US regulators are taking "all appropriate action" to figure out why there was a shortfall in customer funds at the failed broker-dealer MF Global Holdings Ltd., Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler said Thursday.
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Gensler said the CFTC is working with other regulators "to ensure that customers maximize their recovery of funds and to discover the reason for the shortfall in segregated customer money."
"The most troubling aspect about the MF Global situation is the shortfall of customer money at the firm," Gensler said.
Gensler recounted the final hours before MF Global filed for Chapter 11 bankruptcy protection Monday, as it tried to sell itself in a last-ditch effort led by CEO Jon Corzine that eventually failed.
Gensler said the CFTC sent auditors into MF Global last Thursday and "immediately asked for the documentation" on customer funds.
"We had concern over the weekend as this documentation was not forthcoming," Gensler said.
In conversations with other regulators about a possible takeover by Interactive Brokers, Gensler said the CFTC laid out their concerns about customer positions and made it clear that Interactive Brokers would have to take over all of MF Global's positions and guarantee both the positions and the collateral.
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Sunday night, Gensler said MF Global and Interactive Brokers told regulators they verbally agreed to a deal.
But Gensler said he was then woken up by a call at 2:30am ET Monday and by 5:00am, "the CFTC and the SEC working in coordination with the FSA in London made the choice ... that the best way to protect customer money was phone calls to [Securities Investor Protection Corporation]" to put the firm into bankruptcy.
The CFTC is the primary regulator of MF Global's main futures-trading business.
A CFTC lawyer estimated Wednesday that there is a $600-million shortfall for MF Global's brokerage customers, a number he said could get lower as more money is discovered.
By law, clearing firms like MF Global are required to "segregate" the funds of their customers from the firm's own assets and from one another. If a broker fails, separate accounts make it easier to transfer customers' futures positions and funds to another broker.