Andrew Abraham

andy-0101 My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I adhere to the philosophy of trend following. Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets me apart from other traders is that I am not only concerned about the return on investment but how much risk I will have to tolerate to achieve my goals.

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More On Legal Stealing – The Infamous CFTC Rule 1.29

The below article is from the blog The Golden Truth..Details CFTC rule 1.29

More On Legal Stealing – The Infamous CFTC Rule 1.29

Time to cut to the chase. Let me just preface this with my belief that the missing $600 million from MF Global was money taken from segregated customer accounts and used by MF Global to satisfy a massive margin call issued by JP Morgan on MF Global proprietary accounts. I say JPM ultimately has the funds in question because if you have been following all of the news from the beginning, including the initial proclamation that the missing funds were found in the basement of JP Morgan followed by the slightly delayed statement of denial by JPM, then it makes sense to me that the dotted lines ultimately connect that missing money to JPM.

If the court rules that JP Morgan’s claims are superior to that of the customers, whose assets were supposed to be in a segregated account and arguably should be treated with a greater degree of superiority and protection than that of a general creditor, then the MF Global bankruptcy is indeed a case of legal stealing.

Everyone is discussing this nefarious CFTC rule 1.29 and pointing to it like it’s the culprit. In order to understand exactly what 1.29 is, it requires a review of the CFTC regulations with respect to “Safeguarding Customer Funds,” which starts with rule 1.20 and includes the subsequent rules through 1.30, plus rule 1.32. A definitive summary of these rules can be found HERE starting on page 8. Reading and understanding this is crucial to understanding the degree to which MF Global acted illegally and fraudulently and to understanding why my view is that the segregated customer funds should be treated as “superior” to any and all other creditor claims by the bankruptcy court.

The nefarious rule 1.29 simply says that any profits from customer funds which are hypothecated for purposes defined in 1.20-1.28 may be kept by the broker (FCM – Futures Commission Merchant aka commodities broker). Whether or not you agree or disagree with this ruling, and I disagree with it, the rules outlined in 1.20-1.28 set forth very specific procedures which must be followed in order to keep customer funds not only definitively segregated but clearly defined in terms of amount and market value. Here’s some examples from the link:
– the books and records of an FCM shall at all times accurately reflect the FCM’s interest in total assets on deposit in segregated accounts, which is the amount of funds in segregation in excess of the amount of funds required to be segregated (CFTC Regulation 1.23)
– each FCM that invests customer segregated assets must keep a record of such investments that shows certain information for each investment (CFTC Regulation 1.27)
– each FCM must prepare, as of the close of each business day, by noon the following business day, a record showing the total amount of customer assets required by the Act to be deposited in segregated accounts, the total amount of assets deposited in Section 4d(2) segregated accounts, and the amount of the FCM’s residual interest in such segregated customer assets (excess funds in segregation) (CFTC Regulation 1.32)
As you can see, the procedure for segregating and accounting for this segregation is very well defined and explicit. It’s essentially the “mother’s milk” of the securities industry. Furthermore, pursuant to the following, at any given point in time firms like MF Global should know exactly how much each customer has in its segregated account, how much can be hypothecated or repo’d and how much is hypothecated or repo’d AND what the usage is of those hypothecated funds – these are all legally defined procedures which are computerized and backed-up on a separate server, typically:
Whenever an FCM knows or should have known that the total amount of its funds on deposit in segregated accounts on behalf of customers is less than the total amount of such funds required to be segregated on behalf of customers, CFTC Regulation 1.12(h) requires the FCM to report immediately such deficiency to the CFTC and to either NFA or the exchange having primary responsibility for compliance surveillance of the firm
In effect, these rules dictate that the customer funds should not be missing and that tracking down what happened to them should have been a few mouse-clicks away. This is true regardless of whether or not 1.29 enables MF Global to accrue profits on the funds. Moreover, the CFTC and CME, the exchange having primary responsibility for compliance surveillance, should have been on top of this. I guess since Goldman Sachs people (Corzine and CFTC Chairman Gary Gensler, Corzine’s buddy from Goldman) are used to throwing around and losing $10’s of billions, they couldn’t be bothered with mere pocket-change like $600 million.

The bottom line here is that ultimately the flow of funds should have been very easy to track. And given that $600 was initially traced to JP Morgan, I believe that JP Morgan needs to be given the financial accounting equivalent of a proctology exam to convince me that they were not the beneficiaries of the $600 million missing from the customer accounts. Finally, Corzine and every staff member responsible for oversight on this matter needs to be held accountable and punished accordingly. There is a massive amount of fraud and theft going on here that is systematically being covered up and obsfuscated by the CME, the CFTC and JP Morgan.

The problem with this situation is that if it is not settled in a manner which creates a vast overhaul of the CFTC regulations and rules regarding the treatment of customer funds and if JP Morgan and other Wall Street creditors to the bankruptcy are treated with superiority with respect to the liquidation claims and distribution, what’s to stop this method of legal stealing from being implemented on a widescale basis by every large securities broker who is about to go under anyway? (Think: Jeffries, Bank of America/Merrill, Morgan Stanley…)

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1 comment to More On Legal Stealing – The Infamous CFTC Rule 1.29

  • Andy Szokolay

    MF could have legally invested client segregated funds in an MFG Corporate Bond, provided the bond was rated “investment grade”. MFG could then have used the bond proceeds to pay JPM’s margin call. MFG did not have to steal client funds if it used this route. Unfortunately, if the bond route was follwed, then clients become ordinary creditors.

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