Is The CME In Hot Water Over The MF Global Bankruptcy? Goldman Explains Why This Is The Case

Tyler Durden's picture

While we will leave the question of the ridiculous Initial margin cut by the CFTC to the side (an action that should have been since reversed, even using the CME's troubled logic, if it was merely meant to facilitate onboarding of MF Global marginless accounts) a bigger, far more troubling question has emerged, namely whether CME has liability over the MF Global bankruptcy. Goldman's Daniel Harris explains: "CME has been under pressure (-9% wow vs. S&P +1% wow) owing to worries it may face liability over the timing of its communication with the CFTC following discovery of a shortfall in MF Global’s segregated client accounts, given its obligations as the DSRO (designated self regulatory organization). According to the CFTC, a DSRO must provide “immediate notification” when “a member has failed to segregate or has misused customers’ funds.” While details emerge, the stock remain under pressure pending more clarity on (1) the status of the reportedly missing $600 mn in client segregated assets, (2) incremental information on how CME satisfied its obligations as the DSRO with respect to MF Global, and (3) the status of CME/CME Trust’s offer to provide a $300 mn guarantee to the SIPC Trustee for the expedited return of client assets." Perhaps the CME should have stuck to just hiking gold and silver margins...

Some prehistory again via Goldman:

MF Global informed the CFTC and CME of a shortfall in segregated assets early on October 31, thus any potential liability relates to reports that CME had uncovered that information before MF Global notified the CFTC. Given the DSRO’s responsibility to provide “immediate notification” to the CFTC of such information, any potential liability is likely to hinge on the timing of when CME initially discovered discrepancies. With both  uncertainty over  CME’s liability as an SRO and negative headlines about the missing client assets at MF Global, it is challenging to expect CME  shares to recover near term regardless of fundamental trends in 4Q. Further, the $250 mn guarantee to the SIPC Trustee could wind up an expense (the $50 mn from CME Trust would not be expense as it is not on the CME balance sheet) if the Trustee disburses funds beyond what is recoverable in bankruptcy.

So is there a reason to be worried? You betcha:

From within the Division of Trading and Markets organization of the CFTC, we highlight an interpretation of Financial and Segregation of accounts. While these are not the specific rules, they are the interpretation and practices followed by the Division of Trading and Markets in administering the Commodity Exchange Act as it relates to Self Regulatory Organizations. We see four key areas that relate to a SRO’s  obligations as they relate to current events unfolding with regards to the MF Global bankruptcy, shortfall in client segregated accounts, and CME’s obligations as the SRO. The below is quoted at length from the Advisory Interpretation, which is available on the CFTC’s website.


Protection of Customer Funds

13. The primary focus of a DSRO’s Program should be on those members that handle regulated commodity customer funds. In this connection, the DSRO should have in place procedures to ensure prompt implementation of its regular surveillance and examination procedures, as soon as  such firms begin handling customer funds. In addition, an SRO which is a contract market should establish procedures for monitoring those  clearing members of theirs which are not Commission registrants to satisfy itself that they have adequate financial resources to meet their obligations to the SRO’s clearing organization. 


Notices to the Commission

18. When material apparent violations of the Commission and other SROs’ rules are discovered, the DSRO must promptly notify the Commission and such other SROs. The following situations will call for immediate notification: a member is not in compliance with the net capital rule; a member’s net capital falls below early warning levels; a member has failed to segregate or has misused customers’ funds; a member has denied the SRO access to its records; or a member has failed to maintain current books and records. However, these notification standards are not in  lieu of any other notification requirements imposed on SROs by existing regulations.


19. An SRO must promptly file appropriate notices with the Commission and with other SROs when required to do so by regulation, the SROs’ rules, or this Interpretation. If an SRO becomes aware that a member has not filed a required notice, it should promptly advise the member of its filing responsibility and ascertain whether the member has then made such filing. If the member fails to file, the SRO shall immediately notify the Commission and such other SROs as may be appropriate.


Close Monitoring of FCMs and IBs with Financial or Operational Problems


22. A DSRO must monitor closely each member-FCM and -IB for which it is responsible and which it knows or suspects is experiencing financial or operational difficulties. It must take prompt and effective action to satisfy itself that the member remedies such difficulties. Where a member has failed to remedy such difficulties promptly, or where the member has recurring financial or operational difficulties, the DSRO must take action to limit the activities of such member until it can affirmatively demonstrate its ability to remain in compliance, or take such other remedial action appropriate to the seriousness of the difficulty. A member-FCM generally will be considered to have recurring financial or operational difficulties when it fails to meet minimum SRO/Commission net capital or segregation requirements, or fails to maintain current books and records, on more than one occasion during any one year period. The Division wishes to make it clear that a DSRO must not automatically and repetitively allow an FCM or IB to continue operating without the registrant’s taking substantive action to remedy the cause of the financial or operational difficulty.”

Hmm, this sure puts that whole very generous offer to offer a $300 million financial guarantee to MF Global accounts in a slightly different light now, doesn't it.


Update: here is the CME response:

CME Group Statement on MF Global Segregation Violation

CHICAGO, Nov. 17, 2011 /PRNewswire/
-- In response to inaccuracies reported yesterday, CME Group confirmed
today that it followed CFTC requirements and CME Rules and procedures in
reviewing MF Global's segregated funds statements and coordinating that
review with the CFTC.  CME was advised in the early hours of Monday,
October 31 that there was an actual shortfall in the segregated funds
account and was told the CFTC was advised concurrently.  Shortly
thereafter, CME Group discussed the shortfall in a conference call with
the CFTC and other regulators.  CME Group is confident that it complied
with all its obligations as a DSRO pursuant to the Commodity Exchange


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Careless Whisper's picture

The Careless Whisper Noontime Threadjacking Update



PIC OF THE DAY:  Retired Philadelphia Police Captain Ray Lewis Outside NYSE With A Message!/AdamGabbatt/status/136529537851858946/photo/1

VIDEO: Philly Police Captain Ray Lewis; The NYPD May Disappear Me

LPS Responds To Robo-Signer Indictments (606 Of Them); They Deserved Foreclosure Anyway

ECB Prints, & Buys Spain Bonds To Keep Yield Below 7%

Fake Terror Plots?

Google Music Opens; Aims At Andriod Users,0,1854544...

VIDEO: Central Bank Of Canada Introduces Fancy Schmansy $100 NOTE; Backed By The Air It Floats Thru

VIDEO: Astro, 14 Year Old Rapper, On Last Nites X Factor

FLASHBACK VIDEO; 3 Weeks Ago; Astro - X Factor Audition

fuu's picture

You posted the same link twice for Astro.

Careless Whisper's picture

my bad

also this link, pic for ray lewis (sorry, but you got to cut and paste, i haven't figure out the stupid twitter shit)!/AdamGabbatt/status/136529537851858946/photo/1/large


iDealMeat's picture

Get to know em:

Dennis A. Suskind

Mr. Suskind has served as a member of our board since 2008. Mr. Suskind joined J. Aron & Company in 1961 where he served as Executive Vice President and was responsible for the worldwide precious metal trading operations. In 1980, Mr. Suskind became a general partner of Goldman Sachs upon its acquisition of J. Aron & Company until his retirement in 1990. During his tenure in trading metals, Mr. Suskind served as Vice Chairman of NYMEX, Vice Chairman of COMEX, a member of the board of the Futures Industry Association, a member of the board of International Precious Metals Institute, and a member of the boards of the Gold and Silver Institutes in Washington, D.C. Mr. Suskind serves on the board of Bridgehampton National Bank and previously served on the board of NYMEX Holdings.


J. Dennis Hastert

Mr. Hastert has served as a member of our board since 2008. He served as Speaker of the House of Representatives from 1999 through 2007. He served 11 terms in Congress and retired from the House of Representatives in 2007. Prior to his role as Speaker, Mr. Hastert served as Chief Deputy Majority Whip in the 104th Congress and also served as Chairman of the House of Government Reform and Oversight Subcommittee on National Security, International Affairs and Criminal Justice.


12ToothAssassin's picture

*NOW* I know why Im not rich: I dont go by my first initial then full middle name!


Step 1: Refer to myself as "J. Larry Johnson" stat

Step 2: ...

Step 3: Profit!

earleflorida's picture

fwiw dept:

**j. aron/ unit of gs's non-fixing market makers[nfmm's]

there are five [5] market makers & three [3] non-fixing mm's remaining as of 10/2010* data on the 'london gold fix [twice daily]'

"London gold fix Market Maker's [5]"

#1 bank of nova scotia

#2 deutsche bank ag

#3 hsbc bank

#4 societe generale

#5 barclays capital plc *{purchased lehman n.a. trading/brokerage}

"London gold fix 'NON-FIXING' Market Maker's [3]"

#6/8 ** j. aron

#7/8 jp morgan chase bank

#8/8 ubs bank

please note: aig & n.m. rothschild's  both had withrawn from the 'london gold fix' in mid 2004 & late 2004 respectfully as 'market makers [mm's]"

ps. barclays plc also purchased n.m. rothschild's seat prior,... along with adding lehman's seat 9/15/08 [dual mandate?] 

PaperBear's picture

The CAD 100 note does sure look pretty but is still nothing more than a slave token.

I wonder how good it burns.

GeneMarchbanks's picture

Jesse's been all over this story. It just gets more horribly obscure and absolutely reeks of phony accounting.

mayhem_korner's picture



Perpetuation of bad governance is never an accident nor does it metastacize quickly.  I'm wondering when this thing first derailed and how many were in the room when the cover up scheme was hatched.

GeneMarchbanks's picture

'I'm wondering when this thing first derailed and how many were in the room when the cover up scheme was hatched.'

This has been layered over through ingenious obscurantism and completely sinister gobbledygook accounting strategies. Good luck to the investigators tracking the client funds. I'm not sure there's been enough time for 'scheme' but I anxiously await the findings.

slewie the pi-rat's picture

well, that would be a good approach, but the unknown super-freaking BiCh-whammy isn't so much in who is covering up the crime, perhaps, as it is in the scope and nature of the crime, and tring to keep the proverbial lid on the bankster counterparties involved with certain "shortages" of this & that, here & there, around the crimex

here is a great source of current scuttlebutt & nuanced innuendo regarding the ever-dastardly banksters and their nefarious networks and felonious schemes: Gold & Whirlwind Crisis

ebworthen's picture

Nice link Slewie, thanks.

We just have to hope Bob Pisani doesn't read it; might make him cash out of his BAC shares.

RockyRacoon's picture

This was just too to pass up:


Those MF Global MFs!

By Global Macro Monitor

We have a good friend with money tied up in the MF Global debacle. As of November 1st, he had close to $100K in his “segregated” futures account with no open positions. He says the MF Global website is shut down and the phones don’t ring when he calls. This guy was a “big swinging Richard” at one of Wall Street’s biggest firms and now trades his own account.

Here is his letter of rebuke to MF Global, which he passed on to us. Can you tell he is a little peeved?

Dear MFGI Correspondence Team:

Since you have been taciturn and uncommunicative – I thought I might lighten the mood, break the ice so to speak.

You do realize that the theft of customer funds is a first. So congratulations, even in the dark days of Hank Paulson and his ummm-how to put this delicately, … “… you are all screwed anyway ..” policy – none of the Oligarchs had descended to just outright theft. Even Madoff had the class to run a proper Ponzi scheme requiring charisma, finesse and time. Outright crude theft – well that is indeed a new phase in our culture. It is a progress from infidelity to gang – bang – from the Sublime to the SubSlime. And So …we are now in uncharted waters.

Just for fun , I like to speculate on what the Oligarchs think will happen once they get all the loot and leave the smoldering remains of a once great country – i wonder if they think we are still in a Rudyard Kipling world where the bare-assed natives in Asia and Africa will welcome them as Gods. I bet not many have actually tried to set up a bank account overseas – they will find that no one wants American clients! They will also find that the pittance they looted won’t go too far – maybe a studio apartment on the outskirts of town, a couple of beers and some local hookers – your money is no good here etc etc. Most of all they will be aliens – have to line up to get temporary visitor visas etc

And until they are able to give up their US citizenship – which would be unwise until some other country grants them citizenship on a refugee or other basis – they will have to file US tax returns and report their earnings from all their world wide sources.

In short – if the Oligarchs think they are going to flee to a life of opulence , they will be bitterly disappointed. But they will unfortunately probably have to flee in any event – take your malaria pills along.

PaperBear's picture

I would say yes, the CME is in hot water over MF Global.

bernorange's picture

Hopefully boiling hot.  I love the smell of boiling crooks in the morning.

Deadpool's picture

luke warm at best, as if G. Gennsler will lift a finger against his old Goldman partner Corzine. If they can't see silver manipulation in 3 years how long before this gets worked out...30?

bernorange's picture

Gensler recused himself from the MF Global investigation.

Max Fischer's picture



No, I don't think they are in trouble. 

Why would Goldman Sachs be the fifth largest shareholder of the CME?

And the CME was the single largest contributer (by a long shot) to Rahm Emanuel's mayoral campaign.  Not to mention the fact that Rahm was on the board of directors for the CME shortly after he left the Clinton white house. The CME is fully protected.* Isn't it funny how someone can go to Sarah Lawrence college because of their dance program (Rahm wanted to be a professional ballet dancer), and end up being such a powerful figure in both Washington and Wall Street?  This guy has absolutely no background in finance or banking, yet he's continually given impressive, powerful positions at CME, Wasserstein Perella, Freddie Mac, etc.  That's the beauty of the Washington/Wall Street circle jerk, and few exemplify it better than Rahm.  He's the slimy, sleazy politician that other slimy, sleazy bankers can call on when they need some government info or protection.  

* As an aside, do you know that the CME is the only futures exchange in the history of the United States that can be bailed out by taxpayer money?  This was a little known provision jammed into the Frank-Dodd bill last summer, thanks to Rahm being in the White House at the time. Oh, wait a minute.... or is it because Dodd's wife is currently a board member of the CME?  *LOL*  Too confusing.... everything is so connected.  Maybe that's why GS owns so much of it.    

Max Fischer, Civis Mundi 

anonnn's picture

Your succinct and effective post duly noted. It's a wavemaker.

TeamDepends's picture

In the future our cars will run on debt and use hope for oil.

GeneMarchbanks's picture

Plus you'll be able to buy it with change.

Bicycle Repairman's picture

That would imply Peak DebtTM.  How realistic is that?

vegas's picture

As I have stated before in previous posts, when the sun finally hits this whorehouse, SHTF bigtime.

They will do everything possible to hide, cheat, lie, and then lie some more to keep this from happening.

The slush fund bullshit and shakedowns that take place there on a regular basis makes for a wonderful DRSO.

Remember how the mafia used to take care of their internal problems? Maybe they can meet at a farmhouse in upstate New York and figure out who's gonna get whacked and take the heat off the place.

mayhem_korner's picture



I thought the $300 million was Crimex pre-posting Corzine's bail.

bill1102inf's picture

Next stop $1600 ..... Gold Bitchezzzz

Careless Whisper's picture

good. i buy more with the chinese.


mayhem_korner's picture



Correction: next stop for GLD.  Gold sells at a different price.  :D

Rastamann's picture

why are LIBERTARIANS complaining about a PRIVATE SELF REGULATING entity like the CME? you should be CELEBRATING....this is what you want: the fastest gun in the west wins....and multi-national corporations are the biggest of the guns......right?


and all you peabrain peons get what you get.


ahhhhhhh don't you just looooove social Darwinism?

Bastiat009's picture

Darwin never EVER studied human beings, let alone social behaviors. The evolution of animals in the wild will never apply to human beings who don't need to kill each other to survive, unlike animals.

iDealMeat's picture

Humans are animals.  Same rules apply. We kill each other for our 'beliefs' to survive.

Tramp Stamper's picture

Humans are worse than animals

Rastamann's picture

social Darwinism is a term defining the "ideology" of EVERY extreme rightwing idiocy....NAZIs and libertarians alike. it doesn't mean that Darwin studied humans.


are you REALLY this stupid in real life? don't answer that.

el Gallinazo's picture

You never EVER studied Darwin.  You a ghost writer for Rush and make up your facts as you go along?

From Charles Darwin, Wikipedia:

Darwin's work established evolutionary descent with modification as the dominant scientific explanation of diversification in nature.[3] In 1871, he examinedhuman evolution and sexual selection in The Descent of Man, and Selection in Relation to Sex, followed by The Expression of the Emotions in Man and Animals. His research on plants was published in a series of books, and in his final book, he examined earthworms and their effect on soil.[12]

fuu's picture

Perhaps you meant to post this at little green footballs.

NotApplicable's picture

It's sad that you're so clueless you cannot even troll effectively.

Can't you be the least bit entertaining?

weinerdog43's picture

I think it's pretty funny.  I especially like using bold to make it extra special.

baseball13's picture

Libertarians also allow for the system to collapse under the weight of it's own fraud. They are not complaining about any self-regulating organization, but rather the fraud involved. Don't confuse Libertarianism with stupidity.

AngryGerman's picture

wow, one criminal organization explains how another criminal organization failed to inform a third criminal organization... that is very interesting, but pointless, as noone will go to jail anyway. rather the people responsible will become head of state of some poor third world country (like italy)...

Cinfultreat's picture

What the mother nigger fuck is going on with Silver?? Did I miss the report that Jupiter is made of it?

AngryGerman's picture

same with gold. probably due to europe being saved...

Careless Whisper's picture

probably due to europe being saved...

correction: probably due to banks in europe being saved...

ebworthen's picture

Central banks selling their PM's for cash, and to punish anyone trying to find real value versus risky shit (equities).

Don't worry, the way they will be printing fiat worldwide over the next several years will make up for daily drops.

Besides, a lot of price action is simply the big boys sloshing their trades in and out of sectors.

Oil one day or two, then equities, then PM's, then Fiancials, then Tech; lather, rinse, repeat.  When their HFT robots do the trades they beat anyone else in the door and out the door.  4% in a day or two over the course of two weeks is all they need to make a killing and squash the "little people".

You have to think in terms of weeks or months or years - macro - if you don't want to get killed.

kito's picture


The Deleuzian's picture

I hear that 'reverse gear' warning sound in my silver dump truck Kito!  Load up!!!

Nage42's picture

The CME trouble got anything to do with the slaughter on Silver/Palladium right now?

Everyone bailing from a sinking [speculative] ship?


Careless Whisper's picture

who knows. who cares. i'm a buyer. you want to sell? be my guest.


Nage42's picture

I sold my 2,000oz @35.5 (into Yen just after BoJ intervened) expecting that there was a lot of speculative money floating things.  With a bit of Risk-Off {tm} I wanted the speculators out so that I could reload and the Yen has appreciated too.  I'll prolly ease back into 1,000 @31 and then fully loaded to 2,000 if it comes near 30.

But that's just me.

If it falls south of 30, I'm not too worried as my initial load-up was @17.5 (I missed 13.5 thinking I'd get a better time... doh!).


I don't want to be out a physical position before the end of this week... things appear to be coming to a head and my Zurich lock-box must not be empty of silver by Friday.


ParkAveFlasher's picture

Is there a selloff of paper on lack of trust in CME?  A "show me the silver" moment?