looks like post-MFG, in particular assessing the impact on members businesses and their future outlook.

SIPA versus Chapter 7 Bankruptcy

The protection of FCM Seg Funds in bankruptcy comes from Subchapter IV of Chapter Seven of the US Bankruptcy Code, Commodity Brokerage Liquidation, 766, Treatment of Customer Property, which mandates that customer segregated funds receive top priority before creditors. In the case of MFG this should mean that a shortfall in customer funds will be satisfied by any remaining assets of the firm, and paid before the claims of general creditors. Paying segregated account holders first is the core foundation upon which rests the statement: "No investor has ever lost money to fraud or bankruptcy in a segregated account." Despite the fact that MFG was overwhelmingly an FCM with 50,000 customer accounts versus less than 400 securities accounts, and had $6.2B in customer assets as an FCM versus $100M as a Broker Dealer, a decision was made to file the bankruptcy under the Securities Investor Protection Act of 1970 (SIPA) over Chapter 7 of the Bankruptcy Code, a legal maneuver with far reaching consequences for the treatment of customer Seg Funds. The SIPA liquidation does not recognize fund segregation or futures industry account regulations, and the process favors general creditors. In a Chapter 7 bankruptcy the MFG accounts would have gone to CME for bulk transfer to other FCMs, and the MFG customers would not be in bankruptcy court. If money was missing, the difference estimated at 11% at the time would be sent to customers out of the first available assets. This is how the integrity and functioning of the futures markets are supposed to be protected in the event of an FCM bankruptcy. SIPA was intended to protect securities investors of Broker Dealers by providing insurance through the Securities Investor Protection Corporation (SIPC). Because of the insurance protection SIPA takes a different approach to the handling of customer funds in the event of a bankruptcy. Under Chapter 7, customers are not creditors, and their claims are superior to those of creditors, whereas under SIPA, customers have no statutory priority and receive insurance proceeds. In addition, SIPCs attorneys have limited experience with commodity futures accounts and contracts, putting MFGs customers at a further disadvantage. Per an article by Mark Melin that originally appeared in Opalesque on January 19th, the fact that SIPC petitioned the Bankruptcy Court to begin the liquidation of MF Global, and the loss of FCM Seg Fund protections afforded by Chapter 7, may have been decided in a phone call between Mark Cook of the Securities and Exchange Commission (SEC) and Jill Sommers of the CFTC on the morning of October 31st: In Closed Door Meeting Preceding Bankruptcy Filing, JP Morgan and Goldman Sachs Granted Superiority over MFG Investor Segregated Accounts. Move Jeopardized Integrity of Futures Markets while Top CFTC Official Acted As Idle Bystander. Per the article, the CFTC is said to have allowed the loss of significant account segregation protections without a fight, "There was no logic behind making this a SIPA liquidation," 5

reported futures industry consultant Elaine Knuth, who contributes to a blog at www.mfgfacts.com. In testimony before the House Committee on Agriculture on December 8, Commissioner Sommers acknowledged that the CFTC agreed with Mr. Cooks decision to favor a SIPA liquidation over a Chapter 7 bankruptcy with protections for segregated accounts. Per Ms Knuth: "What is clear is under its Congressional mandate, the CFTC should have absolutely prevented market disruption and freezing customer assets by a Securities Industry SIPC liquidation and immediately asserted special priority distribution of such property under the US Bankruptcy Code contained in Chapter 7. For the CFTC to give up and throw away critical market protections and allow that to happen in this case is not only absurd to the highest degree, it questions why then the agency even exists." The bankruptcy situation is further complicated by the fact that there are three separate filings and cases, each with their own trustee: (i) MF Global Holdings, the parent company for 45 separate MF Global entities around the world, only 5 of them in the US, including (ii) MF Global Inc, the primary US entity which was the Broker Dealer/FCM, and (iii) MF Global UK. While MF Global Holdings was a US entity, the 40 companies it controlled outside the US are domiciled in numerous countries, each with their own local bankruptcy laws which have varying levels of protections for customer funds. If the bankruptcy had been filed under Chapter 7, the customers could have claimed priority over all the assets of the various MF Global entities, estimated to be $41B versus liabilities of $39.7B at the time of the filing, leaving a surplus of $1.3B that could have been applied to the shortfall. (Korablev, Irina, et al. Public Firm Default Report: MF Global Holdings Ltd. Moodys Analytics October 2011.) Despite the filing under SIPA, and the missed opportunity to contest it, counsel for MFG customers are continuing to assert that their claims are superior to those of general creditors (see below).

Why Seg Funds are Missing

Under the Commodity Exchange Act and the United States Code, invading customer funds to meet the general obligations of an FCM is a felony. Any investments purchased with customer funds are supposed to be deposited into the FCM Seg Funds account concurrent with the transfer of funds to effect the purchase so there is never a deficiency. If there is a Seg Funds deficiency it is supposed to be made up immediately, and if it is not, the shortfall is supposed to be reported immediately to the CFTC. Statement of Gerald F. Corcoran, RJ OBrien Chairman and CEO, House Committee on Agriculture, December 8, 2011. The Seg Funds shortfall was first reported to the CFTC on Monday October 31, just before the bankruptcy filing. However, in a statement released on February 6, the Bankruptcy Trustee indicated that his investigation has now revealed that the shortfall started on Wednesday October 26 and continued to grow in size until the bankruptcy filing on 6

Monday, October 31, 2011. Status Update from the Office of James W. Giddens, Trustee for the Liquidation of MF Global Inc., Concerning the Trustees Investigation. 6 February 2011 (hereinafter Giddens 6 February Update). Further, CME Executive Chairman Terry Duffy testified before Congress that MFG provided false segregated funds reports. (Terrence Duffys Testimony Before Senate Agriculture Committee. Bloomberg 13 December 2011.) Sorting through numerous and conflicting reports, and reviewing the Giddens 6 February Update, reveals a number of purposes that MFG may have used Seg Funds for: customer money was used to meet margin calls on (i) the leveraged firm investment in proprietary European sovereign debt, or (ii) the Seg Funds investment in European sovereign debt, or (iii) house prop trades customer money was transferred to other MFG entities, primarily MF Global (UK) customer money was transferred internally at MFG to operating accounts and was used to fund the daily activities of MFG

The Trustee has overcome the initial difficulty of tracing the thousands of transactions involved, and is now reporting that the whereabouts of most of the Seg Funds are known. Giddens 6 February Update

Amount of Seg Funds Shortfall

Early reports in the press indicated that the shortfall was $900 million or more, but by the close of business on October 31st, the CME reported to the CFTC that they were confident the shortfall was $633 million. Up until last Friday the latest information from the Bankruptcy Trustee was that the shortfall was $1.2B, at which point he increased it to $1.6B to reflect the growing difficulty in recovering the $700M of assets held outside the US by MF Global UK. (Protess, Ben. MF Global Trustee Sees $1.6 Billion Shortfall. NYT DealBook 10 February 2012.)

Customer Representation in Bankruptcy Court

When the MFG bankruptcy was filed nobody appeared in court to represent the interests of customers, either to contest the filing under SIPA as opposed to Chapter 7, or to oppose the claims of creditors whose interests were directly adverse to customers. At a minimum one would have expected the CME as the Designated Self-Regulatory Organization (DSRO), as well as NFA and the CFTC to have appeared on behalf of customers, as NFA did as the DSRO in the Sentinel Case. However, it was not until over two weeks later on November 16th that James Koutoulas, a CTA and principal of Typhon Capital Management (NFA ID 398233) appeared in bankruptcy court on behalf of his clients, and in the process has ended up representing over 8,000 MF Global customers on a pro bono basis through the Commodity Customer Coalition (CCC) .

In a true David v. Goliath undertaking, up against some of the worlds most powerful law firms representing JP Morgan (JPM) and other creditors, relying on donations, and with little prior litigation and no bankruptcy experience, Mr. Koutoulas, with the help of the law firm of Barnes & Thornburg assisting at discounted rates, has: limited JPMs requested use of cash collateral and blocked an attempt by JPM to receive a super priority over customer funds maintained the position that the customers are not creditors and have a superior claim to assets of both MF Global, Inc. and MF Global Holdings, Ltd. submitted a brief that (i) customer funds retain their character and can be clawed back regardless of their locus, and (ii) outlined recommended classification of funds that left MFG as statutory or constructive trusts requested that NFA and CFTC submit amicus briefs on the issue of The Allocation and Distribution of Customer Property brought to light the conflicts of interest of JPM (CNBC Video Gallery) helped to obtain a letter from 5 members of Congress supporting the CCC position in the bankruptcy proceedings that 100% of customer funds should be released immediately authored many of the questions used by Congress in the Financial Services and Senate Agriculture Committee hearings received a formal request from Debbie Stabenow, Chairwoman of the Senate Committee on Agriculture, for assistance and recommendations on market safety and customer protections objected to the Bankruptcy Trustees original plan to return 60% of customer funds beginning in July 2012, and instead, with the help of the CME, won a court ordered distribution to customers of 72% of their US Seg fund balances by the end of December 2011

JP Morgan
JPM was MFGs custodian of customer Seg Funds, prime broker, clearing broker, settlement agent for house trades, and primary lender to MFG, providing a $1.2B revolving credit facility. Playing all these roles created numerous actual and potential conflicts of interest, and JPM is the largest creditor of MFG in bankruptcy with a claim for $1.2B. As MFG sold billions of dollars of securities to raise cash in the week leading up to the bankruptcy, its executives came to believe that JPM, as one of MFGs primary bankers and a middleman, was dragging its feet in forwarding funds. The delays contributed to a 8

serious cash shortage, worsening MFGs distress, and hundreds of millions of dollars of MFG money may still be in accounts at JPM. (Mollenkamp, Carrick, et al. In MF Global, JP Morgan Again at the Center of a Financial Failure. Reuters. 19 January 2012.) JPM was also involved post-bankruptcy in a transaction in which George Soros bought $2B of MFGs European Bonds below the market price. (Zuckerman, Gregory, et al. Corzine's Loss May Be Soros's Gain, Online Wall Street Journal. 9 December 2011.) After receiving $200M from MFG three days prior to the bankruptcy, JPM requested a letter stating that the funds were not customer Seg Funds. No letter was provided, yet JPM has not returned the $200M to the bankruptcy trustee so that it could be distributed to customers. (Patterson, Scott. MF Global Transfer Draws Scrutiny, Online Wall Street Journal. 21 December 2011.) JPM is resisting customer requests for discovery in the bankruptcy proceedings, objected to the Third Bulk Transfer of assets to customers, objected to customers having priority over MF Global Holding Company assets, and retaliated personally against James Koutoulas by cancelling his credit card and bank account without prior notice after he appeared on CNBC for an interview during which he requested a boycott of JPM. It is possible that a significant portion of the missing Seg Funds are at JPM, perhaps as a result of JPM holding on to the proceeds from asset sales it was clearing for MFG as MFG tried to raise cash to avoid bankruptcy. (LaCapra, Lauren, et al. MF Global Sold Assets to Goldman Before Collapse: Sources. Reuters 3 January 2012.) JPM has fought aggressively in bankruptcy court to protect its interests, and received a lien on some of MFG's assets in exchange for granting $8 million to fund the bankruptcy costs. The lien puts JPM's interests ahead of MFG customers. (LaCapra, Lauren, et al. MF Global Sold Assets to Goldman Before Collapse: Sources. Reuters 3 January 2012.)

Prospects for Recovery of Seg Funds in Bankruptcy Court

Per the Trustees latest accounting, 72% of US Seg Fund balances have been returned to customers, leaving a shortfall of $1.6B which now includes assets held outside of the US. Possible sources for recovering these funds include: $200M+ retained by JPM, even though JPM did not get a comfort letter it requested from MFG that these monies were not customer funds $300M in firm assets still in the MF Global, Inc. bankruptcy estate, which may increase as additional recoveries are made $700M at MF Global UK which has been identified as US customer funds, presumably transferred as margin for non-US positions

a reserve of 15-20% held by the Bankruptcy Trustee after the Third Bulk Transfer, perhaps $1B. (Sandler, Linda. MF Global Trustee to Return Up to $2.1 Billion to Customers. Business Week 6 December 2011). lawsuits against Jon Corzine, the Directors of MFG, CME, and MFGs accountants, although any successful damage claims will presumably have a lower priority than those of customers possible clawbacks from numerous entities separate and apart from MF Global as well as among the subsidiaries controlled by MF Global Holdings

Various standards and procedures apply to each of these potential sources of funds, and litigation to resolve all the issues could take years and generate significant fees (the Bankruptcy Trustee is charging the discounted rate of $891 per hour), further depleting the pool of assets that might be left to satisfy customer claims. Subject to what the Bankruptcy Trustee is able to recover, and legal rulings on the priority of customer claims, the final shortfall may be a lot less than $1.6B. Note that CME helped with the recovery of 72% of customer funds in the Third Bulk Transfer by pledging $500M towards recovery of 75% of US Seg Fund balances, and that CME may be able to provide $50M to help pay the Bankruptcy Trustees legal fees. Since it is estimated that the Trustee has sufficient assets in reserve to return up to 83% of US Seg Funds, it appears that the CMEs pledge will be fulfilled, and unless modified, it will not apply to close the gap of any additional shortfall.

Press Coverage and the Perspective of Customers

While the press had been full of MFGs troubles in the weeks prior to the bankruptcy, most customers and industry participants were not worried about the safety of their money since up until now nobody had ever lost a dollar of segregated funds. Post-bankruptcy press coverage has been uniformly bad for the industry with numerous and repeated articles detailing alleged misdeeds, missing funds, customer suffering, political favors, stymied investigations, and the failure of the regulatory agencies to prevent or effectively deal with the problems. Here are two accounts of the personal impact of the MFG bankruptcy, from the perspective of a member of our Association and an MFG customer. Ann Barnhardt (NFA ID 0282801) had been involved in the futures industry since 1997, first working at LFG and RJ OBrien before forming her own firm, Barnhardt Capital Management, which was involved primarily in the cattle business. Her interview with Jim Puplava went viral in the context of the futures industry with over 20,000 hits and expresses the sentiments of many. Ann knew and was working with many people in the

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cattle industry who lost tens of thousands of dollars on hedge positions they were unable to exit in the week and a half after the MFG collapse. As a direct result of the MFG bankruptcy she closed her business and withdrew her registration on November 17th because she could no longer tell her clients that their money was safe. The full interview can be found at Puplava, James. The Entire Futures/Options Market Has Been Destroyed by the MFG Collapse. Financial Sense 1 December 2011. An MFG customer, Dean Tofteland, a farmer from southern Minnesota, in testimony before the Senate Agriculture Committee on December 13th, related that he had an account at MFG that he used to hedge his crops and lock in prices. He called his broker at MFG when he heard that MFG was having trouble and was told not to worry, that his funds were segregated and safe. After the bankruptcy his $250K account was frozen and he was unable to adjust his hedges despite adverse market moves. He also used the MFG account as collateral against an operating loan at his local bank, and is now facing serious financial problems. Testimony of Dean Tofteland.

NFAs Mission and Purpose in Relation to the MF Global Bankruptcy

NFAs stated mission is to ensure futures industry integrity, protect market participants and help our Members meet their regulatory responsibilities. NFA is committed to making decisions and taking actions that reflect the highest level of service excellence for our customers: NFA Members and the investing public. From NFAs home page: Regulation. Redefined. Investor confidence is crucial to the success of the futures markets, and the best way to gain investor confidence is to ensure that the highest levels of integrity are demanded of all market participants and intermediaries. National Futures Association (NFA) is the industry wide, self-regulatory organization for the U.S. futures industry. NFA strives every day to safeguard market integrity, protect investors and help our Members meet their regulatory responsibilities. As set forth in Article III of the Articles of Incorporation the fundamental purposes of NFA are to promote the improvement of business conditions and the common business interests of persons engaged in commodity futures or related activity While NFA has done a phenomenal job in the 30 years since it was formed to build investor trust and confidence, unfortunately, in the wake of the MFG bankruptcy, with each passing day the trust and confidence of investors and the public that took decades to build is being lost. We have failed to keep the promise we made to customers: that their money was safe.

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Why MF Global Customers Should be Made Whole

In practical terms, protecting customers at this point means making them whole. No promise or assurance for future safety will have much meaning or credibility unless the 38,000 MFG customers get 100% of their money back. The success, stability and efficiency of the futures markets in the United States depend on the principle that the segregation of customer funds is absolute. MFGs violation of Seg Fund protections was at a minimum a serious breach of fiduciary duty, at worst it was a federal crime. In either case, we let this happen and customers are entitled to a recovery of all their funds. Given the significant potential for irreparable harm to our industry as a result of the MFG bankruptcy and its aftermath, it is in our common, enlightened self-interest to make the 38,000 MFG customers whole. The alternative is an ongoing drumbeat of negative news and perceptions, while subjecting the customers to years of Dickensian litigation.

Proposal for NFA to Facilitate The Futures Industry Raising Funds to Cover The MFG Shortfall
Given our history of strong self-regulation and the makeup of NFAs Board which includes representatives from all sectors of the futures industry, NFA is in the best position to coordinate an effort to raise funds to cover the MFG shortfall. Similar to the pledge made by CME to cover the return of US assets up to 75%, we propose that NFA work with the Clearinghouses, Exchanges and FCMs to find a way for all of us to stand in the shoes of the customers and make them whole. Specifically, we propose that a working group comprised of NFAs President, Chairman, key staff, and members of Board be formed with the authority to contact industry participants and explore all options. As a possible supplemental source of funds, consistent with the purposes and mission of NFA as set forth in Article III of the Articles of Incorporation, it is within the power of NFA to augment the NFA fee and use the proceeds to secure loans sufficient to help cover the MFG shortfall. Implementing the needed changes to the Bylaws would require approval of a 2/3 super-majority of NFAs Board and approval of the CFTC. Specifically, we request that the Board direct staff to develop proposals pursuant to which NFA could, through either a direct or indirect assessment, raise funds to help cover the MFG shortfall, and report back to the Board by March 31, 2012.

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Proposal for NFA to Directly Monitor and Make Transparent Seg Fund Investments for all FCMs
If customers knew today what FCMs are actually doing with their money would they feel safe or run for the exit? As a better and simpler approach than continually amending lists of permissible investments in a political arena, post-MFG customers have a right to know where their money is invested at all times. Making Seg Fund investments transparent in real-time will let the marketplace determine what level of risk is acceptable. Banning all non-exchange traded instruments for Seg Funds and prohibiting hypothecation go hand-in-hand with transparency. NFA already has in place an online interface for FCMs (for which it is the DSRO) to file a monthly Segregated Investment Detail Report (SIDR). The SIDR (pronounced cider) report provides a detailed breakdown of an FCM's investment of Seg Funds and identifies the carrying brokers and other depositories holding the funds. While currently filed monthly, SIDR filing requirement should be made daily, with all FCMs required to report their Seg Funds investments to NFA (even if NFA is not the DRSO), with the results then made public through a website. Further, NFA should have the authority to monitor and spot check the balances. To further protect Seg Funds, NFA could approve investments and transfers before they occur, and also require that all customer funds be held by a third party custodian or at the Clearing House. FCM executives should be required to sign off daily on all Seg Fund balances and investments, with criminal penalties for any misrepresentations or malfeasance.

Proposal for NFA to Pursue Legislative Changes to Secure the Status of Seg Funds
We need to make sure once and for all that existing public policy is codified: that there is no doubt going forward that customers have first priority rights over the assets of any FCM, or FCM affiliate or parent company, and NFA should seek appropriate amendments to the Bankruptcy Code, CEA and SIPA, as well as NFA and CFTC Rules.

Proposal for NFA to Advocate for Customers in the Bankruptcy Case

For a number of reasons, including that the bankruptcy judge has not yet decided the issue of the priority of customers over creditors, we propose that NFA get directly involved in the bankruptcy case as an advocate for the priority of Seg Funds and the interests of customers generally.

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Conclusion
While some of us may find ourselves on opposite sides in courtroom battles over MFGs assets in the months and years to come, as an Association we need to work together and put the interests of the customers first. Doing so will help the customers, restore investor trust and confidence, and serve everybodys long-term interests. The investment in our future is a small price to pay to see positive headlines along the lines of:

Futures Industry Steps Up to Make MF Global Customers Whole Sanctity of Futures Segregated Funds Preserved NFA Brings Futures Industry Together To Repay MF Global Customers
Going forward, no customer, FCM, CTA, IB or Exchange should have to go through an ordeal like the MF Global Bankruptcy, or worry about the safety of customer funds. We have an opportunity to define the moment, restore trust and build a strong foundation for our future. Lets preserve the truth of the statement: Nobody has ever lost a dollar of segregated funds.

Respectfully submitted,

Douglas Bry, President Northfield Trading LP 3609 South Wadsworth Blvd, Suite 250 Denver, CO 80235 Phone: 303-985-3366 Fax: 303-985-3225 Email: doug@ntlp.com

Ernest Jaffarian, President and CEO Efficient Capital Management, LLC 4355 Weaver Parkway, Suite 200 Warrenville, IL 60555 Phone: 630-657-6800 Fax: 630-657-6686 Email: jaffarian@efficientcapital.com

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