You are on page 1of 8

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 1 of 8

Main Document

Robert C. Mendelson Joshua R. Blackman MORGAN, LEWIS & BOCKIUS LLP 101 Park Avenue New York, New York 10178 Telephone: (212) 309-6000 Facsimile: (212) 309-6001 Attorneys for National Futures Association UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK

In re: MF GLOBAL INC.,

) ) ) ) ) )

Case No. 11-2790 (MG) SIPA

Debtor. AMICUS CURIAE BRIEF OF NATIONAL FUTURES ASSOCIATION

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 2 of 8

Main Document

TABLE OF CONTENTS Page TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I. STATEMENT OF INTEREST OF AMICUS CURIAE . . . . . . . . . . . . . . . . . . . i ii 1 2 2

II. SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . III. ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. THE DISTRIBUTION OF COMMODITY CUSTOMER PROPERTY IS GOVERNED BY TITLE 11 AND THE CFTCS PART 190 RULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B. SEGREGATION VIOLATIONS DO NOT CHANGE THE CHARACTER OF SECTION 4d(a)(2) FUNDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IV. CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 5

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 3 of 8

Main Document

TABLE OF AUTHORITIES FEDERAL CASES Begier v. IRS, 496 U.S. 53 (1990) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . STATUTES AND RULES 7 U.S.C. 6d(a)(2) (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 U.S.C. 21 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 U.S.C. 24 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 U.S.C. 761-766 (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 U.S.C. 761 (10) (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 U.S.C. 766(h) (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 U.S.C. 78fff-1(b) (2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 C.F.R. 1.20(a) (2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 3 1 2 2, 3 3 3 2 2 4

17 C.F.R. 30.7 (2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 17 C.F.R. 190.01-190.10 (2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER S. Rep. No. 95-989 at 106 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 1978 WL 8531 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2

ii

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 4 of 8

Main Document

I. STATEMENT OF INTEREST OF AMICUS CURIAE National Futures Association (NFA) is an independent, industry-wide, self-regulatory organization for the futures industry in the United States and is registered with the Commodity Futures Trading Commission (CFTC) as a futures association under Section 17 of the Commodity Exchange Act (CEA), 7 U.S.C. 21 (2006). Except for limited circumstances not relevant here, NFA membership is mandatory for every registered futures commission merchant (FCM), all firms and individuals who conduct an exchange-traded futures business with public customers, and certain other entities that conduct a derivatives business. As a result, NFA regulates more than 3,600 Member firms and 51,500 Associate Members. NFA develops rules, programs, and services to protect investors and safeguard market integrity. NFA assists Members with their regulatory responsibilities and enforces NFA rules when Members violate them. NFAs role includes protecting the financial integrity of all FCMs that hold customer funds and minimizing systemic risk. The purpose of this amicus curiae brief is to provide the court with NFAs regulatory perspective regarding the handling of customer funds held to margin futures positions. Allowing these funds to lose their character in a proceeding under the Securities Investor Protection Act of 1970 ("SIPA") or due to an FCMs failure to segregate them properly would frustrate Congress's intent and could lead to drastically reduced liquidity and a serious loss of confidence in these vital financial markets.

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 5 of 8

Main Document

II. SUMMARY OF ARGUMENT Chapter 7 of Title 11 contains special provisions in subchapter IV with respect to commodity broker cases, and CFTC regulations set out the procedures to be followed for ascertaining and distributing commodity customer property. These requirements also apply in a SIPA liquidation case with respect to a securities broker dealer that is also a commodity broker. Federal law requires FCMs to segregate customer assets deposited and maintained to margin U.S. futures transactions and has analogous requirements with regard to foreign futures. See 7 U.S.C. 6d(a)(2) (2006) and 17 C.F.R. 1.20(a) and 30.7 (2011). The character of these assetsand the corresponding prioritydoes not change merely because an FCM may have violated its legal obligation to segregate the funds. III. ARGUMENT A. THE DISTRIBUTION OF COMMODITY CUSTOMER PROPERTY IS GOVERNED BY TITLE 11 AND THE CFTCS PART 190 RULES NFA recognizes that this is a SIPA case. As such, SIPA specifically directs the application of Chapter 7, subchapter IV of Title 11 to proceedings involving commodity brokers. 15 U.S.C. 78fff-1(b) (2006);see also 11 U.S.C. 761-766 (2006). In Section 20 of the CEA (7 U.S.C. 24 (2006)), Congress authorized the CFTC to adopt rules implementing certain provisions of Subchapter IV, including provisions relating to customer property. The CFTC exercised its authority by adopting its Part 190 Rules. 17 C.F.R. 190.01-190.10 (2011). The Trustee in this case has incorporated these procedures into his distribution plan. 2

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 6 of 8

Main Document

B.

SEGREGATION VIOLATIONS DO NOT CHANGE THE CHARACTER OF SECTION 4d(a)(2) FUNDS One of the futures industrys primary protections against customer

insolvency losses and systemic risk comes from Section 4d(a)(2) of the CEA, which requires that FCMs segregate customer funds, keeping them separate from the FCMs own funds. 7 U.S.C. 6d(a)(2) (2006). An FCM may commingle funds belonging to separate customers, but it may not use the funds of one customer to margin or guarantee the transactions of any other customer. As a result, FCMs must "gross up" customer funds, that is, their own funds must be added to the segregated funds to cover customer debits and deficits. Furthermore, since futures markets are highly leveraged and volatile, FCMs that carry customer funds must calculate their segregation requirements daily and add additional funds, if necessary. The segregation requirements work together with special provisions in the Bankruptcy Code to provide commodity customers with a priority in their funds. 11 U.S.C. 761-766 (2006). Thus, section 766(h) provides that the trustee shall distribute customer property ratably to customers on the basis and to the extent of such customers allowed net equity claims, and in priority to all other claims . . .. Customer property is defined to include cash, a security, or other property, or proceeds of such cash, security, or property, received, acquired, or held by or for the account of the debtor, from or for the account of a customer . . . 11 U.S.C. 761(10) (emphasis added). The use of the word or before held by indicates that property and proceeds received but not held, are still customer property, and segregation violations do not negate this characterization. 3

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 7 of 8

Main Document

These Bankruptcy Code provisions demonstrate Congress intent that funds required to be segregated be treated as belonging to customers even if segregation does not occur. When these provisions were adopted in 1978, the accompanying Senate Report stated that a customer need not trace any funds in order to avoid treatment as a general creditor. S. Rep. No. 95-989 at 106 (1978). If funds required to be segregated were to lose their character as commodity customer property when a commodity broker violated the segregation requirement, the customers priority would be dictated solely by the commodity brokers compliance or non-compliance with the segregation requirements. Cf. Begier v. IRS, 496 U.S. 53 (1990) (creating a statutory trust for IRS obligations). Such a result would negate the important protections provided to customers by the CEA and the Bankruptcy Code. NFA and the industry rely on the segregation requirements and the Bankruptcy Code priority to protect customers and the futures markets from the potentially devastating effects of a loss of margin funds. This is true even if the FCM violates those requirements and improperly removes the funds from segregation or fails to segregate them in the first place. When NFA discovers that an FCM is undersegregated, it orders the funds restored to the segregated account.1 If customer funds lost their character as commodity customer property upon removal from the segregated account, customer

If the FCM does not have sufficient funds to meet its segregation requirement, NFA takes a Member Responsibility Action placing restrictions on the use and liquidation of the FCMs assets. Although NFA does not have authority over non-Members holding FCM assets, it canand doesorder the FCM and other FCMs carrying funds for the under-segregated FCM to restrict the use of those assets. 4

11-02790-mg

Doc 910

Filed 02/14/12

Entered 02/14/12 17:05:56 Pg 8 of 8

Main Document

protection would be defeated since ordering a potentially insolvent FCM to add sufficient funds to its segregation account to make up a shortfall would be ineffectual. Section 4d(a)(2) of the CEA and the relevant provisions of the Bankruptcy Code work together to ensure that customer funds required to be segregated retain their character, even if the funds are not, in fact, segregated. Any other result would negate the important protections for customers and tie up margin funds, having a potentially destabilizing effect on the futures markets. IV. CONCLUSION Commodity customer property includes all property received, acquired, or held to margin commodity contracts, whether segregated or not. NFA respectfully requests that the Court honor this principle in this case.

Dated: New York, New York February 14, 2012 Respectfully submitted, MORGAN, LEWIS & BOCKIUS LLP

By: _______/s/__________________ Robert C. Mendelson Joshua R. Blackman 101 Park Avenue New York, New York 10178 Telephone: (212) 309-6000 Facsimile: (212) 309-6001 rmendelson@morganlewis.com jblackman@morganlewis.com

Attorneys for National Futures Association