[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]





              HEARING TO EXAMINE THE MF GLOBAL BANKRUPTCY

=======================================================================

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 8, 2011

                               __________

                           Serial No. 112-28







          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov






                                _____

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                        COMMITTEE ON AGRICULTURE

                   FRANK D. LUCAS, Oklahoma, Chairman

BOB GOODLATTE, Virginia,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
TIMOTHY V. JOHNSON, Illinois         TIM HOLDEN, Pennsylvania
STEVE KING, Iowa                     MIKE McINTYRE, North Carolina
RANDY NEUGEBAUER, Texas              LEONARD L. BOSWELL, Iowa
K. MICHAEL CONAWAY, Texas            JOE BACA, California
JEFF FORTENBERRY, Nebraska           DENNIS A. CARDOZA, California
JEAN SCHMIDT, Ohio                   DAVID SCOTT, Georgia
GLENN THOMPSON, Pennsylvania         HENRY CUELLAR, Texas
THOMAS J. ROONEY, Florida            JIM COSTA, California
MARLIN A. STUTZMAN, Indiana          TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio                      KURT SCHRADER, Oregon
AUSTIN SCOTT, Georgia                LARRY KISSELL, North Carolina
SCOTT R. TIPTON, Colorado            WILLIAM L. OWENS, New York
STEVE SOUTHERLAND II, Florida        CHELLIE PINGREE, Maine
ERIC A. ``RICK'' CRAWFORD, Arkansas  JOE COURTNEY, Connecticut
MARTHA ROBY, Alabama                 PETER WELCH, Vermont
TIM HUELSKAMP, Kansas                MARCIA L. FUDGE, Ohio
SCOTT DesJARLAIS, Tennessee          GREGORIO KILILI CAMACHO SABLAN, 
RENEE L. ELLMERS, North Carolina     Northern Mariana Islands
CHRISTOPHER P. GIBSON, New York      TERRI A. SEWELL, Alabama
RANDY HULTGREN, Illinois             JAMES P. McGOVERN, Massachusetts
VICKY HARTZLER, Missouri
ROBERT T. SCHILLING, Illinois
REID J. RIBBLE, Wisconsin
KRISTI L. NOEM, South Dakota

                                 ______

                           Professional Staff

                      Nicole Scott, Staff Director

                     Kevin J. Kramp, Chief Counsel

                 Tamara Hinton, Communications Director

                Robert L. Larew, Minority Staff Director

                                  (ii)


















                             C O N T E N T S

                              ----------                              
                                                                   Page
Baca, Hon. Joe, a Representative in Congress from California, 
  prepared statement.............................................     6
Lucas, Hon. Frank D., a Representative in Congress from Oklahoma, 
  opening statement..............................................     1
    Prepared statement...........................................     2
McIntyre, Hon. Mike, a Representative in Congress from North 
  Carolina, prepared statement...................................     6
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     3
    Prepared statement...........................................     5
Pingree, Hon. Chellie, a Representative in Congress from Maine, 
  prepared statement.............................................     7

                               Witnesses

Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading 
  Commission, Washington, D.C....................................     7
    Prepared statement...........................................    10
    Supplementary material.......................................   155
    Submitted questions..........................................   159
Kobak, Jr., James B., Lead Counsel to James Giddens, Trustee, 
  Securities Investor Protection Act Liquidation of MF Global 
  Inc., New York, NY.............................................    14
    Prepared statement...........................................    15
Corzine, Hon. Jon S., former Chief Executive Officer, MF Global 
  Inc., New York, NY.............................................    63
    Prepared testimony...........................................    65
    Submitted questions..........................................   160
Fletcher, John, General Manager, Central Missouri AGRIService 
  LLC, Marshall, MO; on behalf of National Grain and Feed 
  Association....................................................   113
    Prepared testimony...........................................   114
Duffy, Hon. Terrence A., Executive Chairman, CME Group Inc., 
  Chicago, IL....................................................   116
    Prepared testimony...........................................   117
    Submitted question...........................................   161
Brodsky, J.D., William J., Chairman and Chief Executive Officer, 
  CBOE Holdings, Inc. and Chicago Board Options Exchange, Inc., 
  Chicago, IL....................................................   121
    Prepared testimony...........................................   124
Roth, Daniel J., President and Chief Executive Officer, National 
  Futures Association, Chicago, IL...............................   128
    Prepared testimony...........................................   130
Luparello, Stephen, Vice Chairman, Financial Industry Regulatory 
  Authority, Washington, D.C.....................................   132
    Prepared testimony...........................................   134
Corcoran, Gerald F., Chairman of the Board and Chief Executive 
  Officer, R.J. O'Brien & Associates, Chicago, IL; on behalf of 
  Commodity Markets Council......................................   137
    Prepared testimony...........................................   140

                           Submitted Material

National Pork Producers Council, submitted statement.............   156

 
              HEARING TO EXAMINE THE MF GLOBAL BANKRUPTCY

                              ----------                              


                       THURSDAY, DECEMBER 8, 2011

                          House of Representatives,
                                  Committee on Agriculture,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 9:31 a.m., in Room 
1300 of the Longworth House Office Building, Hon. Frank D. 
Lucas [Chairman of the Committee] presiding.
    Members present: Representatives Lucas, Goodlatte, Johnson, 
King, Neugebauer, Conaway, Fortenberry, Schmidt, Thompson, 
Rooney, Stutzman, Gibbs, Austin Scott of Georgia, Tipton, 
Crawford, Roby, Huelskamp, DesJarlais, Ellmers, Gibson, 
Hultgren, Hartzler, Schilling, Ribble, Peterson, Holden, 
McIntyre, Boswell, Baca, Cardoza, David Scott of Georgia, 
Cuellar, Costa, Walz, Kissell, Owens, Pingree, Courtney, Welch, 
Fudge, Sablan, Sewell, and McGovern.
    Staff present: John Goldberg, Tamara Hinton, Kevin Kramp, 
Josh Maxwell, Josh Mathis, Ryan McKee, Mary Nowak, Matt Perin, 
John Porter, Debbie Smith, Patricia Straughn, Pelham Straughn, 
Lauren Sturgeon, Wyatt Swinford, Heather Vaughan, Suzanne 
Watson, Liz Friedlander, Robert L. Larew, C. Clark Ogilvie; 
Anne Simmons, John Konya, Merrick Munday, Margaret Wetherald, 
and Caleb Crosswhite.

 OPENING STATEMENT OF HON. FRANK D. LUCAS, A REPRESENTATIVE IN 
                     CONGRESS FROM OKLAHOMA

    The Chairman. This hearing of the Committee on Agriculture 
to examine the MF Global bankruptcy will come to order.
    Thank you for joining us today for this important hearing. 
And I would like to thank the Ranking Member and his staff for 
their help in pulling this hearing together. I would also like 
to thank our witnesses for being here.
    Each Member of this Committee understands the importance of 
the futures market for farmers and ranchers across the country. 
For decades, futures markets have been a trusted tool for 
businesses seeking to manage risk. The bedrock of their trust 
in these markets is based on the fundamental protections 
provided by mandatory segregation of customer funds. This has 
supported explosive growth and innovation in futures products 
in recent years providing farmers, ranchers, and businesses 
throughout the economy with risk-management tools. These tools 
allow businesses to reduce the volatility in the price of goods 
and services for consumers.
    Unfortunately, the very cornerstone of the futures market--
customer funds segregation--has been severely and suddenly 
called into question. On October 31, 2011, MF Global filed for 
bankruptcy after revealing that a substantial amount of 
customer funds were missing. There are now reports that as much 
as $1.2 billion may have disappeared. Dozens of my constituents 
have been left not only without their property but also without 
answers about why and how this happened. I know my colleagues 
have all heard similar stories from constituents who now lack 
confidence in the system that served them well for many years.
    Today, this Committee will examine the bankruptcy of MF 
Global. From the start, I would like to make it clear that our 
intention is not to sensationalize the events that have 
unfolded, and we are not here to simply or haphazardly point 
fingers and place blame. We take seriously that we have asked 
both the Trustee and the relevant regulatory organizations to 
appear before us. And we realize that this inevitably diverts 
their time and resources from the most critical objective at 
this time--to recover and return to customers the property that 
belongs to them.
    However, it is critical that this Committee shed light on 
the circumstances surrounding the bankruptcy, to insert 
additional facts and information into the public domain, and to 
dispel much of the confusion and misinformation that exists. A 
deeper more comprehensive understanding of the facts will put 
all of us in a better position to address this situation and to 
begin to restore confidence in the futures markets. This is the 
objective of the hearing today.
    To that end, last week this Committee took extraordinary 
action to compel witness testimony that is essential to 
understanding the whole picture and building a comprehensive 
record. I assure you, both the Ranking Member and I did not 
take this action lightly.
    Last, it is important to stress that this hearing is not 
simply a check-the-box exercise. This Committee will continue 
to monitor the investigation into MF Global's actions and will 
work to ensure that customers receive fair treatment throughout 
this entire process.
    Thank you and I look forward to hearing from our witnesses.
    [The prepared statement of Mr. Lucas follows:]

Prepared Statement of Hon. Frank D. Lucas, a Representative in Congress 
                             from Oklahoma
    Thank you for joining us for this important hearing. I'd first like 
to thank the Ranking Member and his staff for their help in pulling 
this hearing together. I'd also like to thank our witnesses for being 
here.
    Each Member of this Committee understands the importance of the 
futures markets for farmers and ranchers across the country.
    For decades, futures markets have been a trusted tool for 
businesses seeking to manage risk. The bedrock of their trust in these 
markets is based on the fundamental protections provided by mandatory 
segregation of customer funds.
    This has supported explosive growth and innovation in futures 
products in recent years, providing farmers, ranchers and businesses 
throughout the economy with risk management tools. These tools allow 
businesses to reduce the volatility in the price of goods and services 
for consumers.
    Unfortunately, the very cornerstone of the futures markets, 
customer funds segregation, has been severely and suddenly called into 
question.
    On October 31, 2011, MF Global Holdings filed for bankruptcy, after 
revealing that a substantial amount of customer funds were missing. 
There are now reports that as much as much as $1.2 billion may have 
disappeared.
    Dozens of my constituents have been left not only without their 
property, but also without answers about why and how this happened. I 
know my colleagues have all heard similar stories from constituents who 
now lack confidence in the system that has served them well for years.
    Today, this Committee will examine the bankruptcy of MF Global. 
From the start, I'd like to make it clear that our intent is not to 
sensationalize the events that have unfolded. And we are not here today 
to simply or haphazardly point fingers and place blame.
    We take seriously that we have asked both the Trustee and the 
relevant regulatory organizations to appear before us. And we realize 
that this inevitably diverts their time and resources from the most 
critical objective at this time: to recover and return to customers the 
property that belongs to them.
    However, it is critical that this Committee shed light on the 
circumstances surrounding the bankruptcy, to insert additional facts 
and information into the public domain and to dispel much of the 
confusion and misinformation that exists.
    A deeper and more comprehensive understanding of the facts will put 
us all in a better position to address this situation and begin to 
restore confidence in the futures markets. This is the objective of the 
hearing today.
    To that end, last week this Committee took extraordinary action to 
compel witness testimony that is essential to understanding the whole 
picture and building a comprehensive record.
    I assure you, both the Ranking Member and I do not take this action 
lightly.
    Last, it is important to stress that this hearing is not simply a 
check-the-box exercise. This Committee will continue to monitor the 
investigation into MF Global's actions and will work to ensure that 
customers receive fair treatment throughout this process.
    Thank you. I look forward to hearing from our witnesses today.

    The Chairman. And I now turn to the Ranking Member for his 
comments.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Good morning. And thank you, Mr. Chairman.
    As the Chairman said, today's hearing is to review the 
bankruptcy of MF Global, potentially the eighth largest 
bankruptcy in history. Given that futures customers--
particularly those in agriculture--were affected by MF Global's 
collapse, it is necessary that we hear directly from all those 
involved and find out who knew what and when they knew it.
    I want to thank the Chairman for working with us to have 
this hearing. The Committee has held plenty of hearings about 
problems that may or may not occur regarding the implementation 
of Dodd-Frank. Given the serious problem that currently exists 
for thousands of futures customers of MF Global, I think it is 
appropriate that we refocus our attention.
    After the bankruptcies of Bear Stearns and Lehman Brothers, 
the subsequent financial collapse in 2008 and the passage of 
the historic financial reform legislation, I think it is pretty 
amazing that we are in this situation. It appears to me that 
nobody has learned a thing from what has gone on here, that 
Wall Street is operating as if 2008 never happened.
    From all accounts, MF Global was leveraged at 37.5 to 1 at 
one point, far higher than either Bear Stearns or Lehman 
Brothers when they folded. Ironically, it is very possible that 
there is nothing in Dodd-Frank that would have prevented MF 
Global's financial collapse. And that is why I think we should 
tread very cautiously before rolling back Dodd-Frank's 
protections.
    Given what happened here, we should probably be talking 
about strengthening Dodd-Frank, not weakening it. Three big 
financial firm bankruptcies over a 3 year period is not a track 
record that should be extended. During the 2008 financial 
crisis, futures markets continued to function smoothly. When 
Refco and Lehman failed, their regulated commodity customer 
accounts were transferred to other futures commission merchants 
with no disruption. Wall Street, apparently not content to 
sully its own reputation, now has stained our well-run futures 
markets by apparently violating the supreme law, which is 
protection of customer funds.
    The futures industry helps farmers, manufacturers, energy 
companies, and a host of other industries mitigate risks so 
that they can go about growing, producing, generating, and 
making the things that make this country run. We need to get to 
the bottom of what happened with MF Global as quickly as 
possible in order to restore the confidence that has been 
greatly shaken, as the Chairman indicated. We cannot let one 
company succeed in undermining an industry that has operated 
safely for customers for decades.
    Unfortunately, some of my friends on the other side of the 
Capitol seem hell-bent and ready to assign blame for MF Global 
to the CFTC for what they perceive as failing to do their jobs. 
Do we blame the police officer the day after our house gets 
broken into? Of course we don't. The futures world operates 
with a self-regulatory system of oversight because the CFTC 
cannot afford and doesn't have the resources to put a watchdog 
into every futures commission merchant. If these Members had 
their way, the Commission would get even less funds than they 
do now. This blind rush to judgment fails to take into account 
how the self-regulatory system works, and in my view, 
undermines it.
    On a personal note, I find the press accounts expressing 
surprise that the Agriculture Committee could approve something 
as serious as a Congressional subpoena--unanimously I would say 
on a bipartisan basis--quite amusing. The Committee's oversight 
of the futures and derivatives market is a responsibility that 
I do not take lightly, and I think the Members do not take 
lightly either. On these issues the Committee, more often than 
not, will work across party lines because when it comes to 
matters affecting the financial health and stability of our 
country, partisan games have no place. I know that that is not 
something that the press is used to seeing from Congress, but 
it is how we do things on the Agriculture Committee.
    Here at the Agriculture Committee, we are focused on the 
facts. It is the facts that will tell us what happened, who 
knew about it, and consequently, who was responsible. Only by 
uncovering the facts can we prepare ourselves with policy 
responses that are necessary to address what happened. And that 
is what this hearing is all about.
    Again, I want to thank the chair for working with us to 
hold today's hearing, and I am hopeful that today's witnesses 
will shed light on some of what exactly was happening at MF 
Global, and I also want to thank all the witnesses for being 
with us today and look forward to the testimony and the 
questions.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress from Minnesota
    Good morning and thank you, Chairman Lucas.
    As the Chairman said, today's hearing is to review the bankruptcy 
of MF Global, potentially the eighth largest bankruptcy in history. 
Given that futures customers, particularly those in agriculture, were 
affected by MF Global's collapse it is necessary that we hear directly 
from all those involved and find out who knew what, and when they knew 
it.
    I want to thank Chairman Lucas for granting my request to have this 
hearing. The Committee has held plenty of hearings about problems that 
may or may not occur regarding the implementation of Dodd-Frank. Given 
the serious problem that currently exists for the thousands of futures 
customers of MF Global, I think it is appropriate that we refocus our 
attention.
    After the bankruptcies of Bear Stearns and Lehman Brothers, the 
subsequent financial collapse in 2008, and the passage of historic 
financial reform legislation, it is pretty amazing that we're in this 
situation. It appears to me that no one has learned a thing; that Wall 
Street is operating as if 2008 never happened. From all accounts, MF 
Global was leveraged as much as 40 to 1, far higher than either Bear 
Stearns or Lehman Brothers when they folded. Ironically, it is very 
possible that there is nothing in Dodd-Frank that would have prevented 
MF Global's financial collapse. That's why I think we should tread very 
cautiously before rolling back Dodd-Frank's protections. Given what 
happened here we should probably be talking about strengthening Dodd-
Frank, not weakening it. Three big financial firm bankruptcies over a 3 
year period is not a track record that should be extended.
    During the 2008 financial crisis, futures markets continued to 
function smoothly. When Refco and Lehman failed, their regulated 
commodity customer accounts were transferred to other futures 
commission merchants with no disruption. Wall Street, apparently not 
content to sully its own reputation, has now stained our well-run 
futures markets by apparently violating the supreme law--protection of 
customer funds.
    The futures industry helps farmers, manufacturers, energy 
companies, and a host of other industries mitigate risk so they can go 
about growing, producing, generating, and making the things that make 
this country run. We need to get to the bottom of what happened with MF 
Global as quickly as possible in order to restore a confidence that has 
been greatly shaken. We cannot let one company succeed in undermining 
an industry that has operated safely for customers for decades.
    Unfortunately, some of my friends on the other side of the Capitol 
seem hell-bent and ready to assign blame for MF Global to the CFTC for 
what they perceive as failing to do their jobs. Do we blame the police 
officer the day after our house gets broken into? Of course not. The 
futures world operates with a self-regulatory system of oversight 
because the CFTC cannot afford to put a watchdog into every futures 
commission merchant. And, if these Members had their way, the 
Commission would get even less funds than they do now. This blind rush 
to judgment fails to take into account how the self-regulatory system 
works, and in my view, undermines it.
    On a personal note, I find the press accounts expressing surprise 
that the Agriculture Committee could approve something as serious as a 
Congressional subpoena, unanimously on a bipartisan basis, quite 
amusing. The Committee's oversight of the futures and derivatives 
markets is a responsibility that I do not take lightly. On these 
issues, the Committee--more often than not--will work across party 
lines because when it comes to matters affecting the financial health 
and stability of our country, partisan games have no place. I know 
that's not something the press is used to seeing from Congress, but 
it's how we do things on the Agriculture Committee.
    Here at the House Agriculture Committee, we are focused on the 
facts. It is the facts that will tell us what happened, who knew about 
it, and consequently, who was responsible. Only by uncovering the 
facts, can we prepare ourselves for policy responses that are necessary 
to address what has happened. That is what this hearing is all about.
    Again, I thank the Chairman for holding today's hearing and am 
hopeful that today's witnesses will shed some light on what exactly was 
happening at MF Global.

    The Chairman. The chair thanks the Ranking Member for his 
comments.
    The chair would request that other Members submit their 
opening statements for the record so that the witnesses may 
begin their testimony and to ensure that there is ample time 
for questions.
    [The prepared statements of Mr. Baca, Mr. McIntyre, and Ms. 
Pingree follow:]

Prepared Statement of Hon. Joe Baca, a Representative in Congress from 
                               California
    Chairman Lucas and Ranking Member Peterson:

    Thank you for convening this hearing to examine the situation 
surrounding MF Global's filing for chapter 11 bankruptcy.
    I know these are unique circumstances--with the Agriculture 
Committee subpoenaing a former Member of Congress as a witness for the 
first time in over 100 years.
    But with anywhere from $600 million to $1.2 billion in customer 
funds completely missing--we all understand the seriousness of this 
matter.
    I want to recognize our witnesses for being here this morning--and 
helping us better understand the circumstances that led to this 
financial disaster.
    What role did exposure to European sovereign debt play in the 
collapse of MF Global?
    Will customers who lost funds--through both security and futures 
transactions--all be able to recoup lost dollars?
    What steps must we take to prevent other brokerage houses from 
making the same mistakes as MF Global?
    These are just some of the key questions we must answer today.
    The American people must have the OVERSIGHT and ACCOUNTABILITY to 
ensure that consumers are protected.
    And our regulatory agencies--including the SEC and the CFTC--must 
be better funded by Congress in order to have the resources necessary 
to effectively carry out their duties.
    Again, I want to thank the Chairman and Ranking Member for their 
leadership on this critical issue.
    I look forward to this opportunity to learn about what happened at 
MF Global--so we can ensure these missteps are not made again.
    Thank you.
                                 ______
                                 
Prepared Statement of Hon. Mike McIntyre, a Representative in Congress 
                          from North Carolina
    This Committee has a duty to protect one of our nation's most 
prized assets--its farmers--from the ill effects of financial 
institutions and regulatory oversight in New York and Washington. Many 
of America's farmers and grain merchandisers have been deeply affected 
by the MF Global bankruptcy. That is why we are here today to 
investigate the events which led to the suffering incurred by the 
clients of MF Global, so that we may hopefully prevent occurrences of 
this nature from happening in the future.
    The agricultural community is the originator of the derivatives 
contract. Farmers, more than most, rely on the sequencing of events as 
a part of their business. The derived value from their labor is paid 
out in the future, and unsurprisingly, their industry was at the 
forefront in utilizing futures contracts as a way to mitigate the risks 
of their practices. Farmers hedge responsibly, with purpose, and do so 
using sound information based on years of practice and evidence from 
the market. They, as a group, are the gold-plated example of how 
financial tools should be used responsibly and provide the greatest 
example for why financial tools are so necessary in the modern economy.
    Producers and agribusinesses that rely on exchange-trading to 
manage their risks have been startled by the recent events surrounding 
MF Global. Laws are on the books that, if functioning properly, should 
prevent customers' accounts from being ensnared in the fallout from 
risks taken by companies like MF Global on their own principal. Now, in 
unprecedented circumstance, many accounts of farmers and grain 
merchandisers have been frozen, and the prospect for the recovery of 
their property is uncertain.
    MF Global must be held accountable for the suffering that it has 
brought on innocent American farmers and agribusinesses. These risky 
bets were not placed on the farm; they were placed on Wall Street, and 
the financial harm that has resulted from this potentially illegal 
activity must be examined. Specifically, we must determine how the 
segregated funds were implicated in the trading activities of the firm 
and if laws were broken in the process. Whether it is gross 
mismanagement or intentional criminal behavior, the sequence of events 
must be reviewed carefully so that client funds may be returned to 
their rightful owners.
    The hard lessons of the financial crisis are still fresh in the 
minds of many Americans, and it is now more important than ever that 
financial regulators take prudent measures to oversee the American 
financial system and protect the innocent from the harm of the few. 
Today, MF Global provides more concern about this fact. I will continue 
to work with my colleagues in the House of Representatives to find 
sensible solutions to the problems associated with the actions of 
overzealous investors that threaten the financial security of honest 
Americans.
                                 ______
                                 
    Prepared Statement of Hon. Chellie Pingree, a Representative in 
                          Congress from Maine
    Thank you Mr. Chairman and Ranking Member Peterson for calling this 
hearing to discuss what went wrong at MF Global and what we can do to 
avoid these types of failures in the derivatives markets in the future.
    It may seem strange for the Agriculture Committee to delve into 
this issue, but, in fact, we have oversight over the CFTC and the 
derivatives markets for a very good reason. The very derivatives were 
futures and options contracts that provided farmers with a tool to 
protect themselves if the price of their crops fell before they were 
able to harvest or sell. These futures contracts acted as a form of 
insurance, allowing farmers, grain elevator operators and others in the 
agriculture industry to hedge against unpredictable risks. Soon enough 
these contracts were used in other industries to hedge other risks, and 
eventually someone saw them as an opportunity to gamble on those risks.
    Nevertheless, the origins of the derivatives market were literally 
in American soil, in the common sense ideas of American farmers to 
protect their livelihoods. It is fitting therefore that we examine the 
dangers in our commodities markets and the risks demonstrated by the 
failure of MF Global with the common sense approach that the 
Agriculture Committee is known for.
    Ms. Sommers, on Tuesday the CFTC adopted the so-called ``MF Global 
Rule'' which bans the use of customer funds for in-house repo-to-
maturity transactions and re-definies the permitted investments that 
FCMs can purchase with customer funds in repo-to-maturity transactions 
with third parties. The original list of acceptable investments for 
customer segregated funds is spelled out in the Commodity Exchange Act, 
and hews to conservative choices such as Treasuries, municipal bonds, 
and other products fully backed by the United States or a U.S. 
locality.
    Beginning in 2000, however, the CFTC used its discretionary 
authority under the statute to expand the list of allowable 
investments, first allowing the purchase of certificates of deposit, 
commercial paper, and interests in government sponsored entities. In 
2005, it permitted investments in foreign sovereign debt and in-house 
transactions.
    Now that the CFTC has rolled back those de-regulatory measures, how 
can we as lawmakers ensure that a similar de-regulatory slide does not 
happen again?

    The Chairman. I would like to welcome our first panel of 
witnesses to the table--the Hon. Jill Sommers, Commissioner, 
Commodity Futures Trading Commission, Washington, D.C.; Mr. 
James Kobak, Lead Counsel to the Trustee for the Liquidation of 
MF Global Incorporated, New York, New York.
    Commission Sommers, please begin when you are ready.

  STATEMENT OF HON. JILL E. SOMMERS, COMMISSIONER, COMMODITY 
                  FUTURES TRADING COMMISSION,
                        WASHINGTON, DC.

    Ms. Sommers. Good morning, Chairman Lucas, Vice Chairman 
Goodlatte, Ranking Member Peterson, and other Members of the 
Committee. Thank you for inviting me here today to discuss the 
MF Global Bankruptcy. I understand the severe hardship this 
bankruptcy has caused for customers of MF Global. These 
customers correctly understood the risks associated with 
trading futures and options but never anticipated that their 
segregated accounts were at risk of suffering losses not 
associated with that trading. Many customers have reached out 
to me and my staff directly, and we are doing everything we can 
to get as much of their money back to them as quickly as 
possible. I have made that my number one priority.
    The Commission has dozens of staff members, including 
auditors, attorneys, and investigators in New York, Chicago, 
and Washington, D.C., working on these issues. I am unable to 
discuss matters that might compromise the ongoing enforcement 
investigation or parallel investigations by other government 
agencies, so I will focus my comments on the bankruptcy cases 
pending in New York and on the legal requirements surrounding 
the segregation of customer funds held at futures commission 
merchants.
    As I understand the Securities Investors Protection Act of 
1970, or SIPA, the SEC has the authority to refer an entity 
registered as a broker-dealer--whether or not such entity is 
also registered as an FCM--to the Securities Investors 
Protection Corporation, or SIPC, if there is reason to believe 
that the entity is in or is approaching financial difficulty. 
SIPC may initiate a liquidation proceeding to protect customers 
of an insolvent broker-dealer when statutory criteria are met. 
In this instance, the liquidation was initiated on October 31 
with the support of the CFTC and consent of MF Global. When a 
broker-dealer is also a registered FCM, as MF Global was, there 
is one dually registered entity and the entire entity gets 
placed into liquidation.
    Because there is one entity, it is not possible to initiate 
a SIPA liquidation of the broker-dealer and a separate 
bankruptcy proceeding for the FCM. It is important to note, 
however, that when a dually registered BD/FCM is placed into a 
SIPA liquidation proceeding, the relevant provisions and 
protections of the Bankruptcy Code, the Commodity Exchange Act, 
and the Commission's regulations apply to customer commodity 
accounts just as they would if the entity were solely an FCM 
and not in a SIPA bankruptcy proceeding.
    The Commission is no stranger to FCM bankruptcies. Lehman 
Brothers and Refco are the two most recent. While the Lehman 
Brothers bankruptcy was monumental in scale and the Refco 
bankruptcy involved serious fraud at the parent company, 
commodity customers did not lose their money at either firm. In 
both instances, commodity customer accounts were wholly intact; 
that is, they contained all open positions and all associated 
segregated collateral. That being the case, customer accounts 
were promptly transferred to healthy FCMs, with the commodity 
customers having no further involvement in the bankruptcy 
proceeding. Unfortunately, that is not what happened at MF 
Global because the customer accounts were not intact.
    In FCM bankruptcies, commodity customers have priority in 
customer property. This includes without limitation segregated 
property, property that was illegally removed from segregation 
and is still within the debtor's estate, and property that was 
illegally removed from segregation and is no longer within the 
debtor's estate but is clawed-back into the debtor's estate by 
the Trustee. If the customer property as I just described is 
insufficient to satisfy in full all the claims of customers, 
the Commission regulations allow other property of the debtor's 
estate to be classified as customer property to make up any 
shortfall. A parent or affiliated entity, however, generally 
would not be a ``debtor'' unless customer funds could be traced 
to that entity.
    For the past few weeks, the Trustee, with the encouragement 
and assistance of the CFTC, has transferred nearly all 
positions of customers trading on U.S. commodity futures 
markets and has transferred approximately $2 billion of 
customer property. Tomorrow, we hope the court will approve a 
``top-up'' of all commodity customers to at least \2/3\ of 
their account values. These transfers demonstrate that 
commodity customers are indeed receiving the highest priority 
in claims to customer property. We understand that more must be 
done.
    An FCM is authorized to invest funds that are in customer 
segregated accounts. This authorization is found in Section 4d 
of the CEA and Commission Regulation 1.25. The Commission 
finalized changes to Regulation 1.25 on Monday of this week. 
Those changes just reinforce the long-held view of the 
Commission that customer segregated funds must be invested in a 
manner that minimizes their exposure to credit, liquidity, and 
market risks both to preserve their availability to customers 
and DCOs. Regulation 1.25 is a general prudential standard 
which requires that all permitted investments be, ``consistent 
with the objectives of preserving principal and maintaining 
liquidity.''
    While an FCM is permitted to invest customer funds, it is 
important to note that if an FCM does so, the value of customer 
segregated account must remain intact at all times. If customer 
funds are transferred out of the segregated account to be 
invested by the FCM, the FCM must make a simultaneous transfer 
of assets into the segregated account. An FCM cannot take money 
out of a segregated account, invest it, and then return the 
money to the segregated account at some later time. Regulation 
1.25 has never allowed a firm to transfer customer money out of 
segregated accounts to be used for other purposes.
    When a customer opens a trading account at an FCM, 
Commission Regulations require that the customer be provided 
with a risk disclosure statement that generally centers on 
market risk, market volatility, and leverage. We also require 
FCMs to notify the Commission immediately of an occurrence of 
under-segregation or instances of significant margin calls.
    While our current focus is returning as much money as 
possible to the customers, we are expending an enormous amount 
of effort to locate the missing customer funds and pursue the 
enforcement investigation. All of the information we learn 
during these aspects of our work will be relevant to the 
Commission as it considers ``lessons learned'' and any policy 
responses or regulatory changes.
    Obviously, the Commission has a great deal of work ahead of 
it to get customer funds back where they need to be, to 
determine what went wrong with the segregated funds at MF 
Global, and to determine whether to prosecute any violations of 
the Act, and to determine what needs to be done to prevent a 
similar circumstance in the future. Commission staff is 
coordinating on these issues with other regulators both 
internationally and domestically. We are also closely working 
with the SIPA Trustee to provide whatever support he needs to 
resolve issues with commodity customer accounts.
    I greatly appreciate the continued support of this 
Committee as we move forward with this important work. Thank 
you and I am happy to answer any questions.
    [The prepared statement of Ms. Sommers follows:]

  Prepared Statement of Hon. Jill E. Sommers, Commissioner, Commodity 
              Futures Trading Commission, Washington, DC.
    Good morning Chairman Lucas, Vice Chairman Goodlatte, Ranking 
Member Peterson, and Members of the Committee. Thank you for inviting 
me today to discuss the MF Global Bankruptcy. I understand the severe 
hardship this bankruptcy has caused for customers of MF Global. These 
customers correctly understood the risks associated with trading 
futures and options, but never anticipated that their segregated 
accounts were at risk of suffering losses not associated with trading. 
Many customers have reached out to me and my staff directly, and we are 
doing everything we can to get as much of their money back to them as 
quickly as possible. I have made that my number one priority.
    On November 9th, the Commission voted to make me the Senior 
Commissioner with respect to MF Global Matters. This authorizes me to 
exercise the executive and administrative functions of the Commission 
solely with respect to:

   The pending enforcement investigation;

   The pending bankruptcy case in the Southern District of NY 
        involving MF Global, Inc. (which is the broker-dealer/futures 
        commission merchant);

   The pending bankruptcy case in the Southern District of NY 
        involving MF Global Holdings, Ltd. (which is the parent 
        company); and

   Other actions to locate or recover customer funds or 
        determine the reasons for shortfalls in the customer accounts.

    The Commission has dozens of staff members (including auditors, 
attorneys, and investigators) in New York, Chicago, and Washington, 
D.C. working on these issues. I am unable to discuss matters that might 
compromise the ongoing enforcement investigation, or parallel 
investigations by any other government agency, so I will focus my 
comments on the bankruptcy cases pending in New York and on the legal 
requirements surrounding the segregation of customer funds held at 
futures commission merchants (FCMs).
Pending Bankruptcy Cases
    As I understand the Securities Investors Protection Act of 1970 
(SIPA), the SEC has the authority to refer an entity registered as a 
broker-dealer (whether or not such entity is also registered as an FCM) 
to the Securities Investors Protection Corporation (SIPC) if there is 
reason to believe that the entity is in or is approaching financial 
difficulty. SIPC may initiate a liquidation proceeding to protect 
customers of an insolvent broker-dealer when certain statutory criteria 
are met. In this instance, the liquidation was initiated on October 
31st, with the support of the CFTC and consent of MF Global. When a 
broker-dealer is also a registered FCM, as MF Global was, there is one 
dually-registered entity and the entire entity gets placed into 
liquidation. Because there is one entity, it is not possible to 
initiate a SIPA liquidation of the broker-dealer, and a separate 
bankruptcy proceeding for the FCM. It is important to note, however, 
that when a dually-registered BD/FCM is placed into a SIPA liquidation 
proceeding, the relevant provisions and protections of the Bankruptcy 
Code, the Commodity Exchange Act (``CEA''), and the Commission's 
regulations apply to customer commodity accounts just as they would if 
the entity were solely an FCM and in a non-SIPA bankruptcy proceeding.
    An obvious point to make is that if a firm is involved in a 
bankruptcy proceeding, something must have gone very wrong. Bankruptcy 
proceedings can be very complicated and at times, messy. This can be 
magnified when the bankruptcy is among the largest in history and there 
are serious questions about the location of customer funds. The 
Commission is no stranger to FCM bankruptcies. Lehman Brothers and 
Refco are the two most recent FCM bankruptcies. While the Lehman 
Brothers bankruptcy was monumental in scale, and the Refco bankruptcy 
involved serious fraud at the parent company, commodity customers did 
not lose their money at either firm. In both instances, commodity 
customer accounts were wholly intact, that is, they contained all open 
positions and all associated segregated collateral. That being the 
case, customer accounts were promptly transferred to healthy FCMs, with 
the commodity customers having no further involvement in the bankruptcy 
proceeding. Unfortunately that is not what happened at MF Global 
because customer accounts were not intact.
    In FCM bankruptcies, commodity customers have, pursuant to Section 
766(h) of the Bankruptcy Code, priority in customer property. This 
includes, without limitation, segregated property, property that was 
illegally removed from segregation and is still within the debtor's 
estate, and property that was illegally removed from segregation and is 
no longer within in the debtor's estate, but is clawed-back into the 
debtor's estate by the Trustee. If the customer property as I just 
described is insufficient to satisfy in full all the claims of 
customers, Part 190 of the Commission's regulations allow other 
property of the debtor's estate to be classified as customer property 
to make up any shortfall. A parent or affiliated entity, however, 
generally would not be a ``debtor'' unless customer funds could be 
traced to that entity.
    Within the first weeks of the MF Global bankruptcy, the Trustee for 
the BD/FCM had, with the encouragement and assistance of the CFTC, 
transferred nearly all positions of customers trading on U.S. commodity 
futures markets, and transferred approximately $2 billion of customer 
property. On November 29th, the Trustee moved to transfer an additional 
$2.1 billion back to customers, to be used to ``top up'' all commodity 
customers to at least \2/3\ of their account values as reflected on the 
books and records of MF Global, Inc. The Bankruptcy Court will hear the 
motion on December 9th. If the Court grants the motion we expect the 
transfer may be complete in 2 to 4 weeks, given the Trustee's estimate 
of the timeframe within which he can complete the administrative 
functions necessary to effectuate the transfer. These transfers 
demonstrate that commodity customers are indeed receiving the highest 
priority in claims to customer property. We understand that more must 
be done.
FCM Investment of Customer Funds
    An FCM is authorized to invest funds that are in customer 
segregated accounts. This authorization is found in Section 4d of the 
CEA and in Commission Regulation 1.25 (a brief history of changes to 
Regulation 1.25 is found in the attached Appendix). It may be helpful 
to draw an analogy to a savings account at a bank. Let's say someone 
opens a savings account with $1,000 and the bank agrees to pay 0.25% 
interest annually. That $1,000 is not just sitting at the bank waiting 
for the depositor to come and get it. The bank invests that money, or 
loans it to others, etc., with the goal of earning a rate of return 
greater than the 0.25% interest the bank is obligated to pay the 
depositor. Very simply stated, if the bank earns a rate of return 
greater than 0.25%, that is net revenue for the bank. If the bank earns 
a rate of return less than 0.25%, there is a net loss.
    Broadly speaking, the investment of customer funds by an FCM is 
similar, but there are critical safeguards and restrictions placed on 
FCMs. Section 4d of the CEA and Commission Regulation 1.25 list the 
only permissible investments an FCM can make with customer funds. The 
Commission has been, and continues to be, mindful that customer 
segregated funds must be invested in a manner that minimizes their 
exposure to credit, liquidity, and market risks both to preserve their 
availability to customers and DCOs and to enable investments to be 
quickly converted to cash at a predictable value. As such, Regulation 
1.25 establishes a general prudential standard by requiring that all 
permitted investments be ``consistent with the objectives of preserving 
principal and maintaining liquidity.''
    While an FCM is permitted to invest customer funds, it is important 
to note that if an FCM does so, the value of the customer segregated 
account must remain intact at all times. In other words, when an FCM 
invests customer funds, that actual investment, or collateral equal in 
value to the investment, must remain in the customer segregated account 
at all times. If customer funds are transferred out of the segregated 
account to be invested by the FCM, the FCM must make a simultaneous 
transfer of assets into the segregated account. An FCM cannot take 
money out of a segregated account, invest it, and then return the money 
to the segregated account at some later time.
Customer Accounts at FCMs
    When a customer opens a trading account at an FCM, Commission 
Regulations require the customer to be provided with a risk disclosure 
statement that generally centers on market risk, market volatility, and 
leverage. Pursuant to Commission Regulation 1.55(b)(6), the required 
risk disclosure statement must also include the following: ``You should 
consult your broker concerning the nature of the protections available 
to safeguard funds or property deposited for your account.'' There are 
no required disclosures concerning how customer funds can be invested 
by an FCM.
    Commission Regulation 1.20 requires that accounts holding 
segregated funds be titled specifically to identify the contents of the 
account as separate from the ownership of the FCM. In addition, FCMs 
must obtain letters from their depositories acknowledging that the 
depositories cannot exercise any rights of offset to such accounts for 
obligations of the FCM.
    Commission Regulation 1.12 requires FCMs to notify the Commission 
immediately of an occurrence of under-segregation. FCMs also must 
notify the Commission of instances of significant margin calls (such as 
a margin call to a customer, which if not made, would put fellow 
customers at risk if an adequate buffer or ``excess segregation'' was 
not in segregated accounts).
    A customer is required to post margin to support futures positions. 
Generally, a customer deposits more than the minimum initial margin 
required for the positions established. The additional funds provide a 
buffer so a customer can place trades without posting additional 
margin, and lessen the likelihood of repeated margin calls or having 
positions liquidated if margin calls are not met on a timely basis. In 
addition to customers depositing additional margin, in practice, FCMs 
typically maintain significant amounts of their own capital as ``excess 
segregated funds.'' By doing this, one customer's deficit due to market 
moves or unmet margin calls is covered by the FCM's buffer and does not 
result in one customer's funds being exposed to the credit risk of 
another customer. FCMs are not obligated to provide excess segregated 
funds, but given the legal obligation at all times to have sufficient 
funds in segregated accounts to cover all liabilities to customers, 
FCMs generally find it wise to have a buffer.
    A customer may withdraw excess margin funds or use such funds as 
the customer deems appropriate. This would include using the funds for 
non-futures related transactions with the FCM. If the excess funds held 
by the FCM are used in a manner directed by the customer such that the 
funds are not maintained in a futures segregated account, the funds 
would not have the protections afforded segregated customer funds under 
the Bankruptcy Code and Part 190 of the Commission's Regulations.
Oversight of FCMs
    FCMs are subject to CFTC-approved minimum financial and reporting 
requirements that are enforced in the first instance by a designated 
self-regulatory organization (``DSRO''), for example, the Chicago 
Mercantile Exchange or the National Futures Association. DSROs also 
conduct periodic compliance examinations on a risk-based cycle every 9 
to 15 months. The requirements of DSRO examinations are contained in 
Financial and Segregation Interpretations 4-1 and 4-2, which are 
specified as application guidance to Core Principle 11 (Financial 
Integrity) for Designated Contract Markets. The Commission has proposed 
codifying the essential components of these interpretations into an 
amended Commission Regulation 1.52.
    An examination of segregation compliance is mandatory in each 
examination (certain other components need not be included in every 
examination). This examination includes a review of the depository 
acknowledgement letters and the account titles of segregated accounts 
(unless unchanged from the prior examination); verifying account 
balances, and ensuring that investment of customer funds is done in 
accordance with Commission Regulation 1.25.
    Commission Regulation 1.10 requires FCMs to file monthly unaudited 
financial reports with the Commission and the DSRO. These reports 
include the FCM's segregation and net capital schedules, and any 
``further material information as may be necessary to make the required 
statements and schedules not misleading.'' Each financial report must 
be filed with an oath or attestation, and for a corporation, the oath 
must be by the CEO or CFO.
    Commission Regulation 1.16 requires FCMs to file annual certified 
financial reports with the Commission and the DSRO. The audits require, 
among other things, that if a new auditor is hired, that new auditor is 
required to notify the Commission of certain disagreements with 
statements made in reports prepared by prior auditors. Auditors also 
must test internal controls to identify, and report to the Commission, 
any ``material inadequacy'' that could reasonably be expected to: 
inhibit a registrant from completing transactions or promptly 
discharging responsibilities to customers or other creditors; result in 
material financial loss; result in material misstatement of financial 
statements or schedules; or result in violation of the Commission's 
segregation, secured amount, recordkeeping or financial reporting 
requirements.
Conclusion
    While our current focus is returning as much money as possible to 
customers, we are expending an enormous amount of effort to locate the 
missing customer funds and pursuing the enforcement investigation. All 
of the information we learn during these aspects of our work will be 
relevant to the Commission as it considers ``lessons learned'' and any 
policy responses or regulatory changes. It is just too early to tell, 
however, what responses and/or changes the Commission will find 
appropriate.
    Obviously, the Commission has a great deal of work ahead of it to 
get customer funds back where they need to be, to determine what went 
wrong with segregated funds at MF Global, to determine whether to 
prosecute any violations of the Act, and to determine what needs to be 
done to prevent a similar circumstance in the future. Commission staff 
is coordinating on these issues with sister regulators both 
domestically and overseas, and is working closely with the SIPA Trustee 
to provide whatever support he needs to resolve issues with commodity 
customer accounts. I greatly appreciate the continued support of this 
Committee as we move forward with this important work.
    Thank you. I am happy to answer any questions you may have.
                                Appendix
    Under Section 4d of the CEA, customer segregated funds may be 
invested in:

   obligations of the United States and obligations fully 
        guaranteed as to principal and interest by the United States 
        (U.S. Government securities); and

   general obligations of any state or of any political 
        subdivision thereof (municipal securities).

    Pursuant to Section 4(c) of the CEA, in December 2000 the 
Commission expanded the list of permitted investments by amending 
Regulation 1.25 to permit investments in:

   general obligations issued by any enterprise sponsored by 
        the United States (government sponsored enterprise or GSE debt 
        securities);

   bank certificates of deposit (CDs);

   commercial paper;

   corporate notes;

   general obligations of a sovereign nation (to the extent the 
        FCM holds customer funds denominated in that sovereign nation's 
        currency); and

   interests in money market mutual funds (MMMFs).

In connection with that expansion, the Commission included several 
provisions intended to control exposure to credit, liquidity, and 
market risks associated with the additional investments, e.g., 
requirements that the investments satisfy specified rating standards 
and concentration limits, and be readily marketable and subject to 
prompt liquidation.
    In February 2004, the Commission adopted amendments to Commission 
Regulation 1.25 regarding:

   repurchase agreements using customer-deposited securities 
        and time-to-maturity requirements for securities deposited in 
        connection with certain collateral management programs of DCOs.

    In May 2005, the Commission adopted amendments to Commission 
Regulation 1.25 regarding:

   standards for investing in instruments with embedded 
        derivatives;

   requirements for adjustable rate securities;

   concentration limits on reverse repurchase agreements;

   transactions by FCMs that are also registered as securities 
        brokers or dealers (in-house transactions);

   rating standards and registration requirements for MMMFs;

   an auditability standard for investment records; and

   certain other technical changes.

    In 2007, the Commission's Division of Clearing and Intermediary 
Oversight (Division) launched a review of the nature and extent of FCM 
investment of customer funds in order to further its understanding of 
investment strategies and practices and to assess whether any changes 
to the Commission's regulations would be appropriate. As part of this 
review, all registered Derivatives Clearing Organizations (DCOs) and 
FCMs carrying customer accounts provided responses to a series of 
questions. As the Division was finalizing its review of materials 
submitted by DCOs and FCMs, and conducting follow-up interviews with 
them, the market events of September 2008 occurred and changed the 
financial landscape such that much of the data previously gathered no 
longer reflected current market conditions.
    In May 2009, the Commission issued an advance notice of proposed 
rulemaking to solicit comment prior to proposing amendments to the list 
of permitted investments. The Commission sought comments, information, 
research, and data regarding regulatory requirements that might better 
safeguard customer segregated funds. It also sought comments, 
information, research, and data regarding the impact of applying the 
requirements of Regulation 1.25 to 30.7 funds (30.7 refers to funds of 
foreign futures and options customers). The Commission received twelve 
comment letters--eleven supported maintaining the list of permitted 
investments and/or ensuring that MMMFs remained permitted investments; 
five focused solely on the topic of MMMFs, providing detailed 
discussions of their usefulness to FCMs; and several addressed issues 
regarding ratings, liquidity, concentration, and portfolio weighted 
average time to maturity.
    In October 2010, the Commission proposed changes to the list of 
permissible investments, and on December 5, 2011 adopted final rules in 
that regard. The final rules, among other things:

   retain U.S. agency obligations, including implicitly backed 
        GSE debt securities, but allow investment in debt issued by 
        Fannie Mae and Freddie Mac only as long as they operate under 
        the conservatorship or receivership of FHFA;

   remove corporate debt obligations not guaranteed by the 
        United States;

   eliminate foreign sovereign debt;

   eliminate in-house and affiliate transactions; and

   impose asset-based concentration limits on various 
        investments.

    The Chairman. Thank you, Commissioner.
    Mr. Kobak, you may begin when you are ready.

    STATEMENT OF JAMES B. KOBAK, Jr., LEAD COUNSEL TO JAMES 
             GIDDENS, TRUSTEE, SECURITIES INVESTOR
   PROTECTION ACT LIQUIDATION OF MF GLOBAL INC., NEW YORK, NY

    Mr. Kobak. Thank you, Chairman Lucas, Ranking Member 
Peterson, and Members of the Committee. Thank you for inviting 
me to testify today about efforts to identify, preserve, and 
return assets to former customers of MF Global Inc.
    My name is James Kobak, Jr. I am a partner at the law firm 
of Hughes, Hubbard, and Reed and lead counsel to James Giddens, 
the court-appointed Trustee for MF Global Inc., under the 
Securities Investor Protection Act, or SIPA
    By statute, the Trustee is the customers' advocate. The 
Trustee's staff, which includes legal experts, consultants and 
forensic accountants, is focused on looking after the interests 
of customers and returning assets to them as quickly as 
possible and in a way that is fair and consistent with the law.
    The Trustee appreciates the interest of this Committee. We 
have been working closely and continuously with the Securities 
Investor Protection Corporation, with Commissioner Sommers and 
the Commodity Futures Trading Commission, with the Securities 
and Exchange Commission, with the Chicago Mercantile Exchange, 
and with other industry members and industry groups.
    The Trustee and everyone working with him understands the 
frustration of many former MF Global Inc., customers. When a 
broker-dealer with 36,000 commodity customers fails under the 
unprecedented circumstances here, the liquidation is 
necessarily complex. The Office of the Trustee has been working 
tirelessly with speed and diligence to marshal customer assets 
and find ways to return them to customers to the full extent of 
our ability under the applicable provisions of SIPA, the 
Bankruptcy Code, and CFTC regulations.
    We were appointed on the afternoon of October 31. Through 
expedited court proceedings beginning in less than 2 days that 
have already been approved by the court and with the assistance 
and consent of the CFTC, we distributed $2 billion of property. 
We have a hearing in bankruptcy court tomorrow where we are 
asking the court to approve a transfer of an additional 
slightly over $2 billion that should bring all customers with 
domestic commodities positions up to an amount slightly in 
excess of \2/3\ of the value of their accounts. The customer 
claims process is also up and running with claim forms on the 
Trustee's website and also sent by mail. Claims are being filed 
and reviewed as we speak.
    As part of his statutorily mandated duty, the Trustee is 
also investigating the extent of and reasons for the shortfall 
and what MF Global management should have segregated or 
otherwise set aside at depositories for the benefit of 
commodity customers. The investigation is ongoing and the 
Trustee is not yet in a position to make any definitive 
conclusions. However, he has determined that even if he could 
recover everything that is presently available at U.S. 
depositories, there will be a significant shortfall.
    At present, the Trustee believes the shortfall, based on 
everything he is looking at across the entire business, may be 
as much as $1.2 billion or more. The Trustee felt obligated to 
share these preliminary numbers and explain the uncertainty 
around them, first to the court supervising the liquidation, 
and then to the public through his website. It is the Trustee's 
hope that the shortfall number will come down, but no matter 
the final amount of the shortfall, under any of the estimates 
that have been made, it is significant and substantially 
affects the Trustee's ability to make a 100 percent 
distribution to former MF Global customers.
    Further complicating matters, assets located in foreign 
depositories for customers that traded in foreign futures are 
or should be under the control of foreign bankruptcy trustees 
or administrators. The Trustee is pursuing these assets 
vigorously but recovery may be uncertain and may take more 
time.
    The Office of the Trustee has made every effort to 
communicate directly and frequently with customers through his 
website, mailings, and frequent meetings with various groups. 
In closing, you can be assured that the Trustee and his staff 
are fully committed to returning customers' property as quickly 
as possible and in a fair and equitable manner that complies 
with the law.
    [The prepared statement of Mr. Kobak follows:]

   Prepared Statement of James B. Kobak, Jr., Lead Counsel to James 
Giddens, Trustee, Securities Investor Protection Act Liquidation of MF 
                       Global Inc., New York, NY
    Chairman Lucas, Ranking Member Peterson, and Members of the 
Committee: Thank you for inviting me to testify today about efforts to 
identify, preserve and return assets to former customers of MF Global 
Inc. My name is James Kobak. I am a partner at the law firm Hughes 
Hubbard and Reed and lead counsel to James Giddens, the court-appointed 
Trustee for the Securities Investor Protection Act (SIPA) liquidation 
of the failed broker-dealer, MF Global Inc. On behalf of the Trustee, I 
would like to provide an update on the actions his office is taking to 
protect MF Global Inc. customers.
Introduction
    On October 31st, Mr. Giddens was appointed as the independent 
Trustee for the liquidation of MF Global Inc. by the United States 
District Court for the Southern District of New York, on recommendation 
from the Securities Investor Protection Corporation, or SIPC. As 
empowered by the Securities Investor Protection Act of 1970, when a 
brokerage firm must be liquidated due to bankruptcy or other financial 
difficulties, SIPC uses a court-appointed Trustee to, within certain 
limits, return customers' property as quickly as possible.
    A different Trustee has been appointed to oversee the bankruptcy 
proceedings of MF Global Holdings Ltd. As counsel for the Trustee 
liquidating MF Global Inc., I do not have obligations to the MF Global 
holding company, nor do I have firsthand knowledge about the events 
that transpired prior to MF Global's bankruptcy.
    The Trustee is the customers' advocate. His statutory mandate is to 
preserve and recover MF Global Inc. customer assets so that they can be 
returned to the rightful owners and to maximize the estate for all 
stakeholders. The Trustee's staff, which includes legal experts, 
consultants and forensic accountants, is singularly focused on looking 
after the interests of customers and returning assets to them as 
quickly as possible and in a way that is fair and consistent with the 
law.
    The Trustee appreciates the interest of this Committee and other 
Members of Congress and has been working closely and continuously with 
SIPC, Commissioner Jill Sommers and the Commodity Futures Trading 
Commission, Chairperson Mary Schapiro and the Securities and Exchange 
Commission, along with the staffs of their respective organizations, 
and the Chicago Mercantile Exchange.
    Distributions to nearly all former MF Global Inc. retail customers, 
whether farmers, day traders, or institutional investors, have been 
made within weeks of the bankruptcy filing. Through already approved 
expedited court filings and additional court filings that will be heard 
by the Bankruptcy Court tomorrow, we have laid the ground work for up 
to $4.1 billion in customer distributions. The customer claims process, 
which we asked the Bankruptcy Court to authorize us to establish on an 
expedited basis, is also up and running, with claims forms on the 
Trustee's website and also sent by mail.
    The goal of the Trustee remains to pay MF Global Inc.'s former 
retail commodities and securities customers 100% of the amounts in 
their accounts as promptly as permitted by governing regulations. 
Ultimate distributions are, of course, dependent upon assets available 
and there is no assurance of a 100% return.
    Exhaustive efforts to collect funds from U.S. depositories 
continue. However, complicating matters, assets located in foreign 
depositories for customers that traded in foreign futures are now under 
the control of foreign bankruptcy trustees or administrators. While the 
Trustee will pursue them vigorously, experience dictates that recovery 
of these foreign assets may be more uncertain and may take more time.
    The Office of the Trustee has made every effort to communicate 
directly and frequently with customers. The Trustee's website includes 
updates, court filings, claims forms and claims filing instructions, 
including a section addressing the common questions being asked by 
customers in calls or other communications to the Trustee's staff. The 
Trustee's staff is answering customer calls and e-mails and holding 
meetings with customer groups and counsel. In the month of November, 
the Trustee's call center handled more than 8,500 calls, and more than 
60,000 individuals accessed the Trustee's detailed website on more than 
222,000 occasions.
    If your constituents have any questions, we encourage them to visit 
the Trustee's website at MFGlobalTrustee.com, e-mail the Trustee's 
staff at [email protected], or call our call center at 1-
888-236-0808.
    The Trustee and everyone working with him understands the 
frustration of many former MF Global Inc. customers, some of whom you 
may have heard from directly. When a broker-dealer fails under the 
unprecedented circumstances surrounding MF Global's demise, the 
liquidation is necessarily complex. The Office of the Trustee has been 
working tirelessly with speed and diligence to identify ways to return 
assets to customers to the full extent of our ability under the 
applicable provisions of SIPA, the Bankruptcy Code and CFTC 
regulations.
Customer Distributions
Commodities Accounts
    Returning assets to former MF Global Inc. retail commodities 
customers has been accomplished thus far through two Bankruptcy Court-
approved bulk transfers. The Trustee has filed a motion for an 
additional bulk transfer for commodities accounts that will be before 
the Bankruptcy Court for approval at a hearing tomorrow morning.
    Approximately $2 billion has already been distributed to former MF 
Global Inc. retail commodities customers through the first two bulk 
transfers. The first transfer was approved by the Court just 2 days 
after the appointment of the Trustee and implementation began 
immediately.
    The approval of the third bulk transfer will allow the distribution 
of an additional $2.1 billion, which will restore approximately \2/3\ 
or more of U.S. segregated customer property pro rata to all former MF 
Global Inc. retail commodities customers with U.S. positions.
    Once approved by the Court, the Trustee expects that the process to 
implement the third bulk transfer can start immediately on a rolling 
basis working with the CME and other derivative clearing organizations 
and industry participants, who estimate the transfers will take them 2 
to 4 weeks to complete in most cases.
    The Trustee appreciates the exhaustive efforts of the CME and other 
derivative clearing organizations, which have made the bulk transfers 
possible. The Trustee also appreciates the CME's offer of a $550 
million guarantee, which will be available for the benefit of commodity 
customers should it ultimately be determined that any customer has 
received more than a pro rata share of the final distribution.
Securities Accounts
    Last week, the Trustee filed an expedited motion with the 
Bankruptcy Court seeking authorization to sell and transfer 
substantially all retail securities accounts to Perrin, Holden & 
Davenport Capital Corp. If successfully implemented, this transfer of 
approximately 300 accounts will allow former MF Global Inc. retail 
securities customers to receive all or a majority of the net equity in 
their accounts. This motion will also be heard by the Bankruptcy Court 
tomorrow.
    The Trustee appreciates the ongoing support and partnership of 
SIPC. The staff of SIPC have been an invaluable resource for the 
Trustee's office as both groups work to protect customers and return 
assets as quickly as possible. SIPC will play a vital role in the 
return of securities customer assets.
Claims Process
    The Bankruptcy Court approved the Trustee's customer claims process 
on an expedited basis on November 22, 2011. Consistent with SIPA 
principles and in the interest of an orderly and efficient claims 
process, separate, parallel customer claims processes have been 
established for MF Global Inc.'s commodity futures customers, 
securities customers, and general creditors, respectively.
    Former MF Global Inc. commodity futures customers will file their 
claims against the commodity account estate. They will receive an 
equal, prorated distribution from two subsets in that estate: one for 
U.S. positions traded through U.S. clearing houses (so-called Rule 4(d) 
segregated funds), and another for foreign positions (so-called Rule 
30.7 secured funds). The foreign secured funds are now largely under 
the control of foreign bankruptcy trustees or administrators, and the 
Trustee will use all means available to gain control of those assets 
held by foreign entities for the return to U.S. customers. At this 
time, the Trustee does not have control of most of these assets and it 
is not known when, or if, the assets will become available to the 
Trustee. If commodity customer claims are not satisfied from the 
segregated commodity account estate, the remaining claim will 
automatically go against the general creditors' estate.
    Security customers will file their claims against the separate fund 
of customer property segregated for security customers under SEC rules. 
Deficiencies will be covered to the limit of SIPC, which is $500,000 
for the valid claims of each securities customer, including up to 
$250,000 for claims for cash deposited for the purpose of purchasing 
securities. Remaining deficiencies in security customer claims, if they 
exist, will automatically go against the general creditors' estate.
    General creditors cannot receive distributions from the customer 
estates and can only recover claims from the general creditors' estate.
    The clear regulatory intent of SIPA is the protection of customer 
property. Consistent with SIPA, the Trustee has the authority to seek 
recovery of assets removed from customer property funds to the extent a 
cause of action exists against those who wrongfully removed the funds. 
In addition, the Trustee may also seek Bankruptcy Court approval to 
allocate existing funds from the general creditors' estate for 
distribution to customers to the extent of regulatory shortfalls and 
under certain conditions and circumstances.
    Claims have already started to be filed and reviewed, and the 
Trustee's office is committed to processing them promptly and to 
supporting a customer-friendly claims process. More than 75,000 claims 
forms were mailed to customers last week, and PDF claims forms have 
been available on the Trustee's website since November 23, 2011. The 
Trustee has also provided detailed instructions and deadlines on the 
website and has been meeting with customer groups and counsel about the 
process.
Investigation and ``Shortfall''
    As part of his statutorily-mandated duty, the Trustee is 
investigating the extent of and reasons for the shortfall in customer 
funds. The Trustee's investigative team, consisting of counsel 
experienced in broker-dealer liquidations and expert consultants and 
forensic accountants from both Deloitte and Ernst & Young, continues in 
close coordination with the Department of Justice, the CFTC, the SEC, 
SIPC, and others.
    The investigation is ongoing, and the Trustee is not yet in a 
position to make any definitive conclusions. However, he has determined 
that even if he could recover everything that is at U.S. depositories, 
there will be a significant shortfall in what MF Global management 
should have segregated at U.S. depositories for the benefit of 
customers. At present, the Trustee believes this shortfall may be as 
much as $1.2 billion or more. These are preliminary numbers that may 
well change, and the Trustee will update these numbers as appropriate. 
The Trustee felt obligated to share these preliminary numbers and their 
uncertainty with the public to dampen assumptions that some smaller 
amount of the shortfall was known with certainty and could not be 
larger. It is the Trustee's hope that, for the benefit of customers, 
the number will come down. No matter the exact size of the shortfall, 
however, its probable size is significant and will substantially affect 
the Trustee's ability to make a 100% distribution to former MF Global 
Inc. customers.
    The investigation will also address broader topics, including the 
demise of MF Global Inc. and the events and transactions that preceded 
it. The Trustee has requested and has been granted subpoena power to 
aid the investigation. The Bankruptcy Court has written an opinion 
supporting the Trustee's view of the importance of maintaining the 
independence of that investigation and denying participation in it by 
the representatives of the holding company or former management whose 
conduct of course is an important subject of the investigation. At the 
same time, the Trustee is coordinating his investigation with those 
being conducted for law enforcement purposes by the SEC, the CFTC, and 
U.S. Attorneys. It is expected that the Trustee will make an interim 
report on the investigation to the Court at an appropriate time, and 
that on completion of the investigation, the final report will be made 
public.
Conclusion
    Thank you Chairman Lucas, Ranking Member Peterson and other Members 
of the Committee for the opportunity to be here on behalf of the 
Trustee and to submit this testimony for the full record of the 
hearing. You can be assured that the Trustee and his staff are fully 
committed to returning customers' property as quickly as possible in a 
fair and equitable manner that complies with the law.
  Appendix--Timeline of Trustee's Motions on Behalf of Customers and 
                            Court Approvals

   October 31, 2011--Court appointment of the Trustee for the 
        SIPA Liquidation of MF Global Inc. at approximately 5:00 p.m. 
        EST.

   November 2, 2011--Trustee files emergency motion seeking 
        approval of the bulk transfer of customer commodity open 
        positions and a percentage of the collateral associated with 
        those positions.

   November 2, 2011--Court holds a hearing and approves 
        Trustee's motion for the bulk transfer of open positions and 
        collateral.

   November 4, 2011--Court holds a hearing on an expedited 
        basis and confirms Trustee's authority to issue subpoenas as 
        part of his duty to conduct an investigation. The Court denies 
        a motion to participate in the investigation by representatives 
        of the holding company and subsequently issues an opinion 
        emphasizing the importance of the independence of the Trustee's 
        investigation.

   November 7, 2011--Trustee files motion seeking establishment 
        of procedures to return misdirected wires.

   November 15, 2011--Trustee files application seeking 
        approval of an expedited claims process.

   November 15, 2011--Trustee files motion seeking approval of 
        the bulk transfer of 60% of the cash attributable to 
        commodities accounts holding only unencumbered cash, or cash 
        equivalents, on October 31, 2011.

   November 17, 2011--Court holds a hearing and approves 
        Trustee's motion for the bulk transfer of cash-only accounts.

   November 22, 2011--Court holds a hearing and approves 
        Trustee's expedited claims process.

   November 22, 2011--Court holds a hearing and approves 
        procedures for return of post-bankruptcy misdirected wires.

   November 29, 2011--Trustee files motion seeking approval of 
        the bulk transfer of up to an additional $2.1 billion to 
        restore approximately \2/3\ or more of U.S. segregated customer 
        property pro rata to all former MF Global Inc. commodities 
        customers with U.S. positions. The motion is scheduled for 
        hearing on December 9.

   November 30, 2011--Trustee files motion seeking 
        authorization to sell and transfer substantially all retail 
        securities accounts to Perrin, Holden & Davenport Capital Corp. 
        The motion is scheduled for hearing on December 9.

    The Chairman. Thank you, Mr. Kobak.
    I now recognize myself for 5 minutes.
    Commission Sommers, it has become clear that there were 
warning signs at MF Global in the weeks if not months leading 
up to the bankruptcy--increased exposure in foreign sovereign 
debt, increased leverage, insufficient capital. Was the CFTC 
aware of these warning signs?
    Ms. Sommers. Mr. Chairman, the investments in foreign 
sovereign debt would be on the broker-dealer side of that 
business. The types of reports that we receive from the FCM we 
were receiving daily segregation reports from MF Global, and 
those did not raise red flags for us until right before the 
bankruptcy.
    The Chairman. So it is fair to say, then, that the first 
time you were made aware of these issues was right before the 
bankruptcy. Who has primary responsibility for monitoring those 
segregation account records, the CFTC or the DSRO or the NFA? 
Who verifies their accuracy in addition to monitoring?
    Ms. Sommers. A typical FCM would be required to compute and 
keep daily segregation records that the DSRO or the CFTC would 
be able to come in and look at. In the case of MF Global, those 
daily seg reports were not actually just kept at MF Global, but 
they were sent to the CFTC and the DSRO.
    The Chairman. Nonetheless, the bottom line is still that 
the daily reports were prepared, they were examined at CFTC, 
but the mechanism by which to verify the accuracy, how is that 
done?
    Ms. Sommers. You would have to go back to bank records to 
make sure. The daily seg reports would compute how much of 
customer segregated money was required to be there and how much 
was actually there.
    The Chairman. So on a day-to-day basis, we were taking 
their word for what they told us they had in the accounts in 
which accounts?
    Ms. Sommers. That is right. Our system relies on self-
reporting, and an FCM is required to report to the CFTC if they 
are ever undersegregated.
    The Chairman. And once again, remind me what CFTC did to 
protect those customer accounts leading up to that bankruptcy 
filing?
    Ms. Sommers. We were reviewing the daily segregation 
reports.
    The Chairman. Okay.
    Mr. Kobak, you indicated that potentially there was at 
least if not more than $1.2 billion in these funds that are not 
accounted for at the present time?
    Mr. Kobak. That is our best estimate to date, yes, Chairman 
Lucas.
    The Chairman. That is a substantial sum of money by 
anybody's definition. Tell me this--if the Trustee is unable to 
recover the missing funds, what priority will MF Global's 
commodity customers be given in the bankruptcy proceedings?
    Mr. Kobak. I actually refer to it not as a priority but 
really with respect to the funds that are there in the 
segregated accounts, it is really an exclusive right of 
commodities customers. So general creditors, securities 
customers, other kinds of claimants have no right at all to 
those funds. If there is an insufficiency, if there are other 
sources available that we can legally pursue, we would do that. 
As Commissioner Sommers indicated, there are provisions that 
allow us to do that. There are also provisions that allow 
general estate assets to be put into the segregated funds and 
to be available for commodities customers.
    The Chairman. Mr. Kobak, the CME has estimated that its 
$550 million guarantee would facilitate the distribution of 
assets to ensure that every customer receives at least 75 
percent of its account value. Is that correct?
    Mr. Kobak. The $550 million guarantee really just goes to 
truing up accounts so that if somebody in some of the transfers 
got more than their proportionate share at the end of the day, 
it would be evened. We don't think it is enough to let us get 
to quite 75 percent. I think the distribution that we are 
hoping the Bankruptcy Court will authorize tomorrow will get us 
up to the area of 69 to 70 percent, somewhere in that vicinity 
for customers.
    The Chairman. So if I am a customer out in the countryside 
caught in this situation, how would I assume that you would 
proceed with this extra money? Will I have to wait 
substantially longer to get potentially up to that 75 percent?
    Mr. Kobak. We have been working with the CME closely. If 
the court approves the transfer, we have systems in place to 
start the mechanism rolling immediately. Some accounts may be 
more complicated than others. The CME thinks that the process 
should take between 2 to 4 weeks depending on the accounts 
involved.
    The Chairman. We have read reports that MF Global's records 
were a mess and that this has complicated the investigation. 
And I ask this of the panel--is that an accurate description of 
MF Global's books and records, a mess?
    Mr. Kobak. Yes. I am no accountant, but I think it is fair 
to state--and I think this often happens in situations like 
this where a company gets in trouble, where there is a run on 
the bank, and there is a tremendous volume of transactions over 
the last week or 10 days of its business, many unusual 
transactions, it is very hard to sort through all that. There 
are a lot of--especially with electronic systems nowadays, 
there are a lot of things that get entered in the record that 
may or may not represent actual transactions. So in that sense, 
the records are a mess.
    The Chairman. And if this goes back previous to the final 
painful days of this business, shouldn't the previous audits 
have forced MF Global to straighten up or clean up their 
records?
    Mr. Kobak. Well, I think most of the mess we see is really 
from the last week or 2. And again, I am not an accountant. We 
have Deloitte and others working for us and they could probably 
answer these questions better than I can. I think frankly the 
customer account records for individual customers were actually 
in fairly good shape up until toward the end, as I understand 
it.
    The Chairman. Commissioner Sommers, any comment on that?
    Ms. Sommers. Yes. I think that there is no real way to 
overemphasize the complexity here. I mean there are over 38,000 
customer position accounts. As I understand it, some of the 
primary bank statements are 300 to 500 pages long. There are 
thousands of transactions that have to be traced from beginning 
to end because we need to know where every penny of the money 
went.
    The Chairman. Thanks, Commissioner.
    My time has expired. I now turn to the Ranking Member for 5 
minutes.
    Mr. Peterson. Thank you, Mr. Chairman.
    I am an accountant and I can understand how it could get in 
this situation that last couple weeks given what went on. And 
from what I can tell, Mr. Corzine, his testimony says he was 
stunned to find out that the customer money was missing, so 
apparently he didn't know about until Sunday either.
    I guess my first question is you have those accountants now 
and they are now sorting through all of this. How long is it 
going to take before they are going to be able to find out what 
happened to this money? Do you have any idea, either one of 
you?
    Mr. Kobak. We are basically working 24/7. I really can't 
answer that question. I think no one will know the exact amount 
of money that is owed to customers until we are through the 
claims process, and that basically began about a week ago and 
there is a 60 day period. So I would hope that at least by the 
end of that period we would have a good understanding of what 
this shortfall is and a better understanding of all the reasons 
for it.
    Mr. Peterson. But during the process, you are also trying 
to figure out who it was that knew about this, authorized it, 
and whatever. That is part of your------
    Mr. Kobak. Yes. Our primary emphasis, though, is how much 
money------
    Mr. Peterson. Yes.
    Mr. Kobak.--is missing? Where did it go? Do we have a legal 
way to get it back?
    Mr. Peterson. Right.
    Mr. Kobak. And there are law enforcement investigations 
with the U.S. Attorney and we really don't want to get in the 
way of those. So we see that as very much a secondary mission 
right now to finding out where the money went.
    Mr. Peterson. Right. On November 29, the New York Times, 
there was an article by Ben Protess and Azam Ahmed about how 
some investigators suspect that there was a transfer of some 
$200 million from MF Global to JP Morgan Chase in Britain and 
it may have been the first major misuse of customer money it 
was reported. It was also said that the authorities are looking 
into whether JP Morgan initially questioned the source of this 
cash and sought proof from MF Global that it was complying with 
regulations. Generally, when third parties receive funds from 
futures commission merchants, what is the third party's 
obligation to confirm or inquire with the FCM whether or not 
these funds are customer funds? And if the third party knows or 
suspects that the funds they receive are from customer funds 
being inappropriately transferred, what obligation does that 
party have to report this knowledge or suspicion to the 
regulator?
    Ms. Sommers. I will take the first part of that question 
first and to say simply that if there is any customer money 
that has been transferred out of the section 4d accounts, that 
is part of what we are working together to find and that money 
will be clawed-back to be distributed back to customers.
    The second part of the question on the obligations of an 
FCM or of a third party, generally speaking, transactions like 
that to take customer money out of a section 4d segregated 
account and transfer it to pay some other debt do not happen. 
That is a violation of the Act. So there wouldn't be an 
obligation for the third party. I mean I would not think that 
it would generally come to somebody's mind to question it.
    Mr. Peterson. As I understand what I have read, this stuff 
that these segregated accounts have a different name. And so if 
you are involved in this business, you are going to understand 
if it has that name, it is a customer's account. I think that 
is part of the issue here is that there was apparently some 
question about the way this thing was named. So if that in fact 
is the case, I mean is there responsibility on the part of JP 
Morgan Chase to question that or did they question that if you 
are looking into that?
    Ms. Sommers. I am not aware of those specific circumstances 
that you are describing, but I would think that in a normal 
course of business there would not be a case for a third party 
to ask for some sort of verification.
    Mr. Peterson. Hopefully you will look into that because I 
also had heard that they were fairly trying to get preference 
to get this money back somehow or another. I don't know. 
Anyway, there was this story out there so hopefully somebody is 
looking into that.
    The other question I have is if you determine--this is for 
both of you--in the course of doing this that the customer 
funds were inappropriately commingled or used, can personnel at 
MF Global, if they authorized these actions, be held personally 
responsible or liable? And can the Commission or the Trustee 
require MF Global personnel responsible for missing funds to 
use personal assets to compensate victims who lost their money?
    Mr. Kobak. It sounds like that is a question for me in the 
first instance, and those are certainly issues that we are 
looking into apart from what their liability might be from a 
criminal side or a regulatory side. As I said, our mission 
right now is to see if there are causes of action and that is 
something that--first, we have to know if people did do things 
improperly, and then if they did, are there legal theories to 
pursue that. But that certainly is the kind of thing we would 
be looking into and are looking into.
    Mr. Peterson. Ms. Sommers?
    Ms. Sommers. From the CFTC's perspective, they are subject 
to civil prosecution under our rules, and there would also be 
potential for criminal violations of the Act as well, so 
criminal prosecution by other authorities.
    Mr. Peterson. So your civil authority, would that just be 
fines?
    Ms. Sommers. Right.
    Mr. Peterson. And is there a limitation on how much the 
fines could be or can you charge enough fines to cover this? 
And if you did, could you use that to make--you probably 
couldn't use that to make good these accounts anyway.
    Ms. Sommers. It is my understanding that there are a number 
of different avenues with regard to the authority we have for 
fines. It is $140,000 per violation of the Act, or three times 
the amount of the monetary gain, as well as additional fines 
that we could charge for restitution to customers and various 
other fines. So there are a number of different ways we could 
go in assessing the fine that would be appropriate.
    Mr. Peterson. But that money wouldn't be available to make 
good the customer account. That is going to go to the CFTC, 
right?
    Ms. Sommers. It is my understanding that would go to 
general Treasury fund. Restitution would go back to the 
customers but the fines would------
    Mr. Peterson. Yes.
    Ms. Sommers.--be returned to the general Treasury fund.
    Mr. Peterson. Right.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    I now recognize the gentleman from Virginia for 5 minutes.
    Mr. Goodlatte. Thank you, Mr. Chairman. Commissioner 
Sommers, Mr. Kobak, welcome.
    My first question to you, Commissioner Sommers, is related 
to how this works. As I understand it, customers of MF Global 
would place funds--in fact in many instances very large amounts 
of funds--into an account that is like a trust account or an 
escrow account that would be held there, and then at 
appropriate times the customer would give instructions to MF 
Global to engage in a particular trade, and when they did that, 
they would take the funds from that account to engage in the 
trade. So what has happened is that MF Global has taken those 
funds without the customers' authorization and placed them in 
various types of investments, some of which like foreign 
sovereign debt might be viewed to be quite risky. Is that what 
is at the heart of this?
    Ms. Sommers. Mr. Goodlatte, I wouldn't want to discuss any 
of the details that may compromise the enforcement 
investigation, but to say that generally speaking, yes, a 
customer would place money in a section 4d account with an FCM 
and that FCM is not allowed to use customer funds, for 
instance, to make proprietary investments for their own 
account.
    Mr. Goodlatte. Okay. And on Monday, the Commission, after 
considerable investigation and deliberation and starting prior 
to this MF Global problem arising, made changes to Rule 1.25 
which gives instructions to companies like MF Global about what 
they can do with the funds in those accounts. Is that not 
correct?
    Ms. Sommers. That is correct. But I think it is also--just 
to be clear, when an FCM is using funds to invest in 
permissible investments under rule 1.25, simultaneously the 
exact amount of money has to be put back into the customer 
account. They can't take the money out there, use it, invest 
it, and then at some other time put it back.
    Mr. Goodlatte. Correct. So they have to maintain the funds 
in that account much like if you put money into a bank account, 
the bank, using that as collateral, will make investments in 
various things but they can't deduct it from the account and 
put it back in later on.
    Ms. Sommers. That is exactly right.
    Mr. Goodlatte. It operates similarly.
    Do you believe that the changes that were enacted by the 
CFTC on Monday would have made clear--I don't know if you can 
say it would have prevented actions that may have been 
illegal--but would it have made it clear that the actions taken 
by MF Global were not legal had they been operating under the 
new rule?
    Ms. Sommers. Nothing under rule 1.25 has ever allowed an 
FCM to use customer funds for investments for their own 
account. So changes that we made on Monday or previous to 
Monday would have ever allowed that.
    Mr. Goodlatte. What was the purpose of making the changes 
on Monday? What did those accomplish?
    Ms. Sommers. Actually, there is a long history there that 
goes back to after 2008 when the reserve fund broke the bank, 
and since then, the CFTC has been looking into what type of 
investments should be allowed for customer funds. And one of 
the beginning issues is whether or not an FCM should be allowed 
to put 100 percent of customer money into one money market fund 
like the reserve fund. So we were looking at concentration 
levels and asset-based concentration levels, issuer-based 
levels on those money market accounts.
    Mr. Goodlatte. And you also restricted their ability to 
invest in foreign sovereign debt, did you not?
    Ms. Sommers. We did on Monday. Yes, we did.
    Mr. Goodlatte. Okay. Do you think that those changes would 
have prevented what happened in MF Global from occurring in 
terms of where they made investments? Maybe not in terms of how 
they conducted the account, which is a whole separate part of 
this investigation, but in terms of where they made the 
investments?
    Ms. Sommers. At this point, I believe it would be premature 
for us to assume that what has happened, that they used 
permitted investments that may have been permitted before 
Monday and that that is where the money was lost. We don't know 
that that is what happened.
    Mr. Goodlatte. So the money could have been lost that way, 
the money could have been embezzled, the money could be 
somewhere that the Trustee hasn't yet located. That part of the 
investigation is not yet clear?
    Ms. Sommers. That is correct.
    Mr. Goodlatte. And one hopes for the best but from looking 
at this one expects the worst.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from Pennsylvania 
for 5 minutes.
    Mr. Holden. Thank you, Mr. Chairman.
    Ms. Sommers, if I understand your answer to Chairman Lucas' 
question, the CFTC was receiving daily reports from the FCM 
that indicated no problem at MF Global?
    Ms. Sommers. Daily segregation reports.
    Mr. Holden. Okay. When was the last CFTC audit of MF Global 
and what did that audit show?
    Ms. Sommers. The CFTC is not the frontline regulator for 
FCMs, so we do not perform audits on FCMs. We do spot checks 
and other different procedures to review books and records. But 
the audits are performed by the DSROs.
    Mr. Holden. Are you aware of the results of the last audits 
by the DSROs and what it showed?
    Ms. Sommers. CFTC staff would review those.
    Mr. Holden. So you don't have personal knowledge of that?
    Ms. Sommers. I do not.
    Mr. Holden. Okay. How closely does the CFTC monitor capital 
levels at FCMs?
    Ms. Sommers. I am sorry, how often?
    Mr. Holden. Not how often, how closely?
    Ms. Sommers. That would be------
    Mr. Holden. Give it a lot of attention.
    Ms. Sommers. For an entity that is FCM solely, those types 
of capital levels would be part of our oversight for an FCM--or 
I am sorry for an entity that would be a broker-dealer FCM, 
then those capital levels would be reviewed by either the 
securities side or the futures side, depending on the higher of 
the two is what the regulations require.
    Mr. Holden. Did the CFTC coordinate with other regulators 
leading up to MF Global bankruptcy? Did you consult with FINRA 
and the SEC?
    Ms. Sommers. I am not sure exactly of the circumstances of 
who was consulting with the SEC or FINRA in the days leading up 
to the bankruptcy. I was not involved at that point.
    Mr. Holden. Well, would it be common practice to consult 
with the SEC?
    Ms. Sommers. I think that there are periodic meetings that 
regulators have to review issues in the markets, but I am not 
sure how often those happen.
    Mr. Holden. Thank you.
    Mr. Kobak, how many accounts were affected? I believe you 
said 36,000; Ms. Sommers said 38,000, so somewhere------
    Mr. Kobak. Our best number is approximately 36,000.
    Mr. Holden. How many of those accounts are commodity 
accounts?
    Mr. Kobak. I am talking about commodities accounts. A small 
number, about 300 or 400 act as securities accounts on the 
broker-dealer side of the business.
    Mr. Holden. Okay. How many accounts have been transferred 
to a different futures commission merchant?
    Mr. Kobak. When we will have completed--assuming the court 
approves the transfer tomorrow--we expect that substantially 
all accounts should move. There are a number of very small 
accounts--I am talking about accounts with less than $1,000, 
many times just $100 or $200 that may not have been active 
accounts for a long time--it may be possible to find other FCMs 
to take those, so we may try to expedite the resolution of 
those claims in the claims process. But other than that, 
virtually all accounts should get to another FCM with something 
like \2/3\ of the value of their domestic positions.
    Mr. Holden. And the transfer has to be reviewed by the 
Trustee, correct?
    Mr. Kobak. Well, we have to move the Bankruptcy Court 
actually, and that is what we are doing tomorrow. And there are 
people that oppose the transfer for various reasons. We are 
hopeful that it will be approved.
    Mr. Holden. Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The chair now recognized the gentleman from Illinois for 5 
minutes.
    Mr. Johnson. Thank you, Mr. Chairman, Members of the 
Committee.
    Ms. Sommers, you are in the unfortunate position of having 
to take some slingshots from Members of the Committee that I 
think are legitimately directed to CFTC but not to you 
personally. But I guess you have broad shoulders and you are 
going to have to accept that.
    I am wondering in the first instance why Mr. Gensler isn't 
here today?
    Ms. Sommers. Congressman, Mr. Gensler has recused himself 
from matters regarding MF Global.
    Mr. Johnson. It is interesting to me that Mr. Gensler, who 
has been willing to come in here hearing after hearing to 
explain the inordinate delays that CFTC has had in regulations 
and rules on perhaps the most important--at least as to the 
agricultural community nationwide--the most important hearing 
we have had in years has chosen to send you in here for him. We 
are glad to have you here, but I find that, in light of his 
past filibustering, entirely unacceptable. When did he first 
determine that he was going to recuse himself?
    Ms. Sommers. It is my understanding that he made that 
decision on November 4.
    Mr. Johnson. Is that because he is part of this Goldman 
Sachs fraternity that includes ministers of foreign governments 
in which the money is invested, Mr. Corzine himself, Mr. 
Gensler himself, and this whole nebulous group of individuals? 
Is that why he has decided to recuse himself because he is part 
of that group or why did he do that?
    Ms. Sommers. I do not know the reason.
    Mr. Johnson. So you are simply here--and we appreciate your 
being here--but I find that entirely unacceptable. And Mr. 
Gensler is here somewhere in the room or listening to this 
which I assume he is, I must tell you that from the standpoint 
of Congressman Johnson, in light of your past testimony and the 
role of CFTC, I find your failure to testify here totally 
unacceptable.
    Mr. Peterson. Will the gentleman yield?
    Mr. Johnson. Sure.
    Mr. Peterson. Yes, I just wanted to inform the gentleman 
that I think the thing that precipitated this is that Senator 
Grassley asked Chairman Gensler to recuse himself.
    Mr. Johnson. Well, I am not certain------
    Mr. Peterson. It was Senator Grassley that precipitated 
this, just so people understand.
    The Chairman. And if both gentlemen yield, I would note I 
believe the Chairman is out of the country today. Is that 
correct?
    Ms. Sommers. Yes, he is.
    The Chairman. He is in Europe.
    Mr. Johnson. When and from whom did CFTC first hear of 
these concerns that were actually expressed as long ago as June 
that MF Global was undercapitalized?
    Ms. Sommers. It is my understanding that CFTC staff, in 
reviewing a focus report that was submitted to us by MF Global 
in August, showed the under-capitalization for July.
    Mr. Johnson. Does CFTC have the power or authority to force 
a firm into bankruptcy?
    Ms. Sommers. No, we do not.
    Mr. Johnson. What is your authority in that regard and how 
far can you push the envelope so to speak in terms of your role 
in the process?
    Ms. Sommers. For a BD/FCM, that would be SIPC. For a firm 
or an entity that was an FCM only, the FCM would have to 
initiate the bankruptcy proceedings.
    Mr. Johnson. How often do you examine the FCMs?
    Ms. Sommers. The CFTC is not the frontline auditor for 
FCMs. It is the self-regulatory organizations that are the 
frontline auditors for FCMs.
    Mr. Johnson. Was there a point--and if so when was it--when 
you audited MF Global? And what were the results if any of that 
audit?
    Ms. Sommers. The DSRO would be the one to audit. And in MF 
Global's case, the DSRO is the Chicago Mercantile Exchange.
    Mr. Johnson. And again can you explain to us--just so I 
will understand when Mr. Corzine is here later because he is 
the other part of the trilogy--what the basis is by which Mr. 
Gensler chose to recuse himself? I just want to know the 
background. I don't understand. I think Mr. Peterson and 
Chairman Lucas' questions are good ones. The points are good 
ones. I am just not entirely sure I understand what the basis 
was for the recusal.
    Ms. Sommers. Congressman, I am not familiar with the basis 
of his--he has a recusal letter, but that is the limit of my 
understanding.
    Mr. Johnson. I guess the last question which is in some 
ways a rhetorical question, and I think probably everybody in 
here, the Chairman, Ranking Member, and the Members of this 
Committee--and I am not sure you are in a position nor your co-
witness at the table answer--I think on behalf of farmers and 
the agricultural sector, investors all over the country, we 
need to know how soon we can give answers to our constituents, 
our people who are trying to buy seed and otherwise when they 
are going to get their money back. What would you expect?
    Ms. Sommers. I understand that completely and want to 
emphasize that that is our number one priority. And we are 
working closely with the Trustee to make sure that happens as 
soon as possible.
    Mr. Johnson. Well, I guess my last question is--I know and 
appreciate your desire to get that done. I guess my question is 
if a co-op, as they have, a number of co-ops in my district 
would ask me and I were to give them an estimate, what would I 
tell them? Because they have to buy seed and land and equipment 
and various other things right now for the next crop year.
    Mr. Kobak. Yes, I understand that. People should be getting 
another--assuming the court approves our motion--another $2 
billion shortly. It should get them up to around 69, 70 
percent. Until we recover more funds, if we recover more funds, 
we can't really do further bulk transfers. At this point, we 
have started the claims process. It has a 60 day period. We 
have started it on an expedited basis. We are already reviewing 
and determining claims, and through that process, people should 
get the remainder of the money that is available. I can't 
really give you a better estimate than that of exactly how long 
it will take.
    As has been noted, some of the accounts are fairly simple 
to determine. Some are very complicated.
    Mr. Johnson. My time has run out. I would just simply say 
that we are all here and inside the Beltway operation, and 
there are millions of people around the country whose lives are 
depending on what we do.
    Mr. Kobak. We are well aware of that.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Iowa for 5 
minutes.
    Mr. Boswell. Well, thank you, Mr. Chairman. And thank you 
and Ranking Member for having this hearing, and I thank our 
witnesses for being here today.
    The last line of questioning kind of triggered me to ask 
this question to both of you. Do you think the CFTC is properly 
funded to do the job that we have charged you to do?
    Ms. Sommers. Congressman, I think that what I have said all 
along with regard to the new authorities that we have been 
given under Dodd-Frank is that it is premature for us to know 
how much more funding we are going to need. I think there is no 
doubt that we cannot implement and enforce Dodd-Frank without 
additional funding, but until we are down the road far enough 
to know who a swap dealer is and what a swap is, it is hard for 
us to know exactly what type of funding we need.
    Mr. Boswell. Well, I appreciate that.
    An earlier comment was made that someone breaks the law or 
breaks the rule, whichever way you want to put it, you don't go 
after the law enforcement. I had an experience with that 
violation of my own home not too many weeks ago. I don't blame 
the law enforcement. They have done a good job. I think you are 
trying to do a good job. But, I am concerned whether you have 
the resources to do the job that we expect you to do? We have 
had that discussion going on here for a while.
    In Dodd-Frank, we seem to expand your responsibilities 
quite a bit, and I have said from the onset that my first 
priority is the producers out there that have this unbelievable 
capital investment these days, which I will probably say more 
about when we get to the third panel, and how do we give them 
the tools they need? And then how are they protected? And that 
is where you folks come in as well. So that is a concern. We 
have a lot of people waiting to ask questions so I am going to 
yield back and probably concentrate on the later panel.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back his time.
    The chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Ms. Sommers, I want to go back to the rule 1.25 change that 
you all had on Monday. And basically, I think a point was made 
by the gentleman from Virginia was that it prohibited now those 
funds being invested in foreign sovereign debt, is that 
correct?
    Ms. Sommers. It eliminated foreign sovereign debt as a 
permissible investment under rule 1.25, but we did invite 
petitioners to petition us for section 4c exemptive relief if 
they choose to do that.
    Mr. Neugebauer. So do we believe then that since this 
entity in their proprietary trading accounts was investing 
their own money in foreign sovereign debt with repurchase 
agreements and others, do we believe that monies for customers 
were being invested in foreign sovereign debt as well?
    Ms. Sommers. I think, Congressman, I would not be able to 
do discuss the specifics of where we believe the money is at 
this time for fear of compromising the investigation.
    Mr. Neugebauer. Yes, I am not asking you where it is, but 
do you have knowledge that the entity was investing customers' 
money into foreign sovereign debt?
    Ms. Sommers. There is no evidence for us to assume that at 
this point, but it is premature because the investigation is 
not finished.
    Mr. Neugebauer. So when you are doing the daily 
reconciliation--and as I understand it all the way through 
Friday the reconciliation showed that the customers' accounts 
were whole--who would determine from an oversight perspective 
what kinds of investments that they are investing customers' 
account money into? Who would oversee that?
    Ms. Sommers. My understanding would be that the FCM 
oversees how the section 4d account would be invested. But the 
CFTC currently does not receive reports to let us know what 
individual FCMs are investing customer money in, what 
permissible investments under rule 1.25.
    Mr. Neugebauer. And I think you also mentioned that you 
really didn't have any knowledge that this entity was having 
financial problems up until the day of the bankruptcy. Is that 
correct?
    Ms. Sommers. The daily segregation reports did not indicate 
that for us.
    Mr. Neugebauer. But, one of the things that we were 
promised in Dodd-Frank that there was going to be tremendous 
amount of interagency coordination, and so obviously this 
entity has other regulators--SEC, FINRA. They were concerned 
about the condition of this company earlier in the year. Were 
they not relaying that to you?
    Ms. Sommers. It is my understanding that we were made aware 
of the increased capital charges on MF Global through their 
focus report.
    Mr. Neugebauer. Mr. Kobak, I want to go to you. I want to 
stay on this rule 1.25 question because I think this is 
something that will be very interesting to see how this plays 
out. Do you have knowledge that the funds of customers on 
behalf of those customers were being invested in foreign 
sovereign debt?
    Mr. Kobak. At this point, I would say we have suspicions 
but we really don't have knowledge. And again we are 
coordinating with regulators and with law enforcement on the 
investigation. So I think I am a little limited in what I could 
say. I certainly don't want to do anything that would delay or 
interfere with any ongoing criminal-type investigations.
    Mr. Neugebauer. And obviously the foreign sovereign debt 
market has been very volatile here lately, so if I had $10,000 
in MF Global and they decided to invest my $10,000 while it was 
just sitting idly in my account, they had decided to invest 
that on my behalf in foreign sovereign debt and that became a 
losing position for me. Then that would diminish my asset value 
and it would be the responsibility of MF Global to then make up 
the difference of that since they had invested my cash in 
something that was------
    Mr. Kobak. Well, they shouldn't have done what you are 
hypothesizing.
    Mr. Neugebauer. But as I understand it, for liquidity 
purposes they can put those monies in other areas and one of 
them is foreign sovereign debt.
    Mr. Kobak. Yes.
    Mr. Neugebauer. So if they do that, even though they are 
not doing it on their account, they are doing it basically on 
my account, if there is a loss suffered because they decided to 
invest that in something that turned out not to make me whole, 
whose responsibility is that?
    Mr. Kobak. Well, it is really management's responsibility. 
Whether there is liability or not, I don't know. Then that is 
something obviously we would be looking into.
    Mr. Neugebauer. So obviously there are three ways my 
account can be diminished. One is I make an investment and I 
lose my money or somebody illegally transfers money out of my 
account for other purposes or they, for liquidity purposes, the 
cash management tool they used didn't make me whole. Is that 
correct?
    Mr. Kobak. Potentially. It is probably not just your money 
but the money in the pool for customers.
    Mr. Neugebauer. Yes.
    Mr. Kobak. If that happened?
    Mr. Neugebauer. Yes. So if the pool shrunk, then we are 
all------
    Mr. Kobak. Yes.
    Ms. Sommers. If I could just clarify for the record that 
investments in foreign sovereign debt by an FCM are only 
allowable up to the amount that that customer posts a foreign 
currency with the FCM as collateral. So it is to prevent the 
FCM from having to take on currency risk.
    Mr. Neugebauer. Okay. That is an important point. Thank 
you, Ms. Sommers, for that information.
    Thank you.
    The Chairman. The gentleman's time has expired.
    The Chairman would note to the Committee that we have a 
series of votes that has begun. I would ask if the gentleman 
from California, Mr. Cardoza, would like to be recognized for 5 
minutes------
    Mr. Cardoza. Thank you, Mr. Chairman.
    The Chairman.--and then at that point we will stand at ease 
until after the vote series.
    The gentleman is recognized.
    Mr. Cardoza. Thank you, Mr. Chairman.
    Ms. Sommers, did the CFTC coordinate with other regulators 
leading up to the MF Global bankruptcy? For example, did the 
CFTC consult with FINRA and the SEC when they forced MF Global 
to change its capital treatment of its foreign sovereign debt 
positions?
    Ms. Sommers. That would not be part of our oversight. No.
    Mr. Cardoza. Okay. Well, I am looking ahead a little bit, 
and in the written testimony that we have received from Mr. 
Corzine, on page 11 it indicates that he had a series of 
meetings in June or calls with the SEC, CFTC, and FINRA, and 
perhaps other regulators, and it goes on to talk about August 
15 when he met with the SEC to question FINRA's requirements 
that they increase their capital requirement. And then it talks 
further about on September 1 that MF Global was still not happy 
with the fact that they were going to have to increase their 
net capital, and yet they filed the required documents with 
FINRA. During that time, the Federal Government, the different 
agencies involved in this, you weren't coordinating at all?
    Ms. Sommers. The increased capital on the broker-dealer 
side would be something that we would receive notice of from 
the BD/FCM. So we were made aware of that issue by MF Global in 
a report that they are required to file with us monthly.
    Mr. Cardoza. Earlier in your testimony, you indicated that 
you really didn't know about this until a few days before, all 
of a sudden everything unraveled. Yet there were reports that 
indicated there were some problems going on here.
    Ms. Sommers. They were required to post more capital on the 
BD side, and they did. So although they reported being 
undercapitalized for July, because of the increase in their 
capital required by FINRA, they did post that capital. So, for 
instance, we may then look at the house proprietary trades of 
MF Global on our side to look at the risk exposure that they 
have to look at what kind of collateral they are holding.
    Mr. Cardoza. Did you look at any of those things?
    Ms. Sommers. Yes, sir.
    Mr. Cardoza. Okay. And did you find any shortfalls when you 
took those views of their accounts?
    Ms. Sommers. No, sir.
    Mr. Cardoza. Our financial system has traceability 
protocols. When money is transferred from account A to account 
B, we can trace that, correct?
    Ms. Sommers. I am not familiar with--I assume that that is 
true I guess I should say.
    Mr. Cardoza. Okay. My point is at this time does anyone in 
your agency--can you tell us why we can't find the money that 
is supposed to be in MF Global's segregated accounts?
    Ms. Sommers. As I stated earlier, I think that we can't 
overemphasize the complexity of the books and records of MF 
Global. The amount of accounts and transactions are enormous.
    Mr. Cardoza. I understand, but frankly, either we have to 
be able as regulators to do that or we have to throw up red 
flags and say that these things are too complex and we are 
going to have to do a better job. Because ultimately, we are 
put in place to protect the public interest, and if we lose 
confidence in these markets, it is going to affect our entire 
economy, not just the people who lose the money in a one-time 
trade. Others won't want to go in and invest.
    Ms. Sommers. I don't want to suggest that we are not making 
progress. Certainly, we are making enormous amounts of progress 
every day, and there is no doubt that we at the end of the day 
will know where all of these transactions were from beginning 
to end. That is our job.
    Mr. Cardoza. How many companies would you say are engaging 
in transactions that are too complex for us to understand on a 
daily basis?
    Ms. Sommers. I also do not think that they are engaged in 
transactions that are too complex for us to understand. It is 
just tracing the amount of different accounts and the 
transactions from one place to the other.
    Mr. Cardoza. Will your agency be coming forward with 
protocols that will change and make easier our ability to trace 
and understand on a more timely basis?
    Ms. Sommers. I think that there is no doubt after this is 
over and at the end of the day when we know exactly what 
happened that there are going to be ``lessons learned.'' There 
will be policy changes that we will want to come to this 
Committee with for your consideration.
    Mr. Cardoza. I would suggest that is a good idea. Thank 
you.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The chair would note to the Members that we are in the 
first of a series of four votes. When we return, Mr. Conaway 
will be next, followed by Mr. Scott.
    The Committee stands in recess until the conclusion of 
these votes. Please promptly return.
    [Recess.]
    The Chairman. This hearing of the Committee on Agriculture 
to examine the MF Global bankruptcy will come back to order.
    The chair will now recognize the gentleman from Texas for 5 
minutes, Mr. Conaway.
    Mr. Conaway. Thank you, Mr. Chairman. I appreciate it. And, 
Ms. Sommers and Mr. Kobak, thank you for being here.
    In the risk of not asking questions I am going to ask over 
and over and over, Ms. Sommers, when you get these daily 
reports if you see the daily reports with respect to the 
segregated accounts, you never expect to get one that shows a 
breach of the segregation. Is that the norm?
    Ms. Sommers. We do not normally get daily segregation 
reports from an FCM.
    Mr. Conaway. But if you got daily ones, you would normally 
see them to be clear that the segregated funds are there and 
the------
    Ms. Sommers. Absolutely.
    Mr. Conaway. And you are relying on the integrity of 
management and the employees of the FCM in this instance--
whichever one that they are doing--to prepare those reports 
properly and for those reports to properly reflect the status 
on that day?
    Ms. Sommers. Right. They are required to report to us if 
they are under segregation, and that has happened.
    Mr. Conaway. So that is a positive that they have to do 
when you get the statement. And then at the company itself, 
they are relying on first the integrity of the management and 
the employees there. And I assume your requirements under 
Sarbanes-Oxley and others that they have control systems and 
management systems in place that drive information to 
management that is accurate and timely with respect to a 
variety of instances but in particular with respect to this 
segregated account?
    Ms. Sommers. Absolutely.
    Mr. Conaway. And if that didn't happen, if the reports 
don't reflect the underlying activity, then a variety of things 
could have happened which we can subject to conjecture. But 
suffice it to say that the segregated account had a leak of 
about $1.2 billion as we currently understand that number.
    Mr. Kobak, if the ratios are right, the total segregated 
funds should have been in the $6 billion range?
    Mr. Kobak. Somewhere between about $5.5 and $6 billion.
    Mr. Conaway. Okay. So the $1.2 is a meaningful number 
against the total under any circumstances?
    Mr. Kobak. Yes, very.
    Mr. Conaway. Even here in Congress------
    Mr. Kobak. Even $600 or $700 million would be meaningful in 
this situation, yes.
    Mr. Conaway. Okay. So at this point the variety of 
investigations will look to how that happened.
    From a management control standpoint, Ms. Sommers, is a 
breach of the segregated fund a meaningful breach in your 
overall regulatory scheme with respect to FCMs?
    Ms. Sommers. It is extremely serious and it is not 
something that we typically see.
    Mr. Conaway. Okay. I roll through a stop sign; that is one 
thing. I do something much more severe, then that is--I am 
trying to get the severity of where a breach in the segregated 
account would fall under the attention that your investigators 
and the folks that regulate--would they immediately talk to you 
about it or somebody?
    Ms. Sommers. It is one of the most serious breaches of CEA 
regs.
    Mr. Conaway. Okay. And then if that is the case, at a 
company--now we are going to hear some testimony later on where 
the witness will say, ``I was so far up the food chain that I 
really didn't get involved in the details.'' But from a company 
standpoint--and we have some FCMs coming later; we will ask 
this question of them as well--where would that breach fall in 
terms of importance that upper management should be made aware 
of it?
    Ms. Sommers. I am not familiar enough to be able to answer 
that. I assume on the FCM side, it would be the upper 
management of the FCM. But as far as a parent company, I would 
not know.
    Mr. Conaway. Okay. Mr. Kobak, you are representing MF 
Global Inc. Is that the overall parent or is that------
    Mr. Kobak. No, that is the broker-dealer FCM. There was a 
holding company and a number of affiliates------
    Mr. Conaway. Right. What is the name of the holding 
company?
    Mr. Kobak. MF Global, Limited, I believe.
    Mr. Conaway. Okay. Is it in bankruptcy?
    Mr. Kobak. It is in Chapter 11, yes.
    Mr. Conaway. Okay. Well, I am going to try to ask Ms. 
Sommers to get her on the hook. If whoever is in charge of the 
segregated funds accounting, the top person there, the person 
in charge of the FCM--and this is the broker-dealer--they would 
have been made aware of it.
    Ms. Sommers. I wasn't sure if the CFO had to sign a daily 
seg report but we could charge them with a failure to supervise 
if the management at an FCM did not know.
    Mr. Conaway. Okay. And then, of course, there had been a 
breach and they had failed to notify you of that, that is in 
and of itself a separate violation?
    Ms. Sommers. That is right.
    Mr. Conaway. And again, this is just for the record, in the 
scale of bad things FCMs could be accused of doing, breaching 
this secured accounting concept is at the top?
    Ms. Sommers. Absolutely.
    Mr. Conaway. Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman's time has expired. The chair 
now recognizes the gentleman from Georgia, Mr. Scott, for 5 
minutes.
    Mr. David Scott of Georgia. Thank you very much, Mr. 
Chairman.
    Ms. Sommers, let me just get right to what I think is a 
very serious point in this. First of all, I find it very 
unacceptable that Commission Chairman Gensler is not here, that 
he has recused himself, that he has gone out of the country at 
the very time that we are faced with the eighth largest 
bankruptcy in the history of the United States on a firm that 
comes under his oversight. Where $1.2 billion of our 
constituents' money is missing, and where Mr. Gensler has a 
very close personal relationship with Mr. Corzine where they 
both worked at Goldman Sachs. Now, I am just raising this 
because it raises a great deal of suspicion.
    But here is the real point: the core of this entire 
investigation and resolution of this investigation rests with 
the application of Rule 1.25. And in that rule, it clearly 
states you can't commingle any of the customers money with the 
business accounts. Here we have a company and a firm, MF 
Global, who goes out, over-leverages tremendously with European 
sovereign debt. You all put a rule in that you passed just 
Monday, but that isn't the first time you put it out. You put 
this rule out in June or July of this year. Then, Mr. Corzine 
calls Mr. Gensler, opposes this, and you delay that 
implementation of this rule to prohibit the use of customers' 
funds for sovereign debt on Monday, just 3 days ago, after the 
fact.
    This is a glaring, glaring example of why the American 
people are rapidly losing faith in our ability here in 
Washington to get our hands around this. So I think that at 
some point Mr. Gensler is going to have to answer some 
questions about what happened here about this, and I think that 
it just raises some questions there. So I think that this is 
something we have to really answer. Could you please tell me 
why you delayed putting this rule into place after Mr. Corzine 
contacted the CFTC?
    Ms. Sommers. Congressman, I think just to clarify, the 
investments in foreign sovereign debt or the repo to maturity 
investments that have been widely reported is my understanding 
are on the BD side of the broker-dealer FCM. Rule 1.25 is a 
regulation that governs what are permissible investments for an 
FCM to be able to use customer funds to invest in. Rule 1.25 
has never allowed an FCM to take money out of a customer 
segregated account, invest it, and not simultaneously put back 
the exact amount into the customer's------
    Mr. David Scott of Georgia. Ms. Sommers, my time is pretty 
short, but just my question is why the delay after you were 
contacted by Mr. Corzine on an agreement to prohibit at that 
point--but prior to that point, prior to Monday, it was okay to 
use customers' funds for an account. But here is a company that 
went down in 10 months. They moved from $1.5 billion in 
sovereign debt to $6.3 billion in sovereign debt, which is the 
cause of their problems. So you see the connection here and you 
have a rule now to prohibit that. Here he is in this and that 
decision was made to delay it until now.
    Ms. Sommers. The Rule 1.25 would not govern what type of 
investments a broker-dealer would be able to make with their--
whether it is their house funds, Rule 1.25 only governs 
customer segregated money on the FCM side. The rule that we 
passed on Monday would not prohibit a BD from making 
investments out of their house account in foreign sovereign 
debt.
    Mr. David Scott of Georgia. All right. But now, under this 
rule, it is illegal; it is wrong; you cannot take a customer's 
money now and apply it to foreign debt under the rule you just 
passed Monday.
    Ms. Sommers. The rule we passed on Monday eliminates 
foreign sovereign debt as a permissible investment but allows 
FCMs to petition us for exemptions.
    Mr. David Scott of Georgia. All right. Let me just ask you 
this on the DSROs, the designated self-regulatory 
organizations, do you feel that that is sufficient in the wake 
of the spectacular collapse of MF Global, can this model 
continue to be justified? Should not the CFTC be conducting 
some of these audits themselves? And do you have the capacity 
to do so?
    Ms. Sommers. We do reviews of the DSROs to make sure that 
the DSROs are performing those audits in an adequate manner. So 
we have authority over the DSROs, and if we ever find any 
deficiencies there, the DSROs are required to correct those 
deficiencies.
    Mr. David Scott of Georgia. Mr. Kobak, I just want to ask 
you a really quick question. You are now nor have you ever been 
an employee of MF Global?
    Mr. Kobak. No.
    Mr. David Scott of Georgia. And you are employed by Hughes, 
Hubbard, and Reed, the court-appointed bankruptcy Trustee, is 
that correct?
    Mr. Kobak. The Trustee is James Giddens, who is a partner 
of our firm and our firm was appointed to be his counsel.
    Mr. David Scott of Georgia. It is my understanding though 
that your firm, this firm, also has in its employ nearly 200 
former MF Global staffers as part of its forensic accounting 
team.
    Mr. Kobak. Well, we have about 175, some in Chicago, some 
in New York. They are really not part of the forensic work. 
They are really more the people that understood the accounts, 
were the back office people who processed trades. We have hired 
them temporarily for about 3 months in order to help with the 
transfer------
    Mr. David Scott of Georgia. Do you feel that this 
complicates matters any to have the employees formerly of the 
firm who were on the audit forensic team of the------
    The Chairman. The gentleman's time is about to expire. The 
witness may answer the question.
    Mr. Kobak. Yes, they are really not on the audit forensic. 
They are just really helping us do account transfers, look at 
the accounts. We need people. We did the Lehman case. A lot of 
the employees had been hired by Barclays that bought a lot of 
the business. We didn't have people like that available to help 
us understand the accounts. And I am not talking about the big 
accounting transfers; I am talking about the individual 
commodity claims. So that is really why we hired them.
    Mr. David Scott of Georgia. Thank you, sir.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Nebraska for 5 
minutes.
    Mr. Fortenberry. Thank you, Mr. Chairman, particularly for 
coordinating this important hearing. Welcome to our witnesses.
    A number of years ago in the wake of the near financial 
collapse due to Wall Street's reckless behavior, I had met with 
a group of Nebraskans who are members of the Chamber of 
Commerce; they were bankers there. And I looked at them and I 
asked, I said how many of you use synthetic collateralized debt 
obligations? And they just stared at me. They didn't know what 
I was talking about. And I thanked them because our financial 
institutions back home didn't take advantage of liberalized 
credit, didn't do things out of the lanes, stayed responsible, 
lived up to their fiduciary responsibility. And so 
consequently, we have not suffered some of the problems that 
the rest of the country has because of this reckless behavior.
    The reason I say this--and I want to quote directly from a 
Thomson Reuters article that has just come out--and it is a new 
term I have never heard of called ``rehypothecation.'' And I am 
going to quote directly from the article. ``MF Global's 
bankruptcy revelations concerning missing client money suggests 
that funds were not inadvertently misplaced or gobbled up in MF 
Global's dying hours but were instead appropriated as a part of 
a mass Wall Street manipulation of brokerage rules that allowed 
for the wholesale acquisition and sale of client funds through 
rehypothecation.'' Would you explain this, please?
    Mr. Kobak. I really can't explain it. I don't think that is 
what our investigation has shown at this point necessarily. 
Now, we are at an early stage and it may be that we will find 
that there is money that went to account A and then that got 
rehypothecated somewhere else.
    Mr. Fortenberry. Let me read the next sentence. ``A 
loophole appears to have allowed MF Global and many others to 
use its own client funds to finance an enormous 6.2 billion 
eurozone repo bet.''
    Mr. Kobak. I think there was a repo on the securities side. 
I don't think at this point we know all the details of that or 
what the outcome was.
    Mr. Fortenberry. But again the issue is the segregation of 
client accounts and now we are learning there may be a loophole 
manipulated to get around this requirement. Am I reading this 
correctly?
    Mr. Kobak. Yes, I think it is on the broker-dealer side, 
not necessarily the commodities side. It is something that we 
are looking into. It is a very complex transaction.
    Mr. Fortenberry. But it still applies because it is 
effectively commingling clients' funds, which is disallowed by 
these rules that we are talking about.
    Mr. Kobak. Well, except I think it is on the broker-dealer 
side, not the commodities side. And one of the things we are 
looking at is in doing some of these transactions, were 
commodities, funds that should have been segregated, used? Were 
securities funds that should have been segregated used 
improperly? That is one of the things we are looking at.
    Mr. Fortenberry. How long do you think before we will have 
that answer?
    Mr. Kobak. I just can't give you a definitive answer. As I 
said, we have this 60 day claim period. We will know then what 
the amount of the claims are, and I am hoping that in that time 
frame we will have a pretty good idea of what happened.
    Mr. Fortenberry. I am going to speed up some questions 
because the time is limited. Who owns MF Global?
    Mr. Kobak. Are you referring to the broker-dealer entity 
that we are involved in or the holding company entity?
    Mr. Fortenberry. MF Global. You define it.
    Mr. Kobak. Well, okay. The holding company, which was our 
parent company, is now in Chapter 11 and an independent Trustee 
was recently appointed by the bankruptcy court. Our entity----
--
    Mr. Fortenberry. So how is it structured and who owns it?
    Mr. Kobak. Well, it is now under the jurisdiction of the 
bankruptcy court.
    Mr. Fortenberry. Well, no, I understand that, but prior to 
this?
    Mr. Kobak. Prior to that, it was owned--I am not exactly 
sure but it was owned as any holding company would be. It had a 
management. It owned a number of companies, including our 
entity and a number of other affiliates.
    Mr. Fortenberry. Okay. It goes to the issue of fiduciary 
responsibility and to a question that the Ranking Member asked 
earlier. In regards to your investigations, if you find that 
funds were inappropriately commingled, will you be able to go 
after the personal assets of people who violated the public 
trust here?
    Mr. Kobak. We would have to look carefully at what the law 
says. If there is a theory, we would go after people.
    Mr. Fortenberry. Can particular personnel be held liable, 
accountable, their personal funds?
    Mr. Kobak. I think it depends on the facts and 
circumstances. That certainly is something that we would be 
prepared to do if the law provides for it.
    The Chairman. The gentleman's time has expired.
    The chair now turns to the gentleman from North Carolina, 
Mr. Kissell, for his 5 minutes.
    Mr. Kissell. Thank you, Mr. Chairman, and I welcome our 
witnesses here today, obviously a very important, very timely 
hearing. A lot of important issues have been raised and I am 
trying not to go through the same questions.
    So Ms. Sommers, I want to try to look at some of the red 
flags, the warnings, maybe things that were missed and kind of 
understanding maybe why they were missed, what could have been 
done. Did I understand you correctly that prior to just very 
recently there were no red flags that would have been sent in 
your direction, CFTC's direction?
    Ms. Sommers. Yes, Congressman. The types of reports that we 
receive, the daily segregation reports from MF Global would 
show how much segregated funds should be there and how much 
were there. But we don't, on a daily basis, look behind those 
reports to look at bank statements. So if the FCM is reporting 
that that segregated money is there, then there would be no red 
flags for us.
    Mr. Kissell. Now, I am just curious. If they had shown that 
there had been a breach of the segregated funds, what would 
have been your reaction? What would have happened next?
    Ms. Sommers. If they had reported to us that there had been 
a breach------
    Mr. Kissell. Yes, ma'am.
    Ms. Sommers.--of segregation? Then, they are required to 
come into compliance immediately.
    Mr. Kissell. Okay. Does that happen much with corporations 
or is that a very rare thing?
    Ms. Sommers. It has happened in the past. I cannot tell you 
how many times.
    Mr. Kissell. And do they come into compliance fairly 
quickly?
    Ms. Sommers. Yes.
    Mr. Kissell. Okay. I had read that the risk assessment 
manager for MF Global had issued warnings that they were going 
into dangerous territory some time ago, maybe even a year ago, 
and this person was fired. Is that your understanding?
    Ms. Sommers. I do not have knowledge of that.
    Mr. Kissell. If that was the case and this person was 
seeing the warning signs, is there any way that those warning 
signs would come in your direction?
    Ms. Sommers. I suppose if that risk officer would contact 
us to give us some sort of tip, that could come our way.
    Mr. Kissell. But internally, if somebody sees something 
going wrong, unless they do make that effort, there is no 
institutional way in which that information would be sent up 
the chain to you guys?
    Ms. Sommers. Not that I know of.
    Mr. Kissell. Okay. Okay. Thank you so much for being here.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from Florida, Mr. 
Rooney, for 5 minutes.
    Mr. Rooney. Thank you, Mr. Chairman, caught me off guard 
there for a second.
    I just have some basic fact-finding-type questions for Ms. 
Sommers. From what I have read, the CFTC--first of all, the 
CFTC, months prior to the collapse of MF Global, had been 
trying to change the rule for whether or not the type of 
trading that ended up leading to the collapse of MF Global, 
they were trying to reign in that type of behavior, is that 
correct?
    Ms. Sommers. If you are referring to Regulation 1.25, that 
is not--to clarify, 1.25 only goes to permissible investments 
of customer funds.
    Mr. Rooney. I am just trying to get some basic information 
here. The kind of trading that apparently MF Global was 
involved in, this repurchase agreements that had become 
somewhat commonplace, your agency was trying to reign that in. 
You weren't? You weren't trying to reign in something that was 
overly risky to investors?
    Ms. Sommers. As I understand it, Congressman, the repo to 
maturity or foreign sovereign debt investments that MF Global 
was engaging in is on the BD side of that entity. The 
Regulation 1.25 under our rules would not prohibit a broker-
dealer from using house funds to invest in foreign sovereign 
debt or repo to maturity instruments.
    Mr. Rooney. Okay. So it is of the opinion of your agency 
that that kind of activity is not risky and should not be 
regulated?
    Ms. Sommers. It is not regulated by us.
    Mr. Rooney. Is it your opinion that it should be?
    Ms. Sommers. No. That is on the broker-dealer side 
regulated by the Securities and Exchange Commission.
    Mr. Rooney. Okay. I am just trying to, as I said, get some 
background.
    And the gentleman that Mr. Johnson was referring to before, 
Mr. Gensler, who is recused from testifying today is your 
superior, your boss so to speak?
    Ms. Sommers. He is not my boss, but he is the Chairman of 
the Commission.
    Mr. Rooney. And Mr. Gensler used to work for Mr. Corzine at 
Goldman Sachs?
    Ms. Sommers. That is my understanding.
    Mr. Rooney. So what I am trying to get my hands around is 
that when the CFTC was trying to curb certain investment types 
like these repurchasing agreements or risky behavior--I am 
getting this from the New York Times article which you probably 
are familiar with--months before this happened that there was 
pushback from the industry not just from MF Global but from 
various trading people that work in this business and that 
there was pushback and that Mr. Corzine was one of the ones 
that pushed back against your agency. And then you guys backed 
off because of that effort. Is that correct?
    Ms. Sommers. I didn't personally have any conversations 
with Mr. Corzine.
    Mr. Rooney. What I am just trying to get my arms around 
here is: it seems like we have an agency that saw a risky 
behavior and was trying to impose a rule. People like Mr. 
Corzine said, hey, back off, and the fact that your boss or the 
guy that is in charge of your agency used to work for Mr. 
Corzine, you all did back off. And now, in retrospect--you can 
correct me if I am wrong. But now, in retrospect, your agency 
is trying to go back in and enforce that rule, which is too 
late for the people that have lost their shirt under MF Global, 
but, now in hindsight you are trying to do it again. So I am 
just trying to get my arms around the players that were 
involved and the timeline.
    Ms. Sommers. Right. So Regulation 1.25 does not apply to 
the investments that MF Global may have made on the broker-
dealer side out of their house account investing in foreign 
sovereign debt. So going back and finalizing that rule does not 
apply to those investments.
    Mr. Rooney. So the article that I am referring to, this New 
York Times article, their factual basis is incorrect?
    Ms. Sommers. I am not familiar with the article.
    Mr. Rooney. Okay. I yield back, Mr. Chairman.
    Mr. Peterson. Mr. Chairman, with the Committee's 
indulgence, I am going to get out on a limb here and hopefully 
not cause too much trouble.
    As I understand it, MF Global was not--was an FCM for 
years, and what they did was they charge commissions to do 
these trades and they had this segregated money and they made 
money on that. But as I understand it, this business has become 
increasingly competitive, and it is to the point where they 
cannot make money, any of these firms, on their commissions 
that they charge to do these trades. The way they are making 
money is on investing the customer money. And so one of the 
reasons they wanted to liberalize, as I understand it--this is 
my interpretation--liberalize that is that then they could make 
more money. But when they invest this money, if they put it 
into a sovereign debt, they have to put treasury bonds into 
that fund to cover it. So the customer is not at risk.
    What happened with this FCM is they were losing money so 
Mr. Corzine came in and made them a broker-dealer. Well, the 
broker-dealers are not regulated by the CFTC; they are 
regulated by the SEC. And so this is where the confusion is 
coming in. So they got into the broker-dealer business. They 
started investing in sovereign debt, and doing these repos, 
adding their risk. They leveraged themselves up somewhere 
between 30 and 37.5 times and this thing moved against them. 
They had to come up with margins; they couldn't come up with 
the margins; the firm collapsed.
    So there are two different things, and what Commissioner 
Sommers is trying to tell you is that the CFTC doesn't regulate 
the broker-dealer side of this. I am sure some of my folks back 
home that did business with MF Global forever, are--I don't 
know if they weren't paying attention--but all of a sudden now 
that firm became a broker-dealer, got into a much riskier 
business, and jeopardized their customer accounts. That is what 
happened basically.
    So, you need to split this between what the CFTC can do and 
what they can't.
    The Chairman. And to distill it even further was money from 
the futures side of the business that is regulated by CFTC used 
to offset the stakes made in the securities side of the------
    Mr. Peterson. Right.
    The Chairman.--company regulated by a different entity, and 
that transfer then is the legal question and the question of 
responsibility that ultimately has to be addressed.
    Mr. Peterson. And if the bottom line here as I understand 
it that I have been considering requiring that this money be 
put in a third party account so somebody else would hold the 
money instead of the firm. But I have been told if I did that, 
we would bankrupt all of these FCMs because they can't make 
money just doing business on commissions.
    So it is kind of like the issue with the banks on their 
interbank fees. If you do this, these people are going to have 
to raise their commissions and the people that do business with 
them are going to have to pay more money in order to keep them 
in business. So it is complicated.
    The Chairman. And the Ranking Member touches on several 
subjects for several more hearings.
    With that, let us return to regular order.
    And the next person the chair would like to recognize for 5 
minutes is the gentleman from Connecticut.
    Mr. Courtney. Why thank you, Mr. Chairman. And I appreciate 
the colloquy actually which just took place and would just like 
to reiterate also the comments the chair and the Ranking Member 
made earlier regarding the Chairman, Chairman Gensler, which is 
that his decision to recuse himself was in response actually 
from a Member of the Senate who demanded that he recuse himself 
because of allegations that somehow there was some relationship 
with MF Global. You can get whiplash around this place 
sometimes trying to keep up with the competing finger-pointing 
that is going on right now. But I think he followed what was a 
demand from this Branch of the Government to step back from 
this whole question.
    Going to the rulemaking process on Monday, which again you 
did a nice job, Commissioner, in terms of explaining the 
distinction between what the rule applied to what the hearing 
is about today. Nonetheless, I mean if you look at the notice 
that the Federal Register posted after you voted and it was a 
unanimous vote, am I correct? You know, it stated what the sort 
of legal source of that rule was, which was a statutory source 
like almost all administrative regulations, which was Section 
939(a) of the Dodd-Frank Act. And I realized your staff had 
been working on this issue for a number of years, as you 
testified earlier.
    But nonetheless, the legal trigger for the process that 
took place on Monday, according to your own notice that was 
issued by the Commission, was 939(a) of the Dodd-Frank Act. Am 
I correct?
    Ms. Sommers. That was part of it. That section, as I 
understand it, required us to remove all references to credit 
rating agencies. So that was part of what we did in the 
amendments to 1.25.
    Mr. Courtney. Thank you. And I ask that question because 
frankly, for the last 11 months, I mean this Committee--and 
Chairman Gensler has been here on a number of those hearings 
and so have you--has been bitterly complaining that you are 
moving too fast. And now today we get another case of whiplash 
from people who are saying you move too slow. And what I would 
just simply say is that--what I think we ought to do is let you 
do your job and also, by the way, give you the resources that 
you need so that you can do your job.
    And you testified earlier again that it may be 
inappropriate for the Commission to get more money before you 
know what the scope of your duties are pursuant to Dodd-Frank. 
But nonetheless, I mean what we just went through in terms of 
the budget this year wasn't about increasing your budget. The 
House reported out an appropriations to cut your budget by 
about $30 million. And we are talking about a total budget that 
is about $200 million. So I mean that is a huge decrease. And 
again here we are today with Members of Congress complaining 
that you are not doing enough when at the same time it is the 
same chamber which was out to really just knock the legs out 
from you in terms of having the resources to do your job.
    And again this is a Committee that reported out a bill H.R. 
1573 which pushed back Title VII of Dodd-Frank for 2 years in 
terms of implementing any of the rules on derivatives despite 
the fact that for some of us you are not moving fast enough. 
You are using all deliberate speed in terms of trying to digest 
tens of thousands of comments that are flooding into your 
agency.
    So, there are times when I just look at your agency, which 
in my opinion is so important to the smooth functioning of 
markets and our economy and the punching that you are subjected 
to from all sides, whether it is to participate or recuse or to 
defund it or not fund it.
    And then we have a situation like this today when again it 
is hopefully an educable moment about the value of what the 
CFTC brings to our country and to our economy. And I again just 
hope all of us will let you guys just proceed and do your job 
and in my opinion follow the mission in a reasonable, balanced 
way in terms of what the Dodd-Frank Act asks for.
    And with that I yield back.
    The Chairman. The gentleman yields back his time.
    The chair now recognizes the gentleman from Indiana, Mr. 
Stutzman, for 5 minutes.
    Mr. Stutzman. Thank you, Mr. Chairman.
    And first of all, Mr. Chairman, I would like to identify 
myself with Mr. Scott and his comments earlier. You know, I 
guess I just believe that for us to get the facts to everything 
that has happened here, every player should be willing to step 
forward and share with this Committee what they know and when 
they knew it. You know, I believe the buck always stops at the 
top, and in this situation I believe that Mr. Gensler should be 
here as well and I believe that for us to get to the bottom of 
this we could get the answers that we are looking for more 
quickly. And I believe that a trip internationally today must 
have been more important and I think that the timeliness of 
that trip is no coincidence.
    But I would like to ask Mr. Kobak. You have been working 
with about 200 employees I believe from MF Global through this 
liquidation. Is that correct?
    Mr. Kobak. About 175.
    Mr. Stutzman. About 175? How has that been working? I mean 
obviously they are in a tough situation with them losing the 
company that they worked for. Have you heard from them? Did 
they see things happening? I mean the timeline that I see--and 
I would like you to comment on that--and then also this might 
be a question for the Federal Reserve Bank folks--but it looks 
like according to this company, a company that had $41 billion 
in assets when Mr. Corzine became the CEO in 2010, as early as 
June of 2011 the FINRA started to grow concerned. But in 
February of this year, MF Global was designated as a primary 
dealer in February of 2011. And so there seems to be a very 
short timeline here that I have a real problem with that 
weren't there red flags being thrown up somewhere along the way 
with as many eyes that were looking at this particular company? 
And also if you could comment about the employees that are now 
working with you.
    Mr. Kobak. Okay. So that is a couple of questions.
    Mr. Stutzman. Sorry.
    Mr. Kobak. So I will take the second part first. I think it 
is fair to say that our investigation in the short term has 
been focusing more on what happened on the end. Is there 
missing money? If there is, where do we think it went? And if 
we can find out where it went, what if anything can we do about 
recovering it? So those other questions, although we are 
looking into them, are kind of questions for a later day.
    On the first part of your question about the 175, most of 
those people were systems people and things like that so I 
don't think they are the ones who would know the answers to 
these questions.
    Mr. Stutzman. Have any of them mentioned, though, that they 
had concerns earlier on?
    Mr. Kobak. We have been talking to them. We have also been 
talking to others. One of the first things in this case was get 
an order from the bankruptcy court confirming our power to do a 
very thorough and independent investigation. Some of the 
holding company that I alluded to, which obviously would be one 
of the groups of people we would be looking at to possibly 
recover money wanted to participate in that investigation and 
we filed papers and argued to the judge that we didn't think 
that was at all proper. We are supposed to have independent 
authority and that having some of the very people we might need 
to investigate looking over our shoulder wasn't appropriate. 
And the judge immediately, while he was on vacation I think, 
wrote an opinion confirming our independence.
    So we are talking to people, both the people we employ but 
more importantly other people. Now, some of those people have 
lawyers and might not allow us to talk to them. We also are 
trying to coordinate our investigation with the U.S. Attorney's 
offices, so in some cases we may need to hold off talking to a 
witness until they have done their job.
    Mr. Stutzman. Okay. Real quick, I have a question for 
Commissioner Sommers. In reviewing daily segregation reports, 
were there any signs that anything was awry? If so when? And 
also, could MF Global, without commingling, use the buying 
power with segregated funds in purchasing sovereign debt?
    Ms. Sommers. So the last part of that question if you could 
repeat, could they------
    Mr. Stutzman. Without commingling funds, could you use the 
segregated, sacred, funds to use to buy sovereign debt?
    Ms. Sommers. So typically an FCM in purchasing foreign 
sovereign debt would be purchasing the amount of foreign 
sovereign debt that a customer would have posted to them as 
collateral. So you could do that without commingling.
    Mr. Stutzman. Okay. All right. And then also real quick, 
anything awry on the daily segregation reports? Did you see 
anything?
    Ms. Sommers. As I stated before, although we review those 
daily segregation reports, an FCM is required to report to us 
if they are undercapitalized. We don't look behind them to bank 
records to verify that what they have reported to us on a daily 
basis is absolutely accurate.
    Mr. Stutzman. Thank you, Mr. Chairman. I will yield back.
    The Chairman. The gentleman's time has expired.
    The next person up will be Congressman Owens of New York, 
and I would serve note to Congressman Austin Scott, you are 
after that.
    The gentleman from New York is recognized for 5 minutes.
    Mr. Owens. I thank you, Mr. Chairman.
    Your testimony here today has indicated that prior to the 
weekend of the collapse of MFG that there was no indication in 
the reports, nor was there any self-reporting that they were 
out of compliance.
    Ms. Sommers. That is correct.
    Mr. Owens. That being the case, what audit techniques or 
risk management techniques or procedures should be in place in 
order to require that type of reporting? I think we can safely 
assume based upon the facts that we know to date that this is 
likely a fraud perpetrated by MFG at some level. And it seems 
to me that we can't rely on the individuals in this particular 
instance to self-report. Is there some technique that you are 
aware of--either a computer program or other audit technique 
that would require the self-reporting?
    Ms. Sommers. They are already required to self-report if 
they are under seg.
    Mr. Owens. So we assume that they did not.
    Ms. Sommers. Right.
    Mr. Owens. Then is there some independent analytic tool 
that you could access remotely, if you will, to determine 
whether or not they have made any inappropriate use of their 
customer funds?
    Ms. Sommers. I think in the end when we know exactly what 
happened and how it happened, it will be appropriate for us to 
go back and look at every single measure that could be used to 
prevent this from ever happening in the future.
    Mr. Owens. And if you do discover that there are tools 
available, would you be inclined to impose those requirements 
on these organizations?
    Ms. Sommers. Absolutely. And I think in some cases if there 
are changes that need to be made, we would come to this 
Committee to ask for you to give us the authority.
    Mr. Owens. So it is your belief, then, that this is a 
serious enough issue that this type of regulation would be 
appropriate?
    Ms. Sommers. When we are able to look at what went wrong, I 
think that absolutely that may be one of the things that we can 
look to to change in the future.
    Mr. Owens. Thank you very much.
    I have no further questions. I yield back.
    The Chairman. The gentleman's time has expired. The chair 
now recognizes the gentleman from Georgia for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    And I share the concerns of the other Committee Members 
about the money that my constituents lost. And you know, I 
think what we have to get to here is how do we work together to 
stop this from ever happening again.
    I guess, Ms. Sommers, one of the things I would like to get 
back to is the reporting. As I understand it, it is self-
reporting of the segregated accounts. And I guess when I look 
at the Moody's ratings and everything else, this firm was rated 
investment grade less than 10 days before the bankruptcy. I 
think that is an indication of how complex these issues are and 
how hard it is to just unwind everything that is on the books 
of some of these firms like this.
    But getting back to the reporting, if we audited those on 
an unannounced basis, spot-checking if you will, do you believe 
that that would have been enough of a deterrent to stop this?
    Ms. Sommers. Congressman, that already happens. DSROs 
certainly do spot-checks on unannounced basis right now.
    Mr. Austin Scott of Georgia. Okay.
    Ms. Sommers. That is, in the end, what they are responsible 
for.
    Mr. Austin Scott of Georgia. So obviously, then, that is 
not enough to stop it from happening if we are doing it right 
now and it hasn't stopped it. I will be interested as you go 
through your investigation to know what mechanisms we need to 
put in place to ensure that the reports that we are getting--
that your agency is getting are actually reflective of what is 
going on in the firm.
    Mr. Kobak, as you go into the courtroom tomorrow, what are 
some of the issues that you think may arise that would prevent 
the customers, the consumers from being made whole throughout 
this bankruptcy process?
    Mr. Kobak. Well, what we are doing tomorrow is asking the 
court to give us authority to distribute another little over $2 
billion, which we think would bring everybody up to around 69 
or 70 percent. We have had some opposition to that motion and 
there are some people that represent the creditors committee in 
the holding company case--that would be the creditors of the 
parent company, not even us--have opposed it on the ground that 
it might be taking money away from those creditors' banks and 
bond-holders------
    Mr. Austin Scott of Georgia. Yes.
    Mr. Kobak.--in favor of commodities customers and we have 
opposed that pretty vigorously, as you might imagine. We think 
it kind of turns the whole statute and our whole proceeding on 
its head to say that customers don't come before those people. 
So we are getting oppositions like that. There are some foreign 
administrators who are holding funds that are customer funds 
abroad that we are not including in this motion, although I 
think eventually we will probably come to some understanding 
with them, and their customers can also receive funds. It is 
just not right now. Their big concern was maybe we weren't 
holding back money and we are holding back some money for that. 
So I don't think that will be a problem.
    Mr. Austin Scott of Georgia. If I could interrupt you real 
quick because I am down to a little better than a minute, but 
as far as putting the customers first with regard to who gets 
paid first, do you believe that the statute is clear on that or 
do you think that is something that this Committee should 
address?
    Mr. Kobak. I am happy to have the Committee address it. I 
believe it is crystal clear. I don't think, as I said, it is 
just a priority------
    Mr. Austin Scott of Georgia. Yes, sir.
    Mr. Kobak.--the way that is used in bankruptcy. It really 
says customers have exclusive rights to these funds.
    Mr. Austin Scott of Georgia. Thank you, sir. And thank you, 
ma'am, for your testimony.
    Mr. Chairman, I yield back the remainder of my time.
    The Chairman. The gentleman yields back his time.
    The chair now turns to the gentleman from Texas for 5 
minutes.
    Mr. Cuellar. Thank you, Mr. Chairman.
    Commissioner Sommers, let us talk about lessons learned. 
What is it that we have not learned from the past issues that 
are so novel in this case, so novel that we have to change 
policy? Could you outline the lessons that you have learned 
from this particular case in order to protect customers?
    Ms. Sommers. Certainly. We are not used to having a 
bankruptcy in the futures side that customers lose money, that 
customer segregated accounts are not whole. And as I talked 
about in my testimony, the past two bankruptcies, the most 
recent two bankruptcies, even though there were problems with 
those companies, customer segregated accounts were whole. So 
those customers and their positions and the collateral 
supporting those positions were transferred to healthy FCMs 
with no issues for customers.
    Mr. Cuellar. That is lesson number one. Give me lesson 
number two.
    Ms. Sommers. So we need to look forward as to how we--if 
there are loopholes or if there are any parts of our regulation 
that don't provide for the ultimate protection for customer 
funds, those need to be changed.
    Mr. Cuellar. So that is lesson number one. Give me lesson 
number two. And this is not a one-term bankruptcy. I am looking 
forward so we can do some preventive medicine before we get in 
that situation. Give me another lesson.
    Ms. Sommers. Well, it may be a little bit premature for me 
to already say that I know what the lessons learned are when we 
are not sure what happened.
    Mr. Cuellar. Right, but you said earlier I think it was for 
Mr. Cardoza you had said that there were some lessons learned 
that would change policies. So I assume you do know of some 
lessons learned because I mean this is not the first time. And 
I know Enron and the other situations were different. I 
understand but I mean every time we get into this situation, 
our regulators, the first thing they say, oh, lessons learned. 
So how many more situations do we need to have before we get it 
right? So you said lessons learned. Is that the only one you 
can give me, a post-situation, after the bankruptcy for better 
protection? Can you name any other ones?
    Ms. Sommers. Not at this point. And I certainly didn't mean 
to suggest before that we know everything and we know what 
lessons we have learned. I think this is going to be something 
that will be comprehensive for us but we don't have all the 
facts.
    Mr. Cuellar. All right. Could you submit that to the 
Chairman, the Ranking Member, the Committee any lessons 
learned------
    Ms. Sommers. Absolutely.
    Mr. Cuellar.--because apparently the only thing we have 
learned so far has to do with better protection of the 
bankruptcy situation. Is that correct?
    Ms. Sommers. Better protection------
    Mr. Cuellar. That is the only one you can name right now.
    Ms. Sommers. For customer funds.
    Mr. Cuellar. Right, for customer funds.
    This question is to Mr. Kobak. Is this basically a straight 
bankruptcy? Do the bankruptcy laws apply on secured creditors? 
And I assume that is where those creditors are coming in. Give 
us the priority on secured creditors and where customers fall 
in and what priorities do they have?
    Mr. Kobak. SIPC is a special statute that incorporates 
elements of the bankruptcy to the extent they are consistent 
with SIPA. SIPA puts a priority on customers, on the securities 
side, also says the Trustee has the same duties as a Trustee 
would have if it was a straight commodities.
    Mr. Cuellar. And again I wish you all the luck tomorrow for 
the protection of those customers.
    Mr. Kobak. Thank you.
    Mr. Cuellar. So again just so we get the picture, where do 
the customers fall in this particular situation?
    Mr. Kobak. Customers have rights. I will talk about 
commodities customers against the segregated funds. They are 
the sole people that have rights against those funds. The 
bondholders, the banks, and so forth may have rights against 
general estate assets in some cases but nothing to do with the 
fund. If there are general estate assets, it may be possible to 
allocate some or all of those to make up for shortfalls in the 
commodities case.
    Mr. Cuellar. Mr. Kobak, again, let us assume that you are 
successful tomorrow. That will get the customers up to 59, 69 
percent?
    Mr. Kobak. Sixty-nine to seventy percent is our best 
estimate.
    Mr. Cuellar. Sixty-nine. And I know this is just the 
beginning of the Trustee's work and the attorneys, but do you 
foresee other assets that could be out there that could make 
the customers whole?
    Mr. Kobak. I think there will be other distributions. 
Whether customers--we sincerely hope--it is our goal; it is our 
aspiration anytime we do cases like this to try to get 
customers to 100 percent. I think it would be premature to say 
either yes, that will be the case or no, it won't be the case. 
We just don't know.
    Mr. Cuellar. We wish you luck. I know bankruptcies are 
always difficult and all that.
    And Commissioner, again, I would appreciate if you can get 
those lessons learned. Thank you.
    Thank you, Madam Chair. I yield back the balance of my 
time.
    Mrs. Schmidt [presiding.] Thank you. Mr. Tipton?
    Mr. Tipton. Thank you, Madam Chair and Ranking Member.
    Commissioner Sommers, can you explain--I would just like to 
make sure that I am clear--with the Regulation 1.25 that you 
just approved, this is going to be able to prevent MF Global-
type companies that are under the CFTC's regulation from being 
able to take those segregated funds and treasury funds and 
being able to put them into foreign investments. Is that 
correct?
    Ms. Sommers. Sir, the way that Regulation 1.25 treats or 
has treated up until Monday the investments in foreign 
sovereign debt if a customer were to post a foreign currency--
----
    Mr. Tipton. I am talking after Monday.
    Ms. Sommers. So after Monday the regulation eliminated 
foreign sovereign debt as a permissible investment but invited 
petitions for exemptions to that.
    Mr. Tipton. And the problem that we are really having the 
challenge with right now was some investment in foreign 
sovereign debt as it relates to MF Global.
    Ms. Sommers. What has been reported is that there were 
investments in foreign sovereign debt and the repo to maturity 
instruments that were on the broker-dealer side------
    Mr. Tipton. Right.
    Ms. Sommers.--of MF Global, so Regulation 1.25 would not 
speak to those investments.
    Mr. Tipton. Even after------
    Ms. Sommers. Even after.
    Mr. Tipton.--the approval end of it? You know, I think some 
of the comments--and I think it is worthy of some note--where 
there is real concern when we are talking about lessons 
learned, we do have the report that was mentioned earlier out 
of the New York Times. I will just quote it. It said, ``Mr. 
Corzine and other members of the firm met with the Commission 
in July to discuss the proposed rule changes. Following that 
meeting, the rule changes were not implemented.'' Is there a 
problem to where we are seeing the Commission's judgment being 
influenced not by good policy decisions but by outside 
influences?
    Ms. Sommers. Sir, my recollection is that there were a 
number of different issues with the proposed rule last summer. 
They had to do with both in-house repos, as well as the foreign 
sovereign debt, as well as the concentration levels for money 
market funds, and there were a number of different issues that 
we were working through. I don't think it was ever the 
Commission's intention to never take up the rule.
    Mr. Tipton. Right, yes, because in your opening statement 
you had--I think I quoted you correctly here--that it was ``the 
long-held view of the Commission to be able to get this Rule 
1.25 through.'' But the concern seems to be after Mr. Corzine's 
meeting, it stopped.
    Ms. Sommers. The rule was already in place so the long-held 
view of the Commission was that standards that are------
    Mr. Tipton. But you just attested the rule on Monday.
    Ms. Sommers. We made amendments to Regulation 1.25 that has 
been in effect for many, many years.
    Mr. Tipton. I would like to follow up a little bit because 
I am disturbed as some of my colleagues are that Chairman 
Gensler has recused himself. He is recusing himself from the 
enforcement matters related to MF Global and any matter 
directly related. Does this preclude him from being able to 
answer questions regarding events that led up to the bankruptcy 
and the normal operations of the CFTC?
    Ms. Sommers. Sir, I don't think I am in a position to tell 
Mr. Gensler what he should and should not answer questions with 
regard to. His recusal is his personal decision.
    Mr. Tipton. In your opinion, since it is obviously an 
important issue, is this recusal impacting CFTC's ability to be 
able to address this issue?
    Ms. Sommers. I believe that we have dozens of capable 
professional staff that have been working on this issue since 
day 1 and are doing an excellent job.
    Mr. Tipton. I am out of time. Thank you, Madam Chairman.
    Thank you, Commissioner.
    Mrs. Schmidt. Thank you.
    Mr. Costa, you are next.
    Mr. Costa. Thank you, Madam Chair and both to our chair and 
Ranking Member for holding this important hearing.
    Most of my questions regarding the proceedings of the 
bankruptcy, Mr. Kobak, have been asked by other Members, but 
Ms. Sommers, I would like to focus my line of questioning to 
you.
    MF Global, eighth largest bankruptcy in American history, 
do you have any idea under those of your regulatory authority 
if there are other potential bankruptcies out there like this?
    Ms. Sommers. Sir, I am not exactly sure if you are asking 
whether or not a potential bankruptcy of a very large FCM would 
be larger than the eighth largest?
    Mr. Costa. I am asking, do you have a watch list? Do you 
have any idea under the fragile nature of this economic 
recovery that we are dealing with on, I might add, a global 
basis, are there others out there that potentially might fall 
in this category and would you know if in fact there were?
    Ms. Sommers. What we have the ability to see is the FCM or 
the futures side of the business. So what we are looking at on 
a daily basis are the investments of an FCM both in their 
customer accounts and if there are house or proprietary 
investments of those firms.
    Mr. Costa. Okay. That is the process. Do you have a watch 
list?
    Ms. Sommers. I am sure that there are firms that may be 
close to the margins of what collateral they have------
    Mr. Costa. Let me ask it in this way. Is there any concern 
among you and your fellow colleagues, the regulators, that 
there may be others out there that are in harm's way or, on the 
other hand, that we have farmers and ranchers and dairymen 
around the country in danger? That is my focus, my concern, the 
agricultural futures trading industry that is so essential 
toward financing both short-term and long-term, both 
domestically and internationally, and I don't want to see these 
future markets destroyed or the confidence in them tremendously 
eroded.
    Ms. Sommers. I understand.
    Mr. Costa. And so again my question, can you actually 
perform the duties as a regulator, as a watchdog?
    Ms. Sommers. Absolutely. And certain economic------
    Mr. Costa. But you don't know if there is a list?
    Ms. Sommers. I don't think that there is a particular list 
and it is certainly not a list that is shared with me on a 
daily basis, but we have financial------
    Mr. Costa. Would you think that is something that you ought 
to be looking at?
    Ms. Sommers. I don't mean to suggest we don't look at 
firms. We have a financial surveillance team and that is their 
job, to make sure that firms have the appropriate collateral 
posted with regard to risk exposure of that firm.
    Mr. Costa. Do you have the tools, and do you have the 
staffing to do that job?
    Ms. Sommers. We do.
    Mr. Costa. Do you have 77 full-time equivalents on 
oversight on all the futures commission merchants I understand 
and introducing brokers and commodity cooperators, as well as 
trading advisors, which are under the self-regulatory 
organizations? Is that correct?
    Ms. Sommers. I am not exactly sure the exact amount of 
employees we have------
    Mr. Costa. Well, let me ask this. Are your frontline 
auditors enough to do the job?
    Ms. Sommers. We are not the frontline auditor for FCMs----
--
    Mr. Costa. I know------
    Ms. Sommers. The DSROs do that.
    Mr. Costa.--but do you believe they are?
    Ms. Sommers. Do I believe that we are the frontline 
auditors?
    Mr. Costa. No, no, no, no, no. I am trying to get a handle 
on whether or not you are able to do your job and also the FCMs 
as well. And do you have a sense of this? Could you tell the 
Committee?
    Ms. Sommers. We are absolutely able to do our jobs. There 
is no question about that. We have very capable staff that do 
financial surveillance of these firms that look and review the 
statements that they are required to send to us. We look at 
yearly audits that they are required to send to us. We review 
all of these and------
    Mr. Costa. Before my time expires, we have heard the 
complaints that the claim process sent to the commodity 
customers is very complicated. Is there some way we can make it 
less complicated?
    Ms. Sommers. Not unless you limit the amount of 
transactions that an FCM is able to do. I don't know how else--
----
    Mr. Costa. Should a customer use in any one of our 
districts an account equity in October 31 when a bankruptcy was 
filed to establish a claim or should the customer use an 
account equity at the close of business 4 days later when the 
bulk account transfer took place? Mr. Kobak, do you want to 
respond?
    Mr. Kobak. I think under the CFTC rules you look to when 
positions were liquidated if they were liquidated. So that 
means it wouldn't necessarily be the 31st. If you just had cash 
in your account, it would be the 31st. Otherwise, it might be a 
later date. I know customers have problems with this concept. 
It is difficult to apply. But what we are going to try to do is 
get them statements to show where they were on the 31st and 
then the subsequent activity. It may not be 100 percent 
reliable at this point, but it is the best we have, and that 
should allow people to help them because I realize people have 
had questions about how to fill out------
    Mr. Costa. No. And the questions continue to arise. My time 
has expired but, Mr. Chairman and the Ranking Member, as we try 
to determine the fault lines on this effort and what is the 
proper mix, it seems to me that the potential to have another 
MF Global out there is real. Notwithstanding the answers to the 
questions I raised, I am not confident that you have a good 
handle on whether or not you are able to provide that insight 
to us as to who ought to be on a watch list so that we are not 
surprised like this. I think that is an area we need to work 
on.
    The Chairman. The gentleman's time has expired.
    And observations are important. The chair would note the 
next gentleman will be from Kansas followed by, Mr. Baca, from 
California. The gentleman, Mr. Huelskamp, is recognized for 5 
minutes.
    Mr. Huelskamp. Thank you, Mr. Chairman. First question 
would be for Mr. Kobak. There have been news reports that 
indicated in the last week of October that customers or clients 
that requested the return of their funds in accounts were 
mailed paper checks, the dollars were to subtract out of their 
account. Then, when they went to cash in the checks at the 
bank, are those treated any differently? What are we doing to 
track this down? Because that to me demonstrates clear intent 
at least a week before the bankruptcy to withhold funds.
    Mr. Kobak. We found out about that situation. The accounts 
reflected that the money went out even though the accounts 
bounced, so in this third transfer, assuming the court approves 
it, we are going to include them. There are approximately $57 
million worth of bounced checks that we know about. I think 
that is the universe, and they should all get the 69 to 70 
percent of that. It was unfortunate that we couldn't include 
them in the earlier transfers.
    Mr. Huelskamp. Okay. And I daresay before going further, 
producers always thought the risk they faced was in the market 
rather than the firm that was handling their dollars and this 
has caught a number of my constituents.
    I have a question for Ms. Sommers if I might. I am looking 
at the first question. What is a statement of nonparticipation 
versus recusal? Is that the same thing, Ms. Sommers?
    Ms. Sommers. Congressman, I don't know the answer to that.
    Mr. Huelskamp. Well, the letter that Mr. Gensler sent out 
does not mention recusal at all. It mentions nonparticipation. 
Can you further describe his being a fellow Commissioner at 
CFTC what exactly that is versus recusal?
    Ms. Sommers. I wouldn't know the differences between the 
two. I will say that the CFTC doesn't have a specific policy 
dealing with recusal. We follow the Office of Government Ethics 
regulations on that.
    Mr. Huelskamp. I appreciate that. I appreciate the comments 
of Mr. Stutzman suggesting how that would be a great question 
if we could hear from Mr. Gensler at a later time. But again it 
has been noted in here that Mr. Gensler was forced by a Senator 
but that makes no notice of that in a statement of 
nonparticipation. But again I will note that he participated in 
numerous calls and interactions, activities with MF Global 
after the bankruptcy. Has he indicated to you or other members 
of the staff of CFTC why suddenly he decided after he had 
already participated after the fact in multiple negotiations?
    Ms. Sommers. He has not discussed the particulars of his 
recusal with me, sir, but that is his personal decision.
    Mr. Huelskamp. Thank you. And I wish you would share with 
the other Commissioners that obviously, if you were unaware, 
that looks rather suspect and reflects poorly on him as a 
Chairman of the Commission to invent something such as a 
statement of nonparticipation, which no one seems to know what 
it is other than he has already participated.
    And another question I have, on July 20, which was the 1 
year anniversary and then-deadline for the Dodd-Frank 
requirements, there were four conference calls and I believe 
you participated in one with MF Global. And could you describe 
what occurred in those conference calls?
    Ms. Sommers. I don't believe I participated in a conference 
call with MF Global in July.
    Mr. Huelskamp. You are correct. I am sorry. That was in 
December. I know there were four conference calls. I apologize. 
I had the wrong date on that.
    Ms. Sommers. In December of 2010 I had a meeting in my 
office with MF Global.
    Mr. Huelskamp. Yes. Was Jon Corzine in on that meeting?
    Ms. Sommers. He was.
    Mr. Huelskamp. And were there notes kept of this particular 
meeting?
    Ms. Sommers. Perhaps. I don't recall whether I took notes. 
It was approximately a 15 minute meeting.
    Mr. Huelskamp. Yes. I might ask if you would provide those 
to the Committee.
    [The information referred to is located on p. 155.]
    Is it normal that a meeting such as this there may not be 
notes taken and no one outside the room will know what occurred 
inside this------
    Ms. Sommers. My staff was in the meeting with me. Mr. 
Corzine had staff with him as well, but if no real substantive 
issues were discussed, it is not uncommon to have a meeting 
where there are no notes taken.
    Mr. Huelskamp. Well, it indicated to discuss segregation 
and bankruptcy with MF Global on 12/21 of 2010, I would think 
that would be a particularly important subject as we continue 
here.
    But one other item as far as Mr. Gensler's meetings with 
Mr. Corzine, which one did occur on July 20. Do we have notes 
of what they discussed? And I think this is very strange. I was 
unaware until today that Mr. Gensler actually used to work for 
Mr. Corzine at Goldman Sachs and that seems very suspect, 
certainly, to my constituents. So if I might have an answer to 
that question.
    Ms. Sommers. I can pass that on. I don't know if there 
are------
    Mr. Huelskamp. We do not know if there are any notes of 
this closed-door meeting?
    Ms. Sommers. To Mr. Gensler's meeting I do not know if 
there are notes.
    [The information referred to is located on p. 155.]
    Mr. Huelskamp. Okay. Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired. The chair 
now recognizes the gentleman from California, Mr. Baca, for 5 
minutes.
    Mr. Baca. Thank you very much, Mr. Chairman.
    Commissioner Sommers and Mr. Kobak, thank you very much for 
coming and testifying before us on the enforcement 
investigation into the MF Global. I guess from this we have 
learned a lot of valuable lessons. It is too bad that the 
valuable lessons are at the expense of the consumers. 
Apparently, we need a lot more oversight and accountability, 
and that is why we need the Dodd-Frank Act as well. And we 
can't assume that everybody is going to do the right thing to 
follow the correct guidelines, policies, or procedures, and 
that is what has led to some of the problems.
    But let me ask you, Ms. Sommers, from your testimony it is 
my understanding that MF Global is different than the previous 
FCM bankruptcy such as Lehman Brothers and Refco because the 
commodity customers at MFG lost their money. In layman's terms, 
can you explain to the Committee why these losses occurred for 
commodity customers at MFG but not at Lehman Brothers or at 
Refco?
    Ms. Sommers. Sir, in both of the previous, most recent, 
bankruptcies, Lehman Brothers and Refco, the customer accounts 
were whole or fully intact meaning that all the positions and 
supporting collateral for those positions were in the section 
4d segregated accounts. So when the FCM went into bankruptcy 
proceedings, the customers were transferred to healthy FCMs and 
the customers were whole. In MF Global, that didn't happen.
    Mr. Baca. Why not?
    Ms. Sommers. Because the customer segregated accounts were 
not whole. All the money was not there.
    Mr. Baca. Should they have been?
    Ms. Sommers. Absolutely.
    Mr. Baca. Then why not?
    Ms. Sommers. The money was not there and that is part of 
what our investigation--both on the enforcement side and in the 
accounting or bankruptcy to look through the books and records, 
we are looking at exactly what did happen to the money.
    Mr. Baca. So there is probability that the money was never 
there or was there?
    Ms. Sommers. I think the money was there in the beginning. 
The customers deposited that money with the FCM. So the money 
belonging to the customers was there.
    Mr. Baca. But now it is poof, gone? Okay.
    Let us talk for a moment about staffing needs at CFTC. 
Simply put, does CFTC have enough manpower to effectively 
regulate--I say regulate all of the futures exchanges and 
trades that need to be monitored in the United States?
    Ms. Sommers. Sir, we do have a system where we rely on 
self-regulatory organizations------
    Mr. Baca. Do you have enough manpower? I am asking a 
specific question.
    Ms. Sommers. We do.
    Mr. Baca. Okay. So that means you don't need any additional 
manpower to monitor what goes on in the exchange or trades in 
the United States?
    Ms. Sommers. I think that there is no doubt as we implement 
Dodd-Frank and are given the new authority that we were given 
under that law overseeing swap dealers, major swap participants 
and all the over-the-counter trades that we will be overseeing, 
that there is no doubt that we will need to increase the staff 
and the resources that we have at the CFTC.
    Mr. Baca. Okay. Mr. Kobak, can you explain to the Committee 
some of the difficulties you are facing in collecting MFG 
customer funds that are now located in foreign depositories?
    Mr. Kobak. Yes, there is a separate pool of property under 
different CFTC regulations for that property. Virtually all of 
the property that was held or should have been held for those 
accounts at MFGI is held in foreign locations. Those are 
affiliates of the business that are in bankruptcy or other 
kinds of insolvency proceedings themselves. So they are now 
held by foreign administrators. We have been contacting those 
administrators and seeking to get both an accounting of what 
they have and also to talk to them about getting the funds 
back. But experience tells me that it may be a longer process 
to do that than it is domestically.
    Mr. Baca. Are there any steps that we in Congress can take 
or the CFTC can take to help facilitate the return of the 
customers' funds? And I say the customers' funds because that 
is what we are dealing with. And the American people are tired 
of their funds being spent somewhere else in foreign 
depositories. Are there any steps that we should be doing or 
the CFTC can take?
    Mr. Kobak. Well, the Trustee is taking all the steps that 
he can take. Unfortunately, that might mean having to go to 
litigation with people. Whether there are steps that could be 
taken between regulators and different jurisdictions, that 
might be helpful. I know from experience that one problem in 
these cases sometimes is insolvency rules in other parts of the 
world don't always work the same way they do in the United 
States. And I don't know what the impact of that might be on 
the administrators' decisions.
    Mr. Baca. If not, then maybe we need to develop some 
guidelines to make sure that this happens if they are not or 
make sure that they are clear and they are followed as well.
    Mr. Kobak. Yes, it would be very helpful to have 
international protocols, have countries follow much more 
similar rules than they do today.
    Mr. Baca. Okay. Thank you. I know my time has expired.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Pennsylvania, 
Mr. Thompson, and Mr. Hultgren of Illinois should be standing 
ready.
    Mr. Thompson. Thank you, Mr. Chairman. Commissioner 
Sommers, Mr. Kobak, thank you for your testimony and thank you 
for your due diligence in this ongoing investigation. I think 
the findings from the investigations being completed are 
obviously extremely important to us. This particular situation 
to me in just simple terms poses three potential losses--the 
real loss of the customer monies, and I wish you the best of 
luck in being able to make these individuals whole and their 
resources, their monies; second, is loss of opportunity for 
proper investments where this money would be out and earning 
for those individuals; and finally, a loss of confidence. I 
think a loss of confidence for those in the system that we have 
for trading futures and options in this country.
    Commissioner, a situation like this is exactly why many 
farmers are not using hedging to manage or mitigate risk and 
control their costs. In terms of agricultural producers, what 
can the CFTC do to help rebuild and grow confidence in this 
system?
    Ms. Sommers. Congressman, I think that you have certainly 
hit on a very important issue because we want to make sure that 
confidence is maintained in the markets that we oversee, that 
the integrity and the proper functioning of those markets is 
communicated to the public and to those who are using the 
markets. Shortly after I took over as senior commissioner for 
MF Global, working with the DSROs, I directed a spot review of 
segregated funds so that we can give the public confidence that 
all other clearing FCMs are in compliance with Commission 
regulations and are treating customer segregated funds 
properly.
    Mr. Thompson. MF Global was required to file daily 
segregation reports, monthly audited financial reports and 
annual certified financial reports. Was there a failure on the 
part of CFTC to act on and utilize these reports?
    Ms. Sommers. Absolutely not. If we would have seen any sort 
of red flags with regard to these daily segregation reports, we 
would have acted upon that. The FCM is obligated to notify us 
of being undersegregated and that did not happen.
    Mr. Thompson. And I know the investigation is ongoing but 
it appears if there was a requirement for daily reporting, the 
information at MF Global was reporting on a daily basis 
obviously was failing to disclose the realities that now it 
appears that we have with this loss of funds.
    Ms. Sommers. The red flags were raised for us in the week 
preceding the bankruptcy of MF Global. So, we had staff in MF 
Global starting on the 26th of October.
    Mr. Thompson. My last question actually is for both of you. 
Given that commodity accounts are settled daily, why has it 
taken 5+ weeks to determine if custodial customer account 
excess cash is missing? And are there any preliminary 
recommendations that have been identified to correct that from 
continuing in the future?
    Ms. Sommers. I will certainly let Mr. Kobak answer as well, 
but I think we can't overemphasize again the complexity of 
these books and records, the thousands of accounts, the tens of 
thousands of transactions and following each of these 
transactions, the bank reports, looking through what I 
understand from primary accounts reviewing 300-500 pages of 
summaries from bank accounts. It is very complex.
    Mr. Thompson. Mr. Kobak, any comment?
    Mr. Kobak. Sorry, yes. I would support it is very complex. 
You also have to understand that in the early days of one of 
these proceedings, one may not have perfect access to books and 
records. Sometimes depositories turn off screens or don't allow 
you access. Sometimes system vendors threaten to shut off their 
systems. In our case, we did have some issues with the holding 
company about getting access to documents that both of us had 
an interest in. So in addition to the sheer complexity, they 
are just the practicalities that it may be a few days before 
one can actually get into all the systems and records one needs 
to review.
    Mr. Thompson. Okay, thank you.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The chair will next call upon the gentleman from Illinois 
and note to Mr. Sablan he will be after that, followed by Mr. 
Gibbs.
    Mr. Hultgren, you are recognized for 5 minutes.
    Mr. Hultgren. Thanks, Mr. Chairman. I will be briefer than 
that. I just have a couple questions for Mr. Kobak.
    First, I wonder to what extent the U.S. Department of 
Treasury is involved.
    Mr. Kobak. I am not aware. I know there are some U.S. 
Attorneys that are looking at things, as well as the CFTC and 
the SEC and FINRA.
    Mr. Hultgren. So as far as you know, you don't know 
anything as far as they are tracking funds either domestically 
or internationally?
    Mr. Kobak. Not as far as I know.
    Mr. Hultgren. Okay. I wondered if all domestic exchanges or 
clearinghouses that held MF Global customer money released that 
money to the Trustee?
    Mr. Kobak. They have or they will be doing so. And in the 
first transfers, we actually used--because we hadn't gotten all 
the money from U.S. depositories and a lot of it was at the 
exchanges. So we actually were--especially the CME. We are 
largely using their money to affect the transfers. So they have 
been very good about that.
    Mr. Hultgren. Okay. And you said they have or they will be 
so when would you expect that to be completed?
    Mr. Kobak. Well, if the court approves our motion for the 
next transfer, which is on for a hearing tomorrow morning, I 
think it might take 2 to 4 weeks to implement. It will be a 
little faster for some customers than for others.
    Mr. Hultgren. Okay. Last question and then I will yield 
back my time. Does the Trustee seek or conduct assessments of 
the health of the receiving firms prior to transferring MF 
Global accounts?
    Mr. Kobak. Well, the way the CFTC regulations work, we have 
to get a consent to the CFTC, and one of their criteria is that 
the receiving broker not only agree to take the account but be 
in appropriate financial condition so it wouldn't put them 
under their capital requirements.
    Mr. Hultgren. So there is an assessment of their health----
--
    Mr. Kobak. Yes.
    Mr. Hultgren.--to make sure that they could handle it?
    Mr. Kobak. Yes.
    Mr. Hultgren. Okay. Well, I know there is a number of other 
witnesses that we want to hear from today, so I will yield back 
the balance of my time, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The chair recognizes the gentleman, Mr. Sablan, for 5 
minutes.
    Mr. Sablan. I don't have any questions at this time.
    The Chairman. Thank you.
    The chair recognizes the gentleman from Ohio, Mr. Gibbs.
    Mr. Gibbs. Thank you, Mr. Chairman, and thank you to our 
panelists today.
    The question I am concerned about is the integrity of the 
futures market. I think it is an essential tool for our 
agricultural producers and hopefully Mr. Kobak will be able to 
make our farmers out there whole as quickly as possible; 
because I understand as a farmer when you are making margin 
calls and putting cash up front, it can be detrimental to the 
operation.
    Along the questions on that, I assume that moving 
segregated funds to their house account, per se, is illegal. Is 
that correct, Commissioner?
    Ms. Sommers. That is right.
    Mr. Gibbs. Okay. What are the penalties for doing that? We 
talk about how complex all this is and I understand the 
complexity of that, so enforcement or penalties I would think 
would have to be how we really monitor this or control this. So 
what are the penalties under current law?
    Ms. Sommers. The way the statute reads it would be $140,000 
per violation or three times the monetary gain, as well as 
potential restitution and other types of fines we may find 
appropriate.
    Mr. Gibbs. Okay. Also, when funds are moved to a third 
party, okay, does that third party have any obligations to the 
entity it is moving the funds from to make sure they are not 
segregated funds and do they have any obligations?
    Ms. Sommers. There are obligations that are from our CEA 
regulations put on the banks that hold section 4d accounts. 
They have to provide acknowledgement letters that they 
understand that this is customer segregated money, and so there 
are obligations from our regs. There may well be other 
obligations from banking regulations on other banks with regard 
to those kind of transfers.
    Mr. Gibbs. Okay. I just want to follow up a little bit on 
the Ranking Member's comments. I think he did a really good job 
explaining what really happened here. There was a lot of money 
that moved from margin accounts on the commodities side over to 
the securities side to do their deal they were doing. When 
there are funds like that moved from the commodities side of 
the operations of an FCM, is there any reporting that they have 
to do when it goes over to say the securities side of their 
operation?
    Ms. Sommers. If money is moved out of a section 4d 
segregated account into a permissible investment, the exact 
amount of collateral has to be put back into the customer 
segregated account. It would be a violation of the Act------
    Mr. Gibbs. Okay.
    Ms. Sommers.--to just take that money out and use it for 
your own use.
    Mr. Gibbs. Okay. Thank you very much and I yield back my 
time.
    The Chairman. The gentleman yields back.
    The chair turns to the gentleman from Minnesota, and would 
note that then the gentlelady from Ohio will follow that. Mr. 
Walz is recognized for 5 minutes.
    Mr. Walz. Well, thank you, Mr. Chairman, and thank you for 
your timeliness on getting on this. I know you mentioned and I 
agree $1.2 billion is a lot by any standard. But I have to tell 
you it is the 30,000 of my constituents that I am really 
concerned about. So I know this was probably asked. I don't 
want to take up any more of the time as we move on. Thank you 
both for being here.
    As we look at Regulations 1.20 to 1.30, you need to look at 
those in entirety I understand because I am sure the two of you 
are familiar with the infamous 1.29 as everybody says. Are we 
interpreting that wrong? I know you have had to answer this 
over and over and over again. It appears that in 1.29 that 
those segregated accounts were fair game. Have you told us, Ms. 
Sommers, that that is incorrect and you have to see that rule 
in its entirety, not in the small piece of 1.29?
    Ms. Sommers. Regulation 1.25 deals with the investment of 
customer funds in permissible investments and gives a list of 
what investments are permissible for an FCM to use. But an FCM 
is not allowed to take customer funds out of a segregated 
account to use for their own use. That has never been 
permitted.
    Mr. Walz. So when the next panel arrives, that is the 
question we should be asking. Did those funds get removed for 
use?
    Ms. Sommers. For use on the house side or the securities 
side, however------
    Mr. Walz. Great. My final question is--and maybe, Mr. 
Kobak, you can help me from a bankruptcy side on this. Are the 
claims by the segregated account holders, are those superior to 
all other claims?
    Mr. Kobak. They have claims against that account that no 
other creditors have claims against.
    Mr. Walz. So if JP Morgan asked, these folks are first in 
line?
    Mr. Kobak. In line for those firms. First in line, they are 
really the only line unless there happened to be an excess, 
but, we are not dealing with an excess; we are dealing with a 
deficit.
    Mr. Walz. Okay. Thank you very much.
    I yield back. Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The chair will next recognize the gentlelady from Ohio and 
she will be followed by the gentleman from New York, Mr. 
Gibson.
    The gentlelady from Ohio, Mrs. Schmidt, is recognized for 5 
minutes.
    Mrs. Schmidt. Thank you, Mr. Chairman.
    And Ms. Sommers, I would like to go back to something you 
said a few minutes ago about a December 10 meeting with Mr. 
Corzine. And while you may or may not have taken notes, 
normally when somebody requests a meeting there is a purpose 
for the meeting that has been documented. What was the purpose 
for that meeting?
    Ms. Sommers. As I recall, the issue that we spoke about on 
that day was the issue of individual segregated accounts for 
swaps versus individual segregation for futures accounts. We 
were discussing at the time whether or not we should put swaps 
in individually segregated accounts and whether or not that 
structure or that framework would be appropriate for futures as 
well.
    Mrs. Schmidt. And what was Mr. Corzine's position and what 
was yours?
    Ms. Sommers. His position, as is the same position for a 
lot of FCMs, is that it would be a very costly structure to 
impose on the futures market.
    Mrs. Schmidt. And did you have a position on that Ms. 
Sommers?
    Ms. Sommers. We are still looking at that issue. It is one 
of the issues that we have not finalized with regard to swaps, 
but the proposal that we have been discussing is only for 
swaps. It is not for futures.
    Mrs. Schmidt. Thank you. To go to another part of the 
question, if MF Global was not a broker-dealer and held no 
securities accounts, would SIPC have been involved? Would MF 
Global go through regular bankruptcy proceedings? And what 
would be different from our present situation? And who would be 
in charge? I know that is a couple of questions wrapped into 
one, Ms. Sommers, and then, Mr. Kobak, if you want to follow.
    Ms. Sommers. I am sorry. I thought you were asking him a 
question about the SIPA bankruptcy. Could you repeat?
    Mrs. Schmidt. Sure. If MF Global was not a broker-dealer 
and held no securities accounts, would SIPC have been involved? 
Would MF Global go through regular bankruptcy? What would be 
different from our present situation? And who would be in 
charge? If you can't answer that------
    Ms. Sommers. If MF Global were an FCM only, the proceeding 
would not have been a SIPC or SIPA bankruptcy liquidation. 
However, the Commission CEA regulations, part 190 of our rules 
do apply even in a SIPA bankruptcy. So the customers would not 
be treated any differently in an FCM-only bankruptcy to my 
understanding.
    Mr. Kobak. Yes, and the SIPA statute says that not only 
does the Trustee have duties towards security customers but he 
has all the same duties and rights and so forth as the Trustee 
and bankruptcy if it were just the straight commodities 
liquidation.
    Mrs. Schmidt. Okay. And maybe somebody has already answered 
this, but at the Senate Agriculture Committee hearing last 
week, Chairman Gensler said individuals who commingled customer 
segregated funds with their own funds could face civil 
penalties. Can you confirm that there are civil sanctions for 
this behavior? Are they just monetary? Is their punitive damage 
or jail time for taking a customer fund and using it for a non-
authorized purpose?
    Ms. Sommers. A misuse of customer funds is a violation 
under our Act and we have civil authority to impose civil 
penalties for violations of our Act.
    Mrs. Schmidt. Are they monetary only or------
    Ms. Sommers. Monetary penalties. The criminal authorities 
have the right, of course, to look into this and pursue 
criminal------
    Mrs. Schmidt. And would it be appropriate for you to seek 
those criminal authorities to get involved or would you just 
hope that they would be looking at this and get involved on 
their own?
    Ms. Sommers. In many cases we do referrals to criminal 
authorities.
    Mrs. Schmidt. And do you anticipate that action happening 
here?
    Ms. Sommers. It is my understanding that there are a number 
of different authorities that are looking into this matter.
    Mrs. Schmidt. And if you have an opportunity to weigh in, 
would you be weighing in favor of criminal penalties from the 
civil side or would you just take a--or can't you answer that?
    Ms. Sommers. Well, I think we will pursue to every extent 
of the law that we have under our authority--we will pursue 
that as vigorously as we can. I can't speak to what will happen 
on the criminal side.
    Mrs. Schmidt. Thank you. I yield back my time.
    The Chairman. The time has expired.
    The chair now recognizes Mr. Gibson for 5 minutes. Thank 
you.
    Mr. Gibson. I thank the chair and I thank the panelists for 
being here.
    My question: with regard to the daily segregation reports, 
is it a requirement to report on the weekend?
    Ms. Sommers. The daily segregation reports are required to 
be kept by FCMs. MF Global provided the CFTC with daily 
segregation reports because we required them. It is not 
required of all FCMs.
    Mr. Gibson. And the last report that you are aware of was 
on Friday, the 28th?
    Ms. Sommers. Right. Although I guess I should clarify. Our 
staff went into MF Global on October 26, that Wednesday, and 
hasn't left yet. So we didn't leave on Friday night and come 
back on Monday. We were there Saturday and Sunday.
    Mr. Gibson. So where I am heading with this is we have a 
report on Friday, the 28th. We have a written statement today 
from the former CEO who says he was stunned the funds were not 
there. Any early indication that had there been a report over 
the weekend we may have captured some important information?
    Ms. Sommers. The way I understand this would work, the end-
of-the-day reports from Friday would normally be filed on 
Monday, but if there were examiners in a firm on Saturday and 
Sunday, they could be getting end-of-day Friday reports earlier 
than what they normally would get them.
    Mr. Gibson. So in other words, there is the process where 
it allows for if there is movement over a weekend, you can 
capture that?
    Ms. Sommers. If there are examiners in an FCM, they could 
ask to be looking at those books and records over the weekend.
    Mr. Gibson. Okay. And from the vantage point now of my 
farmers, from customers, and certainly we have had testimony 
here this morning, talked about when you moved the funds even 
if it is in something permissible there is collateral that goes 
into the account, do you think it is reasonable that a farmer 
would expect some kind of disclosure if an FCM is moving their 
money?
    Ms. Sommers. Absolutely. And I think a customer of an FCM 
should be able to ask that FCM what they invest customer money 
in so the customer would know.
    Mr. Gibson. Any thought--it is certainly early in the 
process, but have you had any discussions about that, about how 
things might need to change to provide that?
    Ms. Sommers. We have had a lot of discussion internally 
about those types of requirements, and I think as we get 
towards the end, knowing from the investigation exactly what 
happened, we will be able to put a comprehensive list of 
lessons learned together.
    Mr. Gibson. Well, I thank you for that. And I will be 
watching for that very keenly.
    I yield back.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentlelady from Alabama who 
will be followed by the gentlelady from North Carolina, Mrs. 
Roby is recognized for 5 minutes.
    Mrs. Roby. I am having a hard time putting my eyes on you. 
Thank you both for being here today.
    And just real briefly, Commissioner, you said that very 
emphatically when you were asked by Mr. Costa about whether or 
not you have the ability to do your job, you said very 
emphatically, yes, I have the ability to do my job. So I just 
want to ask a real easy question. Is what we are here today 
about with all of the really particular nuances surrounding it, 
is this about whether or not our current laws are appropriate 
or they are strong enough protections in place as it is right 
now, or is this just really about one or more individuals' poor 
decision-making ability?
    Ms. Sommers. Well, I think certainly after we learn what 
happened, we can look back and see whether or not our current 
statutory authority was appropriate. But at this point, there 
are adequate laws that protect customer segregated funds and 
that do not permit an FCM to take customer funds and misuse 
them.
    Mrs. Roby. And as it relates to the self-reporting aspect, 
why would one self-report their own wrongdoing?
    Ms. Sommers. Well, if they are even undersegregated for a 
little while and they know that it may be an issue for bank 
transfers, an FMC is required to report to us if they are 
undersegregated for that small amount of time. And that does 
happen. FCMs do report that.
    Mrs. Roby. Okay. Thanks so much.
    I yield back, Mr. Chairman.
    The Chairman. The gentlelady yields back.
    The chair now recognizes the gentlelady from North Carolina 
for 5 minutes.
    Mrs. Ellmers. Thank you so much to our panel.
    And Ms. Sommers, my questions are pretty much for you. I 
would like to first make a comment and associate myself with 
the comments that have been made today about Chairman Gensler 
not being here. I think that he should be here. I know it has 
been discussed that there was someone from the Senate who 
compelled him to not be here, but this is the House of 
Representatives and he has been here on a number of occasions 
on behalf of the CFTC, and I think he should have been here as 
well.
    And I applaud you for coming and taking part, Ms. Sommers.
    I just want to clarify something that you had said and 
maybe I misunderstood. In some of the questions you had said if 
we are able to move forward on our investigation, is there 
something standing in the way of the CFTC?
    Ms. Sommers. No, and I am sorry if I said that. I misspoke. 
It is not if; it is when.
    Mrs. Ellmers. Okay. So it is a necessary progression.
    Also, getting back to the red flags and not seeing red 
flags go up and whatnot, I am just going over some of the 
dates. On September 1, MF Global announced in a public filing 
that it would comply with the FINRA determination to increase 
its capital. Was this considered a red flag by the CFTC?
    Ms. Sommers. That was something that we were made aware of 
by a previous filing in August by MF Global to us, but because 
they were required to post more capital and they did, it was 
not necessarily a red flag to us. At that point, we would then 
look at that firm for the FCM side of the business, the futures 
side of the business and make sure that we were reviewing the 
risk associated with their futures positions and making sure 
that they had enough collateral to support their business on 
the futures side. And at that time they did.
    Mrs. Ellmers. Thank you. I yield back.
    The Chairman. The gentlelady yields back. All Members have 
had an opportunity to question.
    The chair wishes to thank this panel for their insights and 
their participation today. And you are dismissed.
    I would like to welcome our second panel witness to the 
table, the Hon. Jon Corzine, former CEO, MF Global, 
Incorporated, New York, New York.
    Mr. Corzine, would you please stand for administering of 
the oath, which will be administered to the rest of the 
witnesses in this hearing. Please raise your right hand. Please 
state your name for the record.
    Mr. Corzine. My name is Jon Stevens Corzine.
    The Chairman. Do you solemnly swear that the testimony you 
are about to give before this Committee in the matters under 
consideration on this day, December 8, 2011, is the truth, the 
whole truth, and nothing but the truth so help you God?
    Mr. Corzine. I do.
    The Chairman. I thank you. Please be seated, Mr. Corzine. 
Do you know you have the right to counsel?
    Mr. Corzine. Yes, I do, sir.
    The Chairman. Is your counsel in the room?
    Mr. Corzine. My counsel is.
    The Chairman. Would you please state his name for the 
record?
    Mr. Corzine. Andrew Levander.
    The Chairman. Thank you, Senator. Of course, I am pleased 
to begin your testimony when you are ready.

   TESTIMONY OF HON. JON S. CORZINE, FORMER CHIEF EXECUTIVE 
             OFFICER, MF GLOBAL INC., NEW YORK, NY

    Mr. Corzine. Thank you, Chairman.
    Chairman Lucas, Ranking Member Peterson, and distinguished 
Members of the Committee, like all of you I am devastated by 
the enormous impact on many people's lives resulting from the 
events surrounding the MF Global bankruptcy. Of course, my 
distress and sadness pale in comparison to the losses and 
hardships that customers--farmers and ranchers and others--
employees and investors have suffered. Their plight weighs on 
my mind every day. As the chief executive officer of MF Global 
at the time of its bankruptcy, I truly apologize to all those 
affected.
    Before I address what happened, I must make it clear that 
since my departure from MF Global on November 3 this year, I 
have not had access to many of the relevant documents which are 
essential to my being able to testify accurately about the 
chaotic days preceding the declaration of bankruptcy. The 
Members should also understand the Committee turned down my 
request to testify voluntarily in January. I had hoped that by 
that time I would have obtained and reviewed relevant records 
so that I could be more helpful to the Committee. While I 
intend to be responsive to the best of my ability today, 
without adequate time and material to prepare, I may be unable 
to respond to various questions Members might pose. Other 
questions, given my specific role in the company, will be 
questions for which I simply have no personal knowledge. I make 
it very clear many of your questions may well be ones I myself 
have.
    When I joined the company in late March 2010, MF Global was 
primary a voice-based broker that provided execution and 
clearing services for products traded in derivative markets on 
exchanges around the world. The firm had reported losses in 
five consecutive quarters before I arrived and it had lost 
money in each of the previous 3 years.
    On my arrival at MF Global, management and the board, 
advised by an outside consultant, devised the new business 
plan. The plan was communicated to the public and provided in 
substance that MF Global would evolve into a broker-dealer and 
ultimately into an investment bank. The implementation of the 
plan was expected to take 3 to 5 years. I was hopeful about the 
prospects for the company and I invested in it personally. Much 
of my compensation was in the form of options to purchase 
stock, which would have value only if the company prospered. In 
addition, on a number of occasions I purchased shares of the 
company with my own funds. I never sold any stock.
    In the summer of 2010, I met several times with Global 
senior traders to discuss ways to improve the company's 
revenues and profitability. One of the ideas discussed was for 
MF Global to purchase short-term European sovereign debt using 
repos to maturity, known as RTMs. Before I came to MF Global, 
the firm had engaged in billions of dollars of RTMs with regard 
to U.S. Treasury securities, U.S. agencies, bonds, and 
corporate debt. It had also previously held billions of dollars 
of foreign sovereign debt positions.
    In the summer of 2010, we decided to draw on these 
experiences and to engage in RTMs involving short-term foreign 
sovereign debt. In these transactions, MF Global purchased 
foreign sovereign debt from a seller and sold the same to a 
counterparty with an agreement to purchase the securities from 
the counterparty at the maturity of the debt.
    When MF Global entered into the transactions, I believed 
that its investments in short-term European debt securities 
were prudent investments. MF Global invested in RTMs with 
respect to the debt of Belgium, Italy, Spain, Ireland, and 
Portugal. The first three of these were rated AA or better when 
MF Global invested in them. Even today, all three remain A 
rated or better. Ireland and Portugal were lower rated but they 
were largely backed by the European Financial Stability 
Facility and the IMF.
    I accept responsibility for the RTM trades. I strongly 
advocated that trading strategy. Nevertheless, it is important 
to recognize that MF Global's investment in these positions was 
the subject of internal discussions with senior managers, 
traders, and with MF Global's Board of Directors. The trades 
were described, analyzed, and debated at multiple board 
meetings. I believe that the board members, all of whom joined 
the board before I joined MF Global were independent and 
sophisticated. They asked hard questions and raised concerns.
    The directors approved sovereign risk limits for these RTM 
trades. At the time of the bankruptcy, MF Global was within 
these risk limits. The RTM positions were also publicly 
disclosed both in the periodic financial statements, which were 
reviewed by the company's counsel and accountants, and other 
public statements including press releases and earnings calls.
    As of today, none of the foreign debt securities that MF 
Global used to engage in RTM trades has defaulted or been 
restructures. All of those securities that reached maturity 
while they were a part of the RTM position paid in full.
    In my written statement, I have attempted to describe the 
relevant contacts with regulators during my time at MF Global. 
As explained in that statement, I did not exert undue or 
improper influence on regulators. My communications were 
typically in the presence of various members of the regulatory 
staff, as well as my own colleagues.
    The late summer and fall of 2011 were extraordinarily 
difficult times in financial markets for almost all market 
participants. On October 17, 2011, The Wall Street Journal 
published an article that described a FINRA ruling regarding 
the capital treatment of RTM positions which MF Global had 
disclosed on September 1, 2011. Other news stories followed. On 
Monday, October 24, rating agencies began to cut MF Global's 
ratings. MF Global announced its quarterly earnings on October 
25. The announcement revealed that MF Global had lost $191.6 
million in the quarter that ended September 30.
    In light of the attention that has been given to RTMs and 
the reports that attributed MF Global's loss to RTMs involving 
European debt securities, it is important to note that the loss 
was not, and I will repeat, not related to those positions. As 
I have explained in my written statement, the lion's share of 
the quarterly loss was a write-off of approximately $119.4 
million that related to tax losses accumulated largely in the 
years before I arrived.
    Shortly following the earnings announcement and the ratings 
downgrade, some clients and counterparties withdrew their 
business from the firm. Others required increased margins. 
Firms' stock traded at sharply higher volumes and lower prices. 
Despite our best efforts to sell assets and generate liquidity, 
the marketplace lost confidence in the firm.
    Obviously, on the forefront of everyone's mind, including 
mine, are the varying reports that customer accounts have not 
been reconciled. I was stunned when I was told on Sunday, 
October 30, 2011, that MF Global could not account for many 
hundreds of millions of dollars of client money. I remain 
deeply concerned about the impact that the unreconciled and 
frozen funds have on MF Global's customers and others. I simply 
do not know where the money is or why the accounts have not 
been reconciled to date.
    As the Chief Executive Officer of the MF Global holding 
company, I ultimately had overall responsibility for the firm. 
I did not, however, generally involve myself in the mechanics 
of the clearing and settlement of trades or in the movement of 
cash and collateral, nor was I an expert on the complicated 
rules and regulations governing the various different operating 
businesses that comprised MF Global. I had little expertise or 
experience in those operational aspects.
    In short, I do not know which accounts are unreconciled or 
whether unreconciled accounts were even subject to the 
segregation rules. Moreover, there were an extraordinary number 
of transactions during this period, the last few days of MF 
Global. And I do not know, for example, whether there were 
operational errors at MF Global or elsewhere or whether banks 
and counterparties have held onto funds that should rightfully 
have been returned to MF Global. I am sure that the Trustee in 
bankruptcy, the SIPC receiver, and the regulators are working 
to answer these questions and to understand precisely what 
happened during the firm's last days and hours.
    As the Chief Executive Officer of MF Global, I tried to 
exercise my best judgment on behalf of our clients, employees, 
and shareholders. Once again, let me go back to where I 
started. I mean this with sincerity. I apologize both 
personally and on behalf of the company to our customers, our 
employees, and our investors. I truly know they are bearing the 
brunt of the impact of the firm's bankruptcy.
    This concludes my prepared remarks and I am willing to 
answer your questions.
    [The prepared testimony of Mr. Corzine follows:]

   Prepared Testimony of Hon. Jon S. Corzine, Former Chief Executive 
                 Officer, MF Global Inc., New York, NY
    Chairman Lucas, Ranking Member Peterson and Distinguished Members 
of the Committee:

    Recognizing the enormous impact on many peoples' lives resulting 
from the events surrounding the MF Global bankruptcy, I appear at 
today's hearing with great sadness. My sadness, of course, pales in 
comparison to the losses and hardships that customers, employees and 
investors have suffered as a result of MF Global's bankruptcy. Their 
plight weighs on my mind every day--every hour. And, as the chief 
executive officer of MF Global at the time of its bankruptcy, I 
apologize to all those affected.
    Before I address what happened, I must make clear that since my 
departure from MF Global on November 3, 2011, I have had limited access 
to many relevant documents, including internal communications and 
account statements, and even my own notes, all of which are essential 
to my being able to testify accurately about the chaotic, sleepless 
nights preceding the declaration of bankruptcy. Furthermore, even when 
I was at MF Global, my involvement in the firm's clearing, settlement 
and payment mechanisms, and accounting was limited.
    The Members should also understand that the Committee turned down 
my request to testify voluntarily in January. I had hoped that, by that 
time, I would have obtained and reviewed relevant records so that I 
could be more helpful to the Committee.
    As a consequence of my situation, not every fact of which I am or 
may have been aware that may be relevant to your inquiry is contained 
in this statement. While I intend to be responsive to the best of my 
ability today, without adequate time and materials to prepare, I may be 
unable to respond to various questions Members might pose. Other 
questions, given my specific role in the company, will be questions for 
which I simply have no personal knowledge. Many of your questions may 
well be ones I myself have.
    Considering the circumstances, many people in my situation would 
almost certainly invoke their constitutional right to remain silent--a 
fundamental right that exists for the purpose of protecting the 
innocent. Nonetheless, as a former United States Senator who recognizes 
the importance of Congressional oversight, and recognizing my position 
as former chief executive officer in these terrible circumstances, I 
believe it is appropriate that I attempt to respond to your inquiries.
My Background
    I was born in 1947 and raised in the rural community of 
Taylorville, Illinois. After high school graduation in 1965, I attended 
the University of Illinois, from which I graduated in 1969. In the 
summer of 1969, I joined the United States Marine Corps Reserve, in 
which I served until 1975. In 1970, I enrolled in the University of 
Chicago Business School. I took classes at night while working at a 
bank during the day, and I and received my MBA in 1973.
    In 1975, after working for a short time for a regional bank in 
Ohio, I took a job as a bond trader at the investment banking firm 
Goldman Sachs in New York. I remained at Goldman Sachs until January 
1999, rising to the position of Senior Partner.
    In 2000, I was elected to serve in the United States Senate 
representing New Jersey. I served in the Senate until January 2006, 
when I became the Governor of New Jersey. I was elected to one term as 
Governor, serving from January 2006 to January 2010.
    Approximately 3 months after I left the governorship, I was 
recruited to become the chief executive officer of MF Global, whose 
prior chief executive had resigned abruptly after serving for 17 
months. Prior to being approached about this position, I had no 
involvement with MF Global, and my only financial tie to it was 
extremely remote--I was an investor in the private equity fund J.C. 
Flowers, which had an investment in MF Global and a seat on the board 
of directors. My connection to J.C. Flowers led to my introduction to 
MF Global.
MF Global Before I Joined
    Before I joined the company in late March 2010, MF Global was 
primarily a brokerage which provided execution and clearing services 
for products traded in derivative markets on exchanges around the 
world. MF Global was primarily a voice-based broker, which means that 
it took and placed orders largely over the telephone and had not yet 
made significant use of electronic trading technology. As stated in MF 
Global's annual Form 10-K filing for the fiscal year ended March 31, 
2009, the company's revenues derived principally from commission fees 
generated from execution and clearing services and from interest income 
on cash held in customer accounts.\1\
    By 2010, however, online brokerages and high-frequency traders had 
begun exerting downward pressure on commissions. Interest rates were at 
historic lows and were expected to remain so for an ``extended 
period,'' according to Federal Reserve policy statements. As a 
consequence of these developments among others, revenues were in 
decline. MF Global was accordingly experiencing substantial losses. The 
firm had reported losses in five consecutive quarters before I arrived, 
including the final quarter of the fiscal year ended March 31, 2010 
(just as I was arriving),\2\ and it had lost money in each of the 
previous 3 years, including the fiscal year that ended on March 31, 
2010, for which the company posted a net loss to common shareholders of 
$167.7 million.\3\ (MF Global's fiscal year ran from April 1 to March 
31; the fiscal year ended on March 31, 2010 was MF Global's 2010 Fiscal 
Year.)
    I took the job at MF Global even though the company was in a weak 
financial position because it had several positive attributes such as 
memberships on multiple derivative exchanges around the globe, solid 
market shares on those exchanges, and an extensive set of client 
relationships. I saw the possibility of taking part in the 
transformation of a challenged company by restructuring existing 
businesses and capturing opportunities available in the post-2008 
financial environment.
    Upon my arrival at MF Global, management and the board initiated a 
strategic review of our business. We engaged an outside consultant, the 
Boston Consulting Group, to help the firm define a business strategy 
that would lead it to profitability. Management, the board of 
directors, and the consultant came to the common conclusion that MF 
Global had to change its business strategy and diversify its revenues.
    The new business plan provided, in substance, that MF Global would 
evolve into a broker-dealer, and ultimately into an investment bank, 
which would provide broker, dealer, underwriting, advisory and 
investment management services. The implementation of the plan was 
expected to take 3 to 5 years. This new strategic plan was communicated 
to the public.\4\
    During my tenure as chief executive officer, MF Global made both 
structural and personnel changes in an effort to implement the 
strategic plan. One of the first priorities was to reduce the level of 
compensation as a percentage of MF Global's revenues. The company was 
paying over 60% of its revenues to its employees, and sought to reduce 
this figure. Many employment contracts were restructured to increase 
the amount of pay that was dependent on MF Global's performance. My own 
pay was structured to include a substantial component determined by MF 
Global's performance, as discussed below.
    Before my tenure at MF Global, Promontory Financial Group 
(``Promontory''), a prominent financial consulting firm run by Eugene 
Ludwig, the former United States Comptroller of the Currency, had been 
retained pursuant to a settlement with the CFTC to review and assess MF 
Global's implementation of the settlement.\5\ During my tenure, we 
retained Promontory to review various of MF Global's compliance 
systems.
    I was hopeful about the prospects for the company, and I invested 
in it personally. Much of my compensation was in the form of options to 
purchase stock, which would have value only if the company prospered. 
When the company made a public equity offering in June 2010, I 
purchased almost $2.5 million worth of stock. In 2011, I bought 
approximately $500,000 more stock in the company.\6\
MF Global's Leverage
    One of the recurrent themes in the media has been that MF Global 
took on too much risk during my tenure, in particular the amount of 
leverage that MF Global bore at the time of its bankruptcy. In fact, MF 
Global reduced leverage. In the quarter ended March 31, 2010, MF 
Global's leverage was 37.3. During my tenure, it was consistently 
around 30.\7\
A. Description of RTMs
    There has been extensive comment about a series of positions 
entered into by MF Global that involved ``repurchase transactions to 
maturity,'' known colloquially as ``RTMs.'' I would like to address 
those here.
    As relevant here, repurchase transactions (also known as ``repos'') 
worked roughly as follows: MF Global would purchase a debt security 
(such as sovereign debt) from a seller and would sell the same security 
to another party (the ``Counterparty''), with an agreement to 
repurchase the security from the Counterparty at a later date. The 
agreement between MF Global and the Counterparty to sell and buy back 
the debt security was the repurchase agreement, and it served, in 
effect, as a loan from the Counterparty to MF Global. The Counterparty 
would hold the debt security as collateral for the loan.
    An RTM is a particular kind of repurchase transaction in which the 
purchaser (MF Global) agrees to buy back the underlying debt security 
on its maturity date.
    The economic benefit of RTMs to MF Global was the difference (or 
``spread'') between (a) the interest rate paid by the issuer of the 
debt security to MF Global, and (b) the repurchase rate (referred to as 
the ``financing rate'') paid by MF Global to the Counterparty. It is my 
understanding--and I do not claim to be an accountant--that under the 
applicable accounting principles, MF Global was required to recognize 
its profit immediately in RTMs, and the asset (the debt security) and 
the liability (the money owed to the Counterparty) must be 
``derecognized,'' i.e., removed from MF Global's balance sheet. I want 
to note here that I believe that accounting issues with respect to the 
RTMs would have been reviewed by MF Global's internal auditors, outside 
auditors (PricewaterhouseCoopers), and its audit committee.
B. Risks Related to RTMs
    Financing the purchase of debt with RTMs allowed MF Global to 
reduce certain kinds of risk. Because RTMs financed MF Global's 
purchase of the debt security to the security's maturity, the RTMs 
eliminated the risk (referred to as ``financing risk'') that at some 
point during the life of the security MF Global would not be able to 
find additional financing for the security, and would therefore be 
forced to sell the security, potentially at a loss. Elimination of the 
financing risk meant that MF Global's market risk (arising from the 
fluctuation of the price of the underlying debt security) was 
significantly reduced.
    MF Global retained, however, the risk that the debt securities 
might default or be restructured. If the debt securities defaulted or 
were restructured, then MF Global would not be paid in full at their 
maturity, even though MF Global would still have the obligation to buy 
back the debt securities from the Counterparty in full (at par).
    Also, the clearing house through which the repurchase transaction 
was executed (typically, the London Clearing House, or ``LCH'') could 
demand that MF Global increase its margin. It might do so for at least 
two reasons: (a) if it determined that MF Global itself was not credit-
worthy, or (b) if it determined that the underlying debt security--
which was the collateral for the loan from the Counterparty to MF 
Global--decreased in value. The possibility of such margin calls from 
LCH meant that MF Global retained liquidity risk.\8\
    To mitigate some of the risk of the RTMs, on some occasions MF 
Global took short positions in the underlying debt securities or in 
similar securities.\9\
C. The Decision To Engage In RTMs Involving European Sovereign Debt
    Even before I joined MF Global, the firm traded European sovereign 
debt securities. For instance, for the year ending March 31, 2010, the 
company reported that it was carrying over $9 billion in foreign 
government securities, including both foreign securities owned outright 
and those sold to counterparties under repurchase agreements.\10\ The 
company also reported that it had used RTM agreements to purchase some 
securities, although not specifically foreign government debt.\11\
    In the summer of 2010, I met with MF Global's senior traders to 
discuss ways to improve the company's profitability. One of the ideas 
discussed was for MF Global to purchase European sovereign debt using 
RTMs. Such transactions were attractive for the reasons stated above--
the reduction of finance risk and market risk--and the spread on the 
European sovereign debt securities appeared to be favorable. MF Global 
could engage in RTMs with these securities much as it had already done 
with other securities. Through these discussions, I became an advocate 
of purchasing European sovereign debt using RTMs.
    At the time that MF Global entered into the transactions, I 
believed that its investments in short-term European debt securities 
were prudent. MF Global invested in RTMs with respect to the debt of 
Belgium, Italy, Spain, Ireland and Portugal. The first three of these--
Italy, Spain and Belgium--were rated AA or better when MF Global 
invested in them. Even today, they are all at least A rated, and some 
of them are AA rated.\12\ All of the sovereign debt of these three 
countries that MF Global held in RTMs matured no later than December 
2012. Ireland and Portugal were lower rated, but for most of the time 
that MF Global held these securities they were backed by financing 
offered through the European Financial Stability Facility (EFSF) and 
the IMF, which made it highly likely that Ireland and Portugal would be 
able to roll over their outstanding debt before June 2013, when the 
funding facility expired. All of the sovereign Irish and Portuguese 
debt that MF Global held in RTMs matured no later than June 2012. 
Furthermore, because the European debt instruments that MF Global 
purchased did not all mature at the same time, there was an additional 
level of risk mitigation. As time went on and as the instruments 
matured, MF Global's risk would decrease.
D. Participants In The Decision To Engage In RTMs Involving European 
        Sovereign Debt
    MF Global's involvement in RTMs involving European sovereign debt 
securities was the subject of internal discussions with the company's 
traders, senior managers, and the board of directors.
    The RTM transactions were reported to the board of directors. There 
were discussions at board meetings, at which the transactions were 
described, analyzed and debated. Although some people complain that 
boards of directors are ``rubber stamps'' for the decisions of company 
management, MF Global's board was not a rubber stamp. The members of 
the board of directors were independent and sophisticated, and they 
asked hard questions and raised concerns about the RTMs. All of the 
members had been on the board of directors before I joined MF Global. 
The board met without management on some occasions, and it is my 
understanding that the RTM portfolio was a topic of discussion during 
at least some of those meetings.
    The directors approved sovereign risk limits up to which MF Global 
could invest in the RTM trades. Ultimately, the limits were specified 
on a country-by-country basis. MF Global attempted to adhere to those 
limits, and generally did so. On a few occasions, however, the chief 
risk officer reported that the firm had exceeded its limits with 
respect to a particular country. I recall, for example, one occasion on 
which the limit was exceeded because the Euro gained value against the 
dollar, and the risk limits were set in dollars. On the occasions on 
which the firm exceeded the country limits, it nonetheless remained 
within the overall limit and took appropriate steps (such as entering a 
reverse-RTM or shorting the same security) to bring its level of 
exposure back within the country limits. At the time of the bankruptcy, 
MF Global was within the risk limits set by the board of directors.
    I accept responsibility for the RTM trades that MF Global engaged 
in from the time that I arrived at MF Global until my departure, on 
November 3, 2011, and I strongly advocated the trading strategy that I 
have described here. It is important to recognize, however, that MF 
Global's involvement in RTM trades was disclosed to the board of 
directors, the senior officers of the company, the company's 
accountants and numerous outsiders.
E. The Public Disclosures Of The RTMs
    The RTM trades were also publicly disclosed, both in the periodic 
financial statements and in other public statements, including press 
releases and earnings calls.
    MF Global's annual filing (Form 10-K), dated May 20, 2011, for the 
fiscal year ended March 31, 2011, stated that MF Global invested in the 
sovereign debt of Italy, Spain, Belgium, Portugal and Ireland, and that 
the final maturity for any of these securities was no later than 
December 2012, which, it noted, was ``prior to the expiration of the 
European Financial Stability Facility.'' \13\ The filing also reported 
that ``[a]t March 31, 2011 securities . . . sold under agreements to 
repurchase of $14,520,341[,000] at contract value, were de-recognized, 
of which 52.6% were collateralized with European sovereign debt.'' \14\
    On July 28, 2011, the company announced its results for the first 
quarter of Fiscal Year 2012 (which ended on June 30, 2011), and its 
disclosures about the RTMs were again extensive. Its filing (Form 10-Q) 
stated that as of June 30, 2011, ``securities purchased under 
agreements to repurchase of $16,548,450[,000] . . . were de-recognized, 
of which 69.3% . . . were collateralized with European sovereign debt, 
consisting of Italy, Spain, Belgium, Portugal and Ireland.'' \15\ The 
Form 10-Q also stated that the net notional value of the Italian, 
Spanish, Belgian, Irish and Portuguese sovereign debt securities that 
MF Global held was $6.4 billion.\16\ In a conference call that MF 
Global held on July 28 to announce its results, the RTMs collateralized 
with European sovereign debt were discussed.\17\
F. The Fate Of The RTMs
    As of today, none of the foreign debt securities that MF Global 
used in the RTM trades has defaulted or been restructured. All of those 
securities that reached maturity while they were part of the RTM 
position paid in full.
Communications With Regulators
A. FINRA's Position Regarding The Capital Treatment Of The RTMs 
        Involving European Sovereign Debt Securities
    In approximately the first week of August 2011, I recall becoming 
aware that officials from FINRA were considering whether to require 
that MF Global modify its capital treatment under SEC Rule 15c3-1 of 
the RTMs involving European sovereign debt instruments. I believe that 
FINRA officials may have raised this issue with others at MF Global 
earlier than August 2011, but to the best of my recollection, I did not 
focus on the issue until approximately early August. I had not met with 
FINRA officials, to the best of my recollection, although I spoke 
briefly at a meeting at MF Global's offices on or about June 14, 2011, 
that was attended by officials from the SEC, the CFTC, FINRA and 
perhaps other regulators. I believe that I spoke about RTMs at that 
meeting. I believe that other members of the management of MF Global 
spoke at that meeting about several topics, although I did not attend 
those others members' presentations.
    On or about August 15, 2011, I went with others from MF Global to 
the SEC in Washington to question FINRA's interpretation of SEC Rule 
15c3-1. We met with Michael Macchiaroli, the Associate Director in the 
Division of Trading and Markets, and others from the SEC, and presented 
our argument that the capital treatment of the RTMs involving European 
sovereign debt securities should not be changed in the way that FINRA 
proposed. Some days after the meeting, MF Global was apprised by FINRA 
that FINRA would not change its position. I thereafter made a telephone 
call to Mr. Macchiaroli who told me, in substance, that there was no 
further appeal and that MF Global had to comply with FINRA's direction. 
He noted, however, that other companies in similar positions had sent 
letters of objection to the SEC, although he was clear that such a 
letter would make no difference to FINRA's or the SEC's position.
    Although MF Global disagreed with FINRA's position, the firm 
promptly complied with the demand that its United States subsidiary 
increase its net capital. On September 1, 2011, we made a Form 10-Q/A 
public filing disclosing FINRA's ruling. It stated:

        As previously disclosed, the Company is required to maintain 
        specific minimum levels of regulatory capital in its operating 
        subsidiaries that conduct its futures and securities business, 
        which levels its regulators monitor closely. The Company was 
        recently informed by the Financial Industry Regulatory 
        Authority, or FINRA, that its regulated U.S. operating 
        subsidiary, MF Global Inc., is required to modify its capital 
        treatment of certain repurchase transactions to maturity 
        collateralized with European sovereign debt and thus increase 
        its required net capital pursuant to SEC Rule 15c3-1. MF Global 
        Inc. has increased its net capital and currently has net 
        capital sufficient to exceed both the required minimum level 
        and FINRA's early-warning notification level . . . .\18\
B. My Communications Regarding Proposed CFTC Rules Changes
    Sometime in late 2010 or early 2011, the CFTC proposed certain 
changes in 17 CFR  1.25 (``Rule 1.25''). As far as I understand, 
roughly speaking, Rule 1.25 outlines the permissible investments and 
uses for customer funds, as that term is defined in the CFTC Rules and 
Regulations, held by a Futures Commission Merchant (``FCM'').
    The proposed rule change was the topic of substantial discussion 
among regulated entities, industry organizations, associations, 
committees and even designated self-regulatory organizations. I 
understand that there were numerous letters received by the CFTC 
opposing various aspects of the proposed rule change.\19\ MF Global 
submitted a letter, along with Newedge, which was one of the largest 
FCMs in the United States, opposing the proposed amendments to the 
rule.
    The proposed rule change was also the topic of the conference call 
in which I took part on July 20, 2011, in which CFTC Chairman Gary 
Gensler participated. As best as I can recall, there were others from 
MF Global who took part in the conference call, and the CFTC's own 
records state that in addition to CFTC Chairman Gensler, four other 
officials from the CFTC were on the call. According to the CFTC's 
records, I was not the only representative of the industry that had 
calls with members of the CFTC, including Chairman Gensler, regarding 
the proposed changes.
    The principal topic of discussion was whether Rule 1.25 should be 
changed to prevent FCMs from engaging in repurchase transactions with 
related broker-dealers. As I understood it, the then-current version of 
Rule 1.25 permitted such transactions but the proposed version would 
not, or would somehow limit such transactions. Consistent with the 
letter that we had submitted with Newedge, I argued, in substance, that 
such transactions should continue to be permitted because such 
transactions could be beneficial to the FCMs.
    On the same afternoon, I spoke with another CFTC Commissioner, Mr. 
Bart Chilton, to discuss the same matter. Mr. Chilton, who, according 
to the CFTC's records was accompanied by another CFTC official, 
listened to the arguments. I was joined on the phone by the General 
Counsel for MF Global.
    Later, I came to understand that the CFTC deferred consideration of 
the new rule.
C. Further Contacts
    From the time that I joined MF Global through October 30, 2011, to 
the best of my recollection, I spoke with Chairman Gensler on only 
limited occasions. In addition to those contacts set forth above, I had 
a meeting with him in or about May 5, 2010, and I also met with him in 
or about December 2010. Those meetings were at the CFTC in Washington, 
and on those occasions there were other officials from the CFTC 
present.
    In addition, Chairman Gensler and I had a few brief interactions at 
which there was, to the best of my recollection, no private discussions 
about the CFTC's regulation or oversight of MF Global. For example:

    (a) He was a guest lecturer on government regulation at my class at 
        Princeton on or about November 22, 2010. When he spoke at 
        Princeton, there was another person from the CFTC present, and 
        we did not discuss professional matters, except in the context 
        of the class.

    (b) I also attended a conference that was sponsored by the 
        investment firm of Sandler & O'Neill on or about June 9, 2011. 
        Chairman Gensler was there, as were others from the CFTC. I 
        gave a presentation about MF Global at the conference, and 
        Chairman Gensler gave the luncheon speech. I do not recall that 
        I discussed any business with Chairman Gensler other than a 
        question that I put to him before the full audience during a 
        question and answer session following his presentation. To the 
        best of my recollection, the question was about proposed 
        changes to Rule 1.25.

    (c) In addition, on or about September 14, 2011, Chairman Gensler 
        and I attended the wedding celebration of mutual friends. On 
        that occasion, Chairman Gensler was not accompanied by anyone 
        from the CFTC, but, again, we did not discuss business or 
        regulatory matters so far as I recall.

    On various occasions during my tenure at MF Global, I met or 
communicated with others at the CFTC about a variety of issues.
    During my tenure at MF Global, to the best of my recollection I 
never spoke about business with Chairwoman Schapiro of the SEC, another 
of our regulators, or any other SEC Commissioner. (I may have greeted 
Chairwoman Schapiro at a conference.) During my tenure at MF Global, to 
the best of my recollection, I never communicated with Secretary of the 
Treasury, Timothy Geithner.
    During my tenure at MF Global, to the best of my recollection, I 
never spoke with the President of the New York Federal Reserve William 
Dudley until approximately the week preceding the bankruptcy of MF 
Global, other than on one occasion (on or about April 13, 2011) when he 
and I attended a speech at Princeton by Chairman Bernanke of the 
Federal Reserve. To the best of my recollection, Mr. Dudley and I 
greeted each other on that occasion, but did not engage in substantive 
conversation. During my tenure at MF Global, to the best of my 
recollection, I did not speak with any governor of the Federal Reserve 
other than to greet Chairman Bernanke after his presentation at 
Princeton.
The Events Of October 2011
    The late summer and fall of 2011 were extraordinarily difficult 
times in the financial markets for almost all market participants. Like 
many comparable firms, MF Global was experiencing poor earnings 
principally on account of diminished revenues, and highly correlated 
volatility in many markets.
    On October 17, 2011, the Wall Street Journal published an article 
that described the FINRA ruling that MF Global had disclosed on 
September 1. Other news stories followed, and some of MF Global's 
counterparties decided to reduce their exposure to the company, 
requiring some adjustment in our financing. MF Global's stock began to 
perform relatively poorly.
    On or about October 21 and 22, 2011--in anticipation of a 
disappointing earnings announcement, and concerned that the ratings 
agencies would downgrade MF Global--I and several of my colleagues made 
presentations to the ratings agencies to put the earnings announcement 
in context. The firm customarily made presentations to the ratings 
agencies shortly before the firm's quarterly earnings announcements.
    On Monday, October 24, 2011, Moody's cut MF Global's rating from 
Baa2 to Baa3, followed by another downgrade to Ba2, on October 27. 
Fitch followed suit, cutting the company's rating from BBB to BB+. On 
October 26, S&P placed MF Global on its ``credit watch negative'' list, 
although it did not downgrade its rating below investment grade.
    MF Global announced its quarterly earnings on October 25, 2011. The 
announcement was made 2 days ahead of schedule so that the firm could 
get full information to the public in light of Moody's downgrade. The 
announcement revealed that MF Global had lost $191.6 million in the 
quarter that ended September 30, 2011.
    In light of the attention that has been given to RTMs, and the 
press reports that attributed MF Global's loss to RTMs involving 
European debt securities, it is important to make clear here that the 
loss was not related to those positions. The lion's share of the 
quarterly loss was a writeoff of approximately $119.4 million that 
reflected a valuation adjustment against a deferred tax asset. That 
asset had been created by years of (non-RTM) tax losses cumulated 
(mostly before I arrived at MF Global) in the firm's United States and 
Japanese subsidiaries, which had allowed MF Global to recognize as an 
asset potential tax benefits--equal to $119.4 million--in future years. 
Under applicable accounting rules, by the second quarter of MF Global's 
2011 Fiscal Year (i.e., the quarter ending September 30, 2011) the firm 
was no longer permitted to recognize those tax benefits as assets, and 
therefore, with the advice and knowledge of its external auditor, it 
recognized a loss in that amount.
    In addition, approximately $16.1 million of the quarterly loss 
resulted from the retirement of debt arising out of MF Global's 
purchase of certain of its 9% senior notes due 2038. Another 
approximately $10.0 million was for ``restructuring charges,'' which 
included the closure of our Japanese securities business. The remainder 
was miscellaneous matters including reserves for litigation, much of it 
arising out of events before I arrived at MF Global. Approximately $18 
million was operating losses (again, not related to the RTMs).
    Shortly following the earnings announcement and the ratings 
downgrades, some clients and counterparties withdrew their business 
from the firm; others required increased margins. The firm's stock 
traded at sharply higher volumes and lower prices.
    During the week of October 24-28, 2011, MF Global undertook 
extraordinary steps to ensure that it was able to honor customers' 
requests to withdraw funds or collateral. To the best of my 
recollection, during that week the firm unwound hundreds of millions of 
dollars worth of RTMs, and sold the underlying sovereign debt 
instruments; it also sought to draw down its revolver loans from a 
consortium of banks led by J.P. Morgan. On October 27, MF Global sold, 
to the best of my recollection, $1.3 billion in commercial paper 
instruments for same-day settlement, and over $300 million in corporate 
securities, also for same-day settlement. The next day, I believe that 
MF Global sold approximately $4.5 billion in United States agency 
securities. Over the course of the week, MF Global reduced the size of 
its match book by, to the best of my recollection, approximately $10 
billion. Despite our best efforts to sell assets and generate 
liquidity, the marketplace lost confidence in the firm.
    The firm was in regular contact with its regulators, including the 
CFTC, the Federal Reserve Bank of New York, the SEC and the UK's 
Financial Services Authority, and the Chicago Mercantile Exchange 
(CME), the firm's designated self-regulatory organization.
    The firm was also engaged in efforts to sell the FCM part of its 
business. It had been contemplating, for some time prior to the week of 
October 24, a strategic partnership involving the FCM business. On or 
about Tuesday, October 25, the firm retained an investment bank, 
Evercore, to explore selling that business. By the next day, MF Global 
instructed Evercore also to explore selling the entire firm. MF Global 
was in negotiations to sell the firm through the weekend of October 29-
30. The sale did not take place when it was discovered that customer 
accounts could not be reconciled at that time.
The Unreconciled Accounts
    Obviously on the forefront of everyone's mind--including mine--are 
the varying reports that customer accounts have not been reconciled. I 
was stunned when I was told on Sunday, October 30, 2011, that MF Global 
could not account for many hundreds of millions of dollars of client 
money. I remain deeply concerned about the impact that the unreconciled 
and frozen funds have had on MF Global's customers and others.
    As the chief executive officer of MF Global, I ultimately had 
overall responsibility for the firm. I did not, however, generally 
involve myself in the mechanics of the clearing and settlement of 
trades, or in the movement of cash and collateral. Nor was I an expert 
on the complicated rules and regulations governing the various 
different operating businesses that comprised MF Global. I had little 
expertise or experience in those operational aspects of the business.
    Again, I want to emphasize that, since my resignation from MF 
Global on November 3, 2011, I have not had access to the information 
that I would need to understand what happened. It is extremely 
difficult for me to reconstruct the events that occurred during the 
chaotic days and the last hours leading up to the bankruptcy filing.
    I simply do not know where the money is, or why the accounts have 
not been reconciled to date. I do not know which accounts are 
unreconciled or whether the unreconciled accounts were or were not 
subject to the segregation rules. Moreover, there were an extraordinary 
number of transactions during MF Global's last few days, and I do not 
know, for example, whether there were operational errors at MF Global 
or elsewhere, or whether banks and counterparties have held onto funds 
that should rightfully have been returned to MF Global. I am sure that 
the Trustee in bankruptcy, the SIPC receiver, and the regulators are 
working to answer these questions and to understand precisely what 
happened during the firm's last days and hours.
    As the chief executive officer of MF Global, I tried to exercise my 
best judgment on behalf of MF Global's customers, employees and 
shareholders. Once again, let me go back to where I started: I 
sincerely apologize, both personally and on behalf of the company, to 
our customers, our employees and our investors, who are bearing the 
brunt of the impact of the firm's bankruptcy.
    That concludes my prepared statement. I am willing to answer the 
Committee's questions.
Endnotes
    1. See FY 2009 Form 10-K (for fiscal year ended March 31, 2009) 
(filed on June 10, 2009), at pp. 3-4 (``Description of Business'').
    2.

------------------------------------------------------------------------
  Quarter     Profit/(Loss)                     Source
------------------------------------------------------------------------
  4Q 2010    ($96.5 million)  News Release, ``MF Global Reports Fourth
                               Quarter and Fiscal Year 2010 Results,''
                               May 20, 2010, at p. 1 (filed with Form 8-
                               K on May 20, 2010).
  3Q 2010    ($22.3 million)  News Release, ``MF Global Reports Third
                               Quarter 2010 Results,'' Feb. 4, 2010, at
                               p. 1 (filed with Form 8-K on Feb. 4,
                               2010).
  2Q 2010    ($16.0 million)  News Release, ``MF Global Reports Second
                               Quarter 2010 Results,'' Nov. 5, 2009, at
                               p. 1 (filed with Form 8-K on Nov. 5,
                               2009).
  1Q 2010    ($32.8 million)  News Release, ``MF Global Reports First
                               Quarter 2010 Results,'' Aug. 6, 2009, at
                               p. 1 (filed with Form 8-K on Aug. 6,
                               2009).
  4Q 2009   ($119.4 million)  News Release, ``MF Global Reports Fourth
                               Quarter and Fiscal Year 2009 Results,''
                               May 21, 2009, at p. 7 (Consolidated &
                               Combined Statements of Operations) (filed
                               with Form 8-K on May 21, 2009).
------------------------------------------------------------------------

    3.

------------------------------------------------------------------------
  Quarter     Profit/(Loss)                     Source
------------------------------------------------------------------------
  FY 2010   ($167.7 million)  News Release, ``MF Global Reports Fourth
                               Quarter and Fiscal Year 2010 Results,''
                               May 20, 2010, at p. 1 (filed with Form 8-
                               K on May 20, 2010).
  FY 2009    ($69.2 million)  News Release, ``MF Global Reports Fourth
                               Quarter and Fiscal Year 2009 Results,''
                               May 21, 2009, at p. 7 (Consolidated &
                               Combined Statements of Operations) (filed
                               with Form 8-K on May 21, 2009).
  FY 2008    ($71.1 million)  News Release, ``MF Global Reports Record
                               Fourth Quarter and Fiscal Year 2008
                               Results,'' May 20, 2008, at p. 1 (filed
                               with Form 8-K on May 20, 2008).
------------------------------------------------------------------------

    4. See, e.g., FY 2011 Form 10-K filing (for fiscal year ended March 
31, 2011) (filed May 20, 2011), at p. 6 (``Growth Strategy''); id. at 
15.
    5. In February 2008, MF Global suffered a loss of $141.0 million, 
following an unauthorized trading incident involving wheat futures 
(``Dooley Trading Incident''). Criminal charges were brought against 
the trader, Evan Dooley. MF Global, among other things, entered into a 
settlement with the CFTC, under which the company agreed to specific 
undertakings relating to risk management, including the engagement of 
an independent outside consultant (Promontory). See FY 2010 Form 10-K 
(for fiscal year ended Mar. 31, 2010) (filed May 28, 2010), at p. 35.
    6.

                   My Equity Acquisitions in MF Global


------------------------------------------------------------------------
      04/07/2010   Granted 2,500,000 stock options (granted as part of
                    my initial compensation)
      06/03/2010   Bought 352,100 common shares at $7.10, in a public
                    offering
      05/20/2011   Granted 1,600,000 stock options (granted at the time
                    of my contract extension)
   06/09-11/2011   Bought 36,100 common shares at between $6.85 and
                    $6.92, on the market
      08/08/2011   Bought 33,960 common shares at $5.71 and $5.91, on
                    the market
      08/10/2011   Bought 1,000 common shares at $5.41, on the market
      08/18/2011   Bought 18,800 common shares at $5.25, on the market
------------------------------------------------------------------------
I never sold any shares or options.

    7. Leverage is calculated by dividing (a) the reported total 
assets, by the sum of (b) total equity and (c) preferred shares. The 
relevant data can be found in MF Global's consolidated balance sheets, 
which are contained in the firm's quarterly (Form 10-Q) or annual (Form 
10-K) financial statements.
    8. These risks were described in, for example, MF Global's Form 10-
Q for the period ending June 30, 2011 (filed August 3, 2011), at p. 76:

        Under the Company's repurchase agreements, including those 
        repurchase agreements accounted for as sales, its 
        counterparties may require the Company to post additional 
        margin at any time, as a means for securing its ability to 
        repurchase the underlying collateral during the term of the 
        repurchase agreement. Accordingly, repurchase agreements create 
        liquidity risk for the Company because if the value of the 
        collateral underlying the repurchase agreement decreases, 
        whether because of market conditions or because there are 
        issuer-specific concerns with respect to the collateral, the 
        Company will be required to post additional margin, which the 
        Company may not readily have. If the value of the collateral 
        were permanently impaired (for example, if the issuer of the 
        collateral defaults on its obligations), the Company would be 
        required to repurchase the collateral at the contracted-for 
        purchase price upon the expiration of the repurchase agreement, 
        causing the Company to recognize a loss. Also, margin funds 
        that are posted by the Company cannot be used by it for other 
        purposes, which may limit the Company's ability to deploy its 
        capital in an optimal manner or to effectively implement its 
        growth strategy. For information about these exposures and 
        forward purchase commitments, see ``-Off Balance Sheet 
        Arrangements and Risk'' and ``Item 3. Quantitative and 
        Qualitative Disclosures about Market Risk-Disclosures about 
        Market Risk-Risk Management.''

    9. See, e.g., FY 2011 Form 10-K, at p. 78 (``From time to time, and 
in addition to short positions in our non-trading book, we also take 
short positions in our trading book to mitigate our issuer credit risk 
further.'').
    10. See Notes 5 & 7 to Consolidated & Combined Financial 
Statements, FY 2010 Form 10-K, at p. 112-13.
    11. See id. at pp. 100, 112 (describing accounting treatment of 
RTMs).
    12. The current ratings are as follows:

------------------------------------------------------------------------

------------------------------------------------------------------------
Belgium:           AA negative (S&P)  AA+ negative      Aa1 possible
                                       (Fitch)           downgrade
                                                         (Moody's)
Italy:             A negative (S&P)   A+ negative       A2 negative
                                       (Fitch)           (Moody's)
Spain:             AA^ negative       (S&P) AA^         A1 negative
                                       negative          (Moody's).
                                       (Fitch)
------------------------------------------------------------------------
The credit ratings above were obtained from the websites of the three
  major credit rating agencies on December 6, 2011. See http://
  www.standardandpoors.com/ratings/en/us/; www.fitchratings.com;
  www.moodys.com.

    13. FY 2011 Form 10-K, at pp. 77-78; see also id. at pp. 99-100.
    14. Id. at p. 100.
    15. Note 3, to Consolidated & Combined Financial Statements, 1Q FY 
2012 Form 10-Q, at pp. 13-14 (filed Aug. 3, 2011).
    16. Id. at p. 90 (table).
    17. Earnings call, ``MF Global Holdings' CEO Discusses F1Q2012 
Results,'' July 28, 2011, at p. 4.
    18. ``Additional Information,'' Q1 FY 2012 Form 10-Q/A, at p. 2.
    19. The CFTC received over 30 comment letters related to topics 
covered by the proposed changes. Many of these letters commented on the 
same proposed changes on which MF Global commented. As examples, both 
the CME and the Futures Industry Association (``FIA'') in conjunction 
with the International Swaps and Derivatives Association (``ISDA''), 
Inc. challenged, among other things, the proposed amendments regarding 
permissible investments and internal repurchase transactions. The 
comments provided by the CME, FIA and ISDA advocated that an FCM should 
be permitted to invest in certain types of foreign sovereign debt and 
also advocated that FCMs should be able to engage in repurchase 
transactions and reverse repurchase transactions with affiliates and to 
engage in in-house transactions. Both JP Morgan Futures, Inc. and 
Morgan Stanley took similar positions.

    The Chairman. Thank you, Governor. And I now recognize 
myself for 5 minutes.
    And you have served in the role of Congressional oversight 
before. You know we have an obligation to get to the facts, to 
address the uncertainties in the market and address whatever 
laws may need to be focused upon.
    Thousands of your former customers across the country are 
experiencing severe financial hardship because of the events 
that occurred under your watch. Many of those customers are the 
very farmers and ranchers I represent in Oklahoma and that this 
Committee represents in the House of Representatives. The fact 
that their property is missing is alarming and, yes, 
disheartening. The fact that they have lost confidence in the 
futures market may have a long permanent impact on the hedging 
practices of the agricultural community.
    Mr. Corzine, many of my constituents I am sure, the 3,000 
or so people that used to work for you are watching today also 
and they are looking for answers, too. I expect you may have 
some of those answers and so I would like to ask you to answer 
these questions to the best of your ability.
    Mr. Corzine, is there a shortfall in the customer funds 
that MF Global was legally required to keep segregated?
    Mr. Corzine. Mr. Chairman, I know only what I read and it 
certainly was true on the late evening of the 30th of October 
that there were unreconciled accounts.
    The Chairman. To the best of your knowledge based on your 
time at the company before you left, why is there a shortfall?
    Mr. Corzine. Well, there are, Mr. Chairman, many 
transactions that occurred in those last chaotic days and I am 
not aware of all those, nor do I have the information to be 
able to look at those transactions. And as a consequence, it 
would be very hard for me to speculate why or where that 
shortfall took place.
    The Chairman. Let me ask in a very precise fashion. In your 
role at MF Global, did you authorize a transfer of customer 
funds from these segregated accounts?
    Mr. Corzine. I never intended to break any rules, whether 
it dealt with the segregation rules or any of the other rules 
that are applicable.
    The Chairman. Are you aware of any transfers authorized or 
unauthorized of funds out of customer accounts?
    Mr. Corzine. I am not in a position, given the number of 
transactions, to know anything specifically about the movement 
of any specific funds, and I will repeat I certainly would 
never intend to direct or have segregated funds moved.
    The Chairman. At what point were you made aware that 
customer funds were missing?
    Mr. Corzine. As I said in my statement, Mr. Chairman, the 
first that I heard of the many millions, hundreds of millions 
missing was on Sunday night.
    The Chairman. I would like to discuss how a company that 
has been around for 230 years fails to the surprise of its 
customers and investors, and based upon press reports and your 
testimony, under your direction. MF Global's sovereign debt 
position increased steadily. In fact, it has been reported that 
MF Global's exposure went from $1.5 billion at the end of 2010 
to $6.3 billion at the time of the bankruptcy. So let me ask 
this, Governor. Who is Michael Roseman?
    Mr. Corzine. Michael Roseman was the Chief Risk Officer of 
the firm preceding my joining the firm and was up until the end 
of 2010.
    The Chairman. Explain to me what a chief risk officer does.
    Mr. Corzine. A chief risk officer represents the Board of 
Directors in administering the delegation of authorities that 
the board assigns to the activities of the firm and looks at 
market risk, credit risk, operational risk. He consults with 
the board and consults with management.
    The Chairman. Is it true that Mr. Roseman on multiple 
occasions both directly to you and to the board expressed 
concerns that MF Global was overexposed in European sovereign 
debt and that the firm did not have enough capital to withstand 
potential losses those positions might impose upon the firm?
    Mr. Corzine. Mr. Roseman certainly had a different view 
about the sovereign default risk associated with euro 
sovereigns and particularly in the context that we did other 
business in those countries, and he expressed that to me 
directly; he expressed that to the board.
    The Chairman. Did any members of the MF Global Board 
express concerns to you with the level of risk accumulating in 
the firm's portfolio?
    Mr. Corzine. There were multiple discussions, as I have 
said in my testimony, most of which I think once I have access 
to records will be documented in the minutes of the board 
meetings about this subject. And there were people who 
dissented in the debates and then sometimes supported actions 
that we were taking after those debates. Sometimes there were 
people who did dissent. I don't know the exact elements but 
generally we arrived at a consensus.
    The Chairman. Is it true, Mr. Corzine, that you threatened 
to leave the firm as CEO if the board did not trust your 
judgment?
    Mr. Corzine. Mr. Chairman, I did not threaten the board 
that I would leave. I had one specific conversation with the 
lead director, which could have been interpreted that way in 
the sense that I said if the board, using the powers that it 
held, had lost confidence in me, I would be willing to step 
down.
    The Chairman. Mr. Corzine, I understand that Mr. Roseman 
was no longer chief risk officer after March of this year. Were 
you involved in that decision?
    Mr. Corzine. My view was that we needed someone in the 
chief risk officer position that was more fully attuned to the 
broker-dealer side of our business than what Mr. Roseman's 
background was about. And there were other issues about how 
people worked with each other, not with me in particular but 
within the firm, that led the board and my agreement to that 
that we should change chief risk officers.
    The Chairman. We have all been watching the eurozone crisis 
unfold, and there has been significant uncertainty about its 
resolution, yet you pushed forward with aggressive bets despite 
warnings from employees and even the board it seems. What do 
you know, Mr. Corzine, that we didn't? Why were you so 
confident about those bets to the degree that you were willing 
to bet the survival of the firm, and yes, its employees which 
you were responsible for?
    Mr. Corzine. Mr. Chairman--I looked at many conditions, 
first of all, the ratings but they were certainly not the only 
consideration, I looked at what counterparties would charge for 
initial margin, you would look at how individual securities 
were looked at by regulatory authorities around the globe, what 
they were able to be used as collateral for, you would look at 
prices in markets to determine whether people thought the 
default or restructuring risk was being priced into it. So 
there were many, many different considerations along with the 
ongoing dialogue which after the fact clearly can be second-
guessed, that the European community was going to take a much 
more--would take much more forceful steps to avoid bankruptcy 
or insolvency rather in sovereigns cases and hold to full 
payment of the securities.
    The Chairman. In the days leading up to bankruptcy, how 
often did you talk with Gary Gensler? Daily or------
    Mr. Corzine. There were no private conversations in my 
recollection were held between Mr. Gensler and myself. I--to 
the best of my recollection and this is one of the reasons I 
need records to be able to verify--Mr. Gensler was on the 
general discussion with regulators on the very early hours of 
October 31. And if I am not mistaken, a posting that was given 
to regulators on Saturday, which I guess would have been the 
29th were there were a series of regulators.
    The Chairman. At any point did Mr. Gensler encourage a 
bankruptcy filing?
    Mr. Corzine. In my recollection, there was no encouragement 
in any of those forms and I don't recall anyone suggesting that 
he was encouraging bankruptcy filings.
    The Chairman. Mr. Corzine, as a registered futures 
commission merchant, MF Global was subject to periodic audits 
both by regulators and accounting firms. What generally were 
the results of those audits over the past year?
    Mr. Corzine. Mr. Chairman, from my recollection------
    The Chairman. As chief executive officer, you would have 
reviewed those, correct?
    Mr. Corzine. Some of them I would, particularly if there 
were exceptions to challenges. As I included in my statement, 
we certainly had discussions with FINRA in the August time 
frame that I was very much aware of, further discussions with 
the SEC. There were inquiries from the SEC about the treatment 
of repos at different points in the year but no reporting of 
significant challenges to how the firm was operating that I can 
recall except with respect to the FINRA issue.
    The Chairman. But when directions and suggestions were 
made, as is the nature of many auditing reports, did you make 
those changes?
    Mr. Corzine. To my recollection of the details--and there 
are many, many elements of internal outside consultants', 
regulators' observation, we had people who made sure that we 
were responding. We went through audit committee reviews of 
those kinds of actions that were taken in response to 
questions. And so I had reason to believe that we did.
    The Chairman. So Mr. Corzine, how would you respond to 
charges that MFG's books were a mess? And you were a supporter 
of Sarbanes-Oxley, too------
    Mr. Corzine. Yes.
    The Chairman.--just like myself.
    Mr. Corzine. Mr. Chairman, my understanding is that our 
books and records were reflecting the chaos that occurred in 
the last 2 or 3 days as the firm was under severe pressure and 
had lost the confidence of the marketplace. I think that is 
distinct from the books and records. I think I have reason to 
believe based on at least the reporting that occurred in our 
audit committees over a period of time that our books and 
records weren't in a mess. But that is a question I think 
others will have to opine about after they look at those in 
retrospect. It is clear that in the last hours, the last days, 
there were many, many, many, many more transactions than 
typically occur.
    The Chairman. One last question. Why did MF Global report 
to FINRA in late September of 2010 that it didn't have any 
position in foreign sovereign debt when it began entering into 
transactions that carried European debt exposure in mid-
September 2010?
    Mr. Corzine. Mr. Chairman, I believe--again, without 
checking records and without the ability to be certain on 
this--always open to confirming with records, I think you must 
be referring to--or looking to the month-end reports that we 
filed with FINRA on our capital position. And in September of 
2010 it is quite possible--and again, I don't have records to 
confirm this with, but it is quite possible that beginning 
positions that we took in euro sovereigns were on the books of 
one of our other subsidiaries not in the FINRA regulated 
subsidiary.
    The Chairman. My time has expired. The chair appreciates 
the indulgence of the Ranking Member and the Members and turns 
to the Ranking Member. If he would like to begin his questions, 
we will soon have to break for a series of votes. The gentleman 
is recognized.
    Mr. Peterson. Well, Mr. Chairman, thank you.
    I wanted to follow up on a couple things: the one thing 
that struck me, Mr. Corzine, about--or Governor or Senator, I 
don't know what to call you exactly--but------
    Mr. Corzine. A lot of people have bad names.
    Mr. Peterson. Mr. Corzine, I don't know. Anyway, in your 
testimony about the leverage, apparently when you took over the 
leverage was 37.5 to 1 or something.
    Mr. Corzine. Something in that neighborhood.
    Mr. Peterson. And then you got it down to 30 and that 
somehow or another that is a good thing. You know, this 
mentality on Wall Street, about this leverage, I don't get it. 
You know, and I guess maybe you have to do that in order to 
make money given the circumstances, I don't know, but it just 
seems pretty risky, you know.
    Mr. Corzine. Congressman, if I might, 30 to 1 was a lot 
higher than I would have wanted to have on a sustained basis 
over a period of time. I think if you review my written 
testimony, you will see that we were actively involved in 
seeking a strategic partnership with the FCM. In the last days, 
we actually moved to trying to sell the FCM. If that had been 
accomplished and we had made progress on that, we were all very 
hopeful that we would. That would have lowered our leverage 
down into the mid-teens to high-teens, which was certainly the 
strategic objective that we wanted to get to. The challenge--
and I listened to some of the earlier conversations--the 
challenge of running MF Global as it was organized is it was 
both an FCM and a broker-dealer. And those two elements posed 
different kinds of constraints, but one of those is it built up 
your leverage higher than would otherwise be the case in an 
organization that was just one or the other.
    Mr. Peterson. Well, according to your testimony, these 
positions or securities you never lost any money on. None of 
them ever defaulted.
    Mr. Corzine. Not to this point.
    Mr. Peterson. So basically what put you in trouble was when 
the margin call or when the FINRA required you to put up 
considerable more money------
    Mr. Corzine. The FINRA capital adjustments that we took are 
really different than the capital--I mean the liquidity issues. 
Those were things that we had, the capital and different parts 
of our overall organization that we could put into the 
regulated subsidiary that FINRA looked at. And with not much 
difficulty we were able to more than meet and run excess 
capital positions. You are suggesting that the RTM positions 
were a drag or a significant user of liquidity is true on the 
clearing exchanges in Europe where sovereign RTMs were cleared. 
On the other hand, the cause of MF Global's stress in its last 
few days was a combination certainly of sovereign positions, 
which were a concern to the marketplace. Make no mistake about 
that. It was also, though, the ratings downgrades and what I 
have tried to say in my oral statement, a--I think an inability 
for those of us in management at MF Global to convey what the 
losses were all about and often got conflated with euro 
sovereign positions which there actually were no losses in.
    Mr. Peterson. Well, I guess we have to go vote, Mr. 
Chairman. I do have a few more questions------
    The Chairman. The Committee will stand in recess and you 
will be back in questions when we return.
    [Recess.]
    The Chairman. This hearing of the Committee on Agriculture 
to examine the MF Global bankruptcy will come to order.
    I now recognize the Ranking Member to continue his 
questions.
    Mr. Peterson. Thank you, Mr. Chairman.
    Mr. Corzine, your testimony indicates that on Sunday, 
October the 30th, that you were informed that MF Global could 
not account for client funds. Who told you this information and 
when on that day did they tell you?
    Mr. Corzine. Congressman, to the best of my memory I was 
informed someplace 10:30, 11:00 on Sunday evening. And I will 
admit that I was in a group of people and I don't know exactly 
whether it was the CFO or the general counsel or who exactly--
----
    Mr. Peterson. Somebody from your firm?
    Mr. Corzine. It was pretty stunning, however.
    Mr. Peterson. Somebody from the firm, though?
    Mr. Corzine. From the firm.
    Mr. Peterson. Yes. So apparently I had talked to Chairman 
Gensler the next morning. He said he had been woken up at 2:30 
and informed of this. Do you have any idea why it took from 
11:30 or 10:30 until 2:30 before he was informed? Because I 
guess he was informed as soon as they knew. Do you have any 
recollection of what happened there?
    Mr. Corzine. To be careful with my remarks, Congressman, 
there was a presumption--although the CFO to my recollection 
was saying people were still working to try to reconcile the 
books. They were going through records and they hadn't 
established unequivocally that the money was missing but there 
was a serious concern that they were not going to be able to do 
that. As you probably have read, the--MF Global--I should say 
the firm was working to be sold at the time and we were in the 
process of doing due diligence with that prospective buyer and 
that individual buyer obviously wanted this reconciliation 
established as well.
    Mr. Peterson. So I take it that there wasn't any kind of 
explanation given to you at the time about why this happened?
    Mr. Corzine. Nothing satisfactory.
    Mr. Peterson. Pardon?
    Mr. Corzine. Not a satisfactory explanation, although 
theories and mostly unreconciled accounts that they were 
attempting to go through, not unlike what I think now is being 
reconstructed. But again I have to--I really should not 
speculate. But that was the efforts that were being put in 
place at that time.
    Mr. Peterson. And so at any point during your tenure I 
assume from what you have said that you were not aware of any 
segregated commodity customer funds being transferred to the 
broker-dealer arm or otherwise?
    Mr. Corzine. I am not--again I have not reviewed records 
and to be absolutely precise of whether there was some small 
entry at some point, but I don't remember. As I sit here and as 
I said to the Chairman, I feel comfortable there was no 
intention certainly on my part to violate any of these 
segregation rules.
    Mr. Peterson. So in your testimony you say you have little 
expertise in operational aspects of the business such as 
movement of cash and collateral and rules and regulations 
governing the various operating business. So who at MF Global 
had that expertise? Who did you rely on for that?
    Mr. Corzine. Sir, every firm would put in place control 
elements, policies, procedures, hire people to give assurance 
to ourselves in the first instance, to our auditors and 
regulators in the filings that we would make to make sure those 
were true and accurate. And at least in the experience of the 
19 months--roughly 19 months that I was at the firm, certainly 
after I got my feet on the ground I had confidence that people 
were doing that. We went through, as I suggested to the 
Chairman, audit committee reviews of the various procedures 
and------
    Mr. Peterson. There was not one person that------
    Mr. Corzine. Well, it--ultimately, the CEO is responsible 
for all aspects of------
    Mr. Peterson. Well, I understand that------
    Mr. Corzine. And then the CFO is responsible for the 
financial aspects of the firm. And there are people in our 
organizational chart that were responsible for the operations 
aspects of the firm. And there are people who are responsible 
for the auditing aspects of the firm, including, by the way, a 
separate group to assure management or to give confidence to 
management that you could comfortably sign the Sarbanes-Oxley 
affirmations on quarterly financial statements.
    Mr. Peterson. Well, I am sure there are different people 
but who had the authority to move customer funds from 
segregated accounts? Is there somebody there------
    Mr. Corzine. I believe that it is a team of people in our--
----
    Mr. Peterson. So there are a number of people------
    Mr. Corzine. Cash financing, cash management that have that 
authority. I don't think it rests with any one single 
individual, although there is a CFO of our--was a CFO of our 
North American operations, a CFO of European operations, 
Haitian operations. That individual, again, in a normal course 
of an organizational structure that would have people who 
handled cash management, handled controls, and would report to 
them. Ultimately, there is somebody that hits a button. I 
wouldn't--probably don't to this day probably would not have 
known who that person was that would send money under the 
system. I--one of the reasons that I have been careful to say 
that without looking at records it is very hard to try to 
reconstruct from the position that I held how that all would 
have worked. It is a complex process.
    Mr. Peterson. Just a couple things here. Did your firm 
invest customer segregated funds in sovereign foreign debt?
    Mr. Corzine. To my recollection--and again all records 
would verify this--the answer to that is no. The sovereign 
positions were held at the broker-dealer and they were not a 
part of the FCM process.
    Mr. Peterson. And I don't know a lot about this business 
but I am told a good part of the profitability of the FCM is in 
the earnings or arbitrage on the customer accounts as opposed 
to the commissions that are earned.
    Mr. Corzine. I won't bore you with rehashing what is in the 
oral statement, but we try to make it precise. You buy a 
security that yields five percent------
    Mr. Peterson. Right.
    Mr. Corzine.--and we finance a security to maturity with a 
payment of two percent of interest to who is financing you, and 
the difference is the profitability that you would make on----
--
    Mr. Peterson. Right.
    Mr. Corzine.--that RTM.
    Mr. Peterson. Yes, but what I was asking is is that a 
bigger part of your profitability than the actual commission 
business itself?
    Mr. Corzine. No, the commission business is still a larger 
percentage of revenue.
    Mr. Peterson. Revenue but I mean are you making money on 
that or where are you making money?
    Mr. Corzine. The--as I--again I tried to frame some of that 
history of MF Global. The FCM business is under enormous 
pressure------
    Mr. Peterson. Now that is what I was getting at.
    Mr. Corzine.--given the legitimate competition for 
commission, high-frequency trading puts enormous pressure on 
it, and so commissions had declined and frankly we had not 
stayed up-to-date with technology so that we were still voice-
brokering much more than technological delivery or--of 
brokerage services. And probably more important than any 
element in the current environment is that the extended period 
of low interest rates in the United States and around the globe 
had compromised what kind of spread an FCM like MF Global would 
be able to earn on those balances. On an upward-sloping yield, 
higher rates would have been positive for the earnings. They 
weren't that--from our FCM business was--made it much, much 
more difficult to be successful. Had other long-term aspects 
that I spoke about in my oral--I mean in my written statement 
that were attractive because of the reach and the scope of the 
business and its reach and scope to clients, but it was a 
business in stress.
    Mr. Peterson. Thank you, Mr. Chairman, for your indulgence.
    The Chairman. The gentleman's time has expired. The chair 
now recognizes the gentleman from Virginia for 5 minutes, Mr. 
Goodlatte?
    Mr. Goodlatte. Thank you, Mr. Chairman. And of course then 
I would like to follow up with some of the questions regarding 
what happened to the best of your knowledge. Can you tell us 
what role you personally played in monitoring the segregation 
of customer funds?
    Mr. Corzine. Congressman, my role would be primarily to 
bring assurance to myself on an ongoing operating basis that we 
had the people, the policies, the procedures in place to 
maintain that segregation, which, as I had said to previous 
questions, at least until those last few chaotic days, how 
comfortable we had adhered to.
    Mr. Goodlatte. How often were you shown data demonstrating 
that customer funds were intact?
    Mr. Corzine. I was aware that we had to make those 
calculations daily. I didn't look at those on a daily basis.
    Mr. Goodlatte. How often would you say you did look at 
them?
    Mr. Corzine. I wouldn't say I looked at them other than the 
fact that I was assured that they were calculated every day and 
submitted to the appropriate bodies.
    Mr. Goodlatte. And when did you first discover that the 
segregated accounts were missing funds?
    Mr. Corzine. As I had answered in previous questions, the 
lack of reconciliation was brought to my attention with regard 
to many millions on Sunday.
    Mr. Goodlatte. Which Sunday?
    Mr. Corzine. The 30th. October 30.
    Mr. Goodlatte. Got you. And are you aware of any instances 
prior to the events immediately preceding the bankruptcy in 
which there were shortfalls in consumer funds?
    Mr. Corzine. I am not aware of any shortfall that had been 
presented to me.
    Mr. Goodlatte. Prior to learning that on the Sunday, 
October 30.
    Mr. Corzine. Prior to--my recollection of events.
    Mr. Goodlatte. And is it possible that any such shortfalls 
could have gone undetected by you or other senior management?
    Mr. Corzine. I am not being flip. Apparently, there were--
----
    Mr. Goodlatte. What I am trying to get at is is this 
something that has been going on for a long time or did it----
--
    Mr. Corzine. Yes.
    Mr. Goodlatte.--suddenly happen------
    Mr. Corzine. My impression, Congressman, is------
    Mr. Goodlatte. Someone made a decision to raid these 
accounts in order to recover for------
    Mr. Corzine. My impression of it, Congressman, is is that 
in the chaos of the last few hours and days either a 
miscalculation or money that was expected to come in versus 
transactions that occurred as I think I said in my statement.
    Mr. Goodlatte. It would be a rather large miscalculation, 
wouldn't it, missing $1.2 billion?
    Mr. Corzine. I agree.
    Mr. Goodlatte. Have customer funds at MF Global ever been 
used to fund investments in its house or proprietary accounts?
    Mr. Corzine. To my knowledge, customer funds, segregated 
funds for futures accounts have been invested in what I would 
call Rule 1.25 eligible securities or were held in depositories 
for the client.
    Mr. Goodlatte. And did your firm ever invest the customers' 
segregated funds in foreign sovereign debt without first the 
approval of the customer to make such an investment?
    Mr. Corzine. Congressman, any recollection I have, that did 
not occur.
    Mr. Goodlatte. And when you have these separate segregated 
funds, I mean the money is not in a vault. You put it 
someplace. What was the------
    Mr. Corzine. Generally, it is invested in securities that 
are allowable under the 1.25 rule or it is in depositories.
    Mr. Goodlatte. But there is some question about whether 
securities under the 1.25 rule could also have included foreign 
sovereign debt.
    Mr. Corzine. Again, I am--I don't want to claim that I am 
the world's greatest expert here, but I think that that is only 
available if you have foreign deposits, foreign denominated 
currency.
    Mr. Goodlatte. And from what you have learned since you 
became aware of this in late October, is it your impression 
that money was taken from those funds to invest in foreign 
sovereign debt or was it used for other purposes?
    Mr. Corzine. Congressman, I really--I don't want to 
speculate and I don't have the information that would allow me 
to do that. As you know, I left on November 3 and I have had no 
access to books and records. And all I can do is read the same 
reports that are in the public forum. And I must say that those 
are confusing to me.
    Mr. Goodlatte. Me, too.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Pennsylvania 
for 5 minutes.
    Mr. Holden. Thank you, Mr. Chairman.
    Senator, I have two questions and one of them you addressed 
several times already but I want to make sure I understand 
clearly your answer. Commission Regulation 1.10 requires an FCM 
to file monthly fiscal reports. Each report must file with an 
oath or attestation and since an FCM is a corporation, it must 
be signed by the CEO or the CFO. From your previous answers, I 
assume the CFO was signing the monthly reports, correct?
    Mr. Corzine. I presume so myself, Congressman, since I am 
not aware of signing those reports.
    Mr. Holden. So in your best recollection he would have been 
the one signing the October 2011 report?
    Mr. Corzine. To be honest, I have no recollection 
whatsoever, but I know to the best of my knowledge anyway I 
don't think I signed those reports.
    Mr. Holden. And in your written testimony, you stated that 
you wanted to voluntarily testify before this Committee in 
January to give you more time to have access to the records so 
you could respond to this Committee's inquiry. Since it has 
been over a month since you stepped down and you have not had 
access to those records, what made or makes you think you would 
have access between now and the 1st of the year?
    Mr. Corzine. Well, that is a good--first of all, it is a 
good question, Congressman. My expectation is is that we will, 
as we get farther down this path, have access. We have requests 
into the Trustee of the holding company for access to my e-
mails, papers, files, things that would potentially shed light 
and give me the ability to be more precise in my answers.
    Mr. Holden. So actions you would take to your counsel to 
try and gain records is what would make you think you would be 
more helpful------
    Mr. Corzine. Right.
    Mr. Holden.--in the next several weeks?
    Mr. Corzine. Right.
    Mr. Holden. Thank you, Mr. Chairman.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentleman from Illinois for 5 
minutes.
    Mr. Johnson. Thank you, Mr. Chairman, Members of the 
Committee.
    Senator, Governor, Mr. Corzine, in my comments, sir, both 
comments and questions and there is some kind of a hybrid so 
you will have to consider them accordingly, I represent--and I 
think the people in this room represent--a large number of 
ranchers, farmers, small business people whose lives and 
livelihood have been jeopardized by their investment, which has 
apparently gone south. My question is do you have an estimate--
and I know you can't tell us exactly--as to how much money 
collectively at this point has been lost by those investors?
    Mr. Corzine. Congressman, that is a question I would like 
to know the answer to as much as you and I am hopeful that 
there will be effective recovery and reconciliation of these 
accounts.
    Mr. Johnson. I would ask this further. I haven't done a net 
worth analysis of individuals who have testified before this 
Committee, but at least according to any accounts, you are a 
person of substantial wealth and I congratulate you on your 
acquisitions. My question for you on behalf of these people who 
are largely small farmers, small businesses, co-ops all over 
the country, assuming that they are not made whole, are you and 
other executives of your company willing to stand the loss with 
your personal fortunes and allow them to be compensated and 
made whole?
    Mr. Corzine. Congressman------
    Mr. Johnson. Either yes or no, it is fairly simple.
    Mr. Corzine. Congressman, I don't think that this will go 
unresolved.
    Mr. Johnson. Assuming it does go unresolved through the 
system, and it appears that there is a lot that is falling 
through the cracks, are you willing to commit that you will 
commit yours and the other executives' personal fortunes------
    Mr. Corzine. As I am sitting here------
    Mr. Johnson.--to making these people whole?
    Mr. Corzine.--today I would not do that.
    Mr. Johnson. My second question is Mr. Gensler has decided, 
and I think appropriately so, to recuse himself on this issue 
largely I think because of your relationship and I guess I 
would say the whole Goldman Sachs fraternity which would 
encompass a number of individuals, including foreign ministers 
of several of the countries in Europe to which you invested. I 
guess my question is if he did that within the last several 
days and given the fact that you probably occupy in some ways a 
position kind of semi-analogous to an attorney before a judge 
where recusal would be appropriate, why didn't this happen a 
year ago? Given your relationship and the CFTC's oversight 
relationship with your company, why wasn't recusal something 
that was pursued a lot earlier in the process?
    Mr. Corzine. Congressman, I think you can expect that I 
would not really speculate about the internal considerations 
that Mr. Gensler or the people at the CFTC took. I hope that we 
demonstrated that in the normal course------
    Mr. Johnson. I am down to a minute and 45 seconds, so I 
appreciate your response.
    I am quoting from you several days ago when you indicated, 
``as the chief executive officer of MF Global, I ultimately had 
overall responsibility for the firm.'' Then you go into in the 
course of a statement or subsequent statements to indicate 
everybody else in the process other than you who was 
responsible for this. My concern is that based on a failure to 
segregate funds and/or a failure to oversee the operation of 
the company and/or a technical deficiency in terms of the 
overall responsibility of governing the firm, something fell 
short. And at the end of the day, the Members of this Committee 
and I have people that live in the real world as you do, a lot 
of people who have suffered dramatically and will suffer since 
they won't be able to buy seed, they won't be able to buy 
equipment, they won't be able to invest for the future year, 
this coming year in what they do. They have suffered 
dramatically.
    And while I certainly commend you in your life history, you 
have been the leader of a state and represented a state with 
millions of people, you have been a CEO of major corporations, 
people have given you a lot of responsibility, fiduciary 
capacity, and I am concerned, frankly, that those capacities 
have fallen short and that a lot of individuals all over the 
country and the people they represent are going to wind up 
holding the bag because of what is either negligence and/or 
commingling and/or abnegation of your responsibility as a 
fiduciary in that capacity.
    So I guess I am down to 14 seconds. I appreciate your being 
here. I also appreciate your not using the veil of the 5th 
Amendment to refuse to answer questions. I must say there are a 
lot of unanswered questions that are going to be answered 
hopefully--and I think you would agree--over the course of the 
next several months so that my constituents, these individual 
constituents are made whole and life can go on out in the real 
world outside the beltway of this process, outside the beltway 
of Wall Street where people live in an everyday world who have 
to make a living. And at this point they are hurting real 
badly.
    The Chairman. The gentleman's time has expired.
    Mr. Corzine. If I may, Mr. Chairman, just respond to say 
that I share the sentiments that the Congressman expresses with 
respect to the people who are caught in the crossfire of this.
    Mr. Johnson. Thank you. And we will be anxious to see the 
next few months.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Iowa, Mr. 
Boswell, for 5 minutes.
    Mr. Boswell. Well, thank you, Mr. Chairman. And in the 
interest of time I don't see much point in repeating so many of 
the things that have been said.
    I am just curious as we think about the capital investment 
that people that I represent have to do to put a crop in and so 
on--and you know all about that--but what would you say to 
them? What would you suggest we say to them as they contemplate 
on how they deal with futures, the market, hedging funds, to 
use the system? What do we tell them? What lesson have we 
learned?
    Mr. Corzine. Congressman, first of all, I would convey the 
kinds of sentiments that I spoke to the previous Congressman 
about at a personal level. I believe that and have the 
expectation that given some of the options that I have put into 
my written testimony and oral testimony and the hard work that 
regulators and the Trustee know that the missing funds will be 
found. That, first and foremost, is the obligation. I would 
expect and legitimately so--and these kinds of hearings help 
bring out some of the elements of--where exposures exist that 
should be corrected when they are understood in the light of 
the facts. And then hopefully that can address some of those 
holes in a way that gives people greater confidence in the 
markets, going forward. There is no question that futures 
markets, security markets are essential for the operations of 
our economy and the global economy at large.
    Mr. Boswell. Well, with that I am going to yield back, Mr. 
Chairman, but I would just say to Governor Corzine, I would 
that as we continue to discuss this, because of your 
background, that we might call on you to make a suggestion or 
two beyond what you have already done. Thank you for your time.
    I yield back.
    The Chairman. The gentleman yields back the balance of 
time.
    The chair now recognizes the gentleman from Iowa, Mr. King, 
for 5 minutes.
    Mr. King. Thank you, Mr. Chairman. I appreciate this 
hearing and, Governor Corzine, I appreciate your testimony as 
well. I listened to some of the comments here and I didn't 
think I would probably say it but I did hear from Mr. Johnson 
from Illinois about personal risk being part of this. And I 
know this has got to weigh heavily on your conscience. It might 
be a great loss to others and may not be a significant personal 
loss to you, but I just ask you do you anticipate a significant 
personal loss when this has all shaken out in proportion to 
those who are investors who entrusted you with their money?
    Mr. Corzine. Congressman, first of all, the hope, my own 
expectation even at these late hours are that the money will be 
recovered, but no matter the anguish that individuals feel 
because they are uncertain is very serious. And for that I both 
apologize and I will certainly do those things that I can to 
help assess--make that process------
    Mr. King. I am convinced of that, but do you anticipate a 
proportional personal loss?
    Mr. Corzine. I think I will repeat what I said to 
Congressman Johnson.
    Mr. King. Then let me just go another way here and looking 
at some of the reports and I think the agriculture piece of 
this thing will continue to be thoroughly examined. So I look 
at the investment in the bonds of Spain, Italy, Portugal, 
Belgium, and Ireland, that investment that was made and that 
seemed to have triggered this. And as I look at that list, that 
is the list of the countries that we have had the greatest 
concern about except Greece. Was there a rationale for not 
trading also in speculating in the bonds of Greece as well as 
the other sovereign nations that I have talked about?
    Mr. Corzine. If one did a detailed credit analysis of the 
underlying sovereigns, which not only people at MF Global but 
other financial analysts would have contributed, Greece seemed 
as a country that could potentially--with a significant 
probability go through a restructuring process.
    Mr. King. Substantially less solvent than the other 
countries?
    Mr. Corzine. A substantially higher debt to GDP, much more 
unreliable statistics on which one could------
    Mr. King. Well, I know that clock is ticking and I talk 
faster than most of the folks in this capital, but is the 
investment in the countries, was it made with the anticipation 
that Greece would be bailed out?
    Mr. Corzine. The investments in those five countries were 
made because there was a judgment, as I said it was a judgment 
challenged by people and------
    Mr. King. And was part of that judgment that Greece was 
likely to be bailed out by the rest of the------
    Mr. Corzine. No, no. The answer is no to that.
    Mr. King. Okay. Thank you. Then I would just go back to 
some of the other history that sticks in my mind here. The news 
reports about the investments by the State of New Jersey into 
Lehman Brothers shortly before the economic situation we all 
know so well in the fall of 2008, do you have an estimate or a 
number on how much money was lost over that investment into 
Lehman Brothers shortly before the fall if I can refer to that?
    Mr. Corzine. I don't recollect the amount of loss. And as I 
think------
    Mr. King. Would it be in the area of $100 million?
    Mr. Corzine. It may very well have been but I would suggest 
that we had an investment department that was separate from the 
Governor's department.
    Mr. King. Okay. And then when Governor Christie alleged 
that there were hundreds of millions of dollars that were 
transferred in the last hours before he was sworn in as 
Governor of New Jersey and that you had spoken to him and 
promised him that he had a $500 million surplus going in. It 
turned out to be less than that. I think you said in a news 
report $2.2 billion. I think you add the $500 million to that 
so that comes to around $2.7 billion of------
    Mr. Corzine. I think we had------
    Mr. King.--shortfall. I wanted to give you an opportunity 
publicly to respond to that. I don't know that I have seen a 
response in the media.
    Mr. Corzine. First of all, I think my former treasurer did 
respond to those numbers and there is a difference about the 
timing on when one was making those judgments. And I would have 
to go back and prepare myself to speak to that.
    Mr. King. Would you state, though, that the current 
Governor's allegations are substantially correct or incorrect?
    Mr. Corzine. I don't accept the analysis exactly as he has 
framed it. There was a growing shortfall, as you know, in the 
winter of 2009 and 2010. The economy was falling dramatically 
and revenues were falling and estimates with regard to what 
revenues would be collected were off in most states.
    Mr. King. And perhaps a compulsion to take risk. Thank you 
very much.
    Mr. Chairman, I yield back.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from California, Mr. 
Cardoza, for 5 minutes.
    Mr. Cardoza. Thank you, Mr. Chairman.
    Mr. Corzine, Governor Corzine, my grandmother, an Azorean 
immigrant to this country in the 1920s, who did not benefit 
from our fantastic education that both you and I benefitted 
from used to give me some great advice. She used to admonish me 
daily when she was still alive to always do the right thing 
when nobody was looking. Can you, sir, tell us today that while 
you have been the head of this organization, MF Global, that 
you always did the right thing when no one was looking, 
followed my grandmother's advice?
    Mr. Corzine. In every effort in intent in my actions were 
to do the right thing.
    Mr. Cardoza. When the wheels started coming off your 
company, did you set up a war room to try and deal with the 
financial crisis and figure out what was going on? Or did you 
bring your folks around you in the corporate room? How did you 
handle yourself at that point?
    Mr. Corzine. There were constant meetings, including with 
the board------
    Mr. Cardoza. Right.
    Mr. Corzine.--in the last few days.
    Mr. Cardoza. That is what I suspected. That is why I asked 
the question. And my next question is was there a point in time 
where you got the first inkling that there was a substantial 
amount of money that had disappeared, been stolen, we don't 
know what happened to it. That is one of the things that 
happened. At that very second that you got the first inkling 
that there was substantial loss in your corporation and that 
you were going to be held liable or your company was going to 
have to take this tremendous hit, what was the first thing that 
you thought of and did? Did you call the police? Did you run to 
the bathroom and throw up? I mean to me you lose a billion or 
$2 billion, that is------
    Mr. Corzine. Congressman, in those late hours--and I think 
I said this earlier to the other question--really was 
disbelief, stunned disbelief that this could be the case when 
many hundreds of millions was reported to be missing. And go 
back------
    Mr. Cardoza. I understand that------
    Mr. Corzine.--and check your work is the first response----
--
    Mr. Cardoza. I understand but I mean did you call and tell 
your CFO, expletive, expletive, expletive------
    Mr. Corzine. I was with the CFO.
    Mr. Cardoza. You were? Where is the money? I mean what was 
the first thing that you did? Do you remember?
    Mr. Corzine. The first thing that followed from this 
conversation was let us get the people to recheck the figures, 
make sure that we have done everything we can to appropriately 
confirm what you are suggesting. It wasn't--it was--it wasn't 
as if all expectations had been closed. There was still a hunt.
    Mr. Cardoza. I would have probably gone to the restroom and 
thrown up myself, but that is--thank you for the answer.
    A few years ago when I first came to Congress, I introduced 
an ethics bill that said if you break the public trust as a 
Member of Congress, as a member of the public society as a 
police officer, anyplace that you have the public's trust and 
you commit a crime in that public trust--and this came in 
response to my dealings with Ken Lay from Enron in California 
as State Legislator--I said you should do double the penalty. 
We passed that bill in the House. It didn't get through the 
Senate. But just looking back on your career in government and 
in business--because I think this applies to business as well--
when you are in a position of public trust, do you agree with 
me that we have a higher standard to the public? And if we 
don't rebuild that public trust in our governmental and 
business institutions that we are going to have a very 
difficult time in this country to succeed in the future?
    Mr. Corzine. I do agree with you, Congressman. And as an 
elected public official, the oath of office that I have taken 
deeply impacts how I try to address the efforts I fulfilled 
when I served in those offices. And I believe that to tell the 
truth as you know it is the responsibility of all of us and 
certainly one of those issues that I believe the public is 
concerned that they don't get a fair shake on today.
    Mr. Cardoza. Thank you for your answer and thank you for 
being here.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Texas, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Corzine, I want to go back to some of your earlier 
testimony because I think the question was asked of you: did 
you authorize the transfer of funds from the segregated 
accounts to other places? And the answer that you gave was no, 
I did not. You said, ``I never intended to violate any rules.''
    Mr. Corzine. I would repeat that in the context that there 
were people who handle the transfer of funds and I am not one 
of those. There are people------
    Mr. Neugebauer. That wasn't the question. The question was 
did you ever in the heat of the moment in those last days when 
you were trying to sell this company, trying to keep this 
company afloat to make the transfer, to hopefully kind of pull 
the rabbit out of the hat, did you ever authorize any of your 
people------
    Mr. Corzine. I never intended to authorize anyone.
    Mr. Neugebauer. So you never intended to but you may have?
    Mr. Corzine. If it did, it was a misunderstanding because 
there is no intention under any context that I can think of 
that I was authorizing tapping into segregated funds.
    Mr. Neugebauer. So the answer that you gave to this 
question so I don't want to mischaracterize this is you gave 
orders and you don't know whether you gave an order------
    Mr. Corzine. No, that is not what--since I don't have 
access to records or phone records or anything that I could 
rely upon, I can only say I know I had no intention to ever 
authorize the transfer of segregated monies.
    Mr. Neugebauer. So the answer is is you don't know whether 
you did or not?
    Mr. Corzine. I certainly couldn't confirm based on what I 
have in--available to me today, but I know what my intentions 
are, yes.
    Mr. Neugebauer. So earlier in the year you were granted 
primary dealer status by the Federal Reserve Bank of New York, 
is that correct?
    Mr. Corzine. Yes, sir.
    Mr. Neugebauer. And you were very proud of the fact that 
you all were able to achieve that and there are some reports--
and again as you said there are a lot of reports out there--but 
on a conference call you were exhorting the fact that you would 
really be able to take the company to a new level with this 
status. What was the strategy that being a primary dealer would 
give you?
    Mr. Corzine. Congressman, I don't recall framing it the way 
you would suggest------
    Mr. Neugebauer. Well------
    Mr. Corzine.--and matter of fact, it would be in my view 
inappropriate and probably would have been criticized by the 
Fed if I had. Now, I often was asked a question on calls what 
does it mean to have primary dealer status?
    Mr. Neugebauer. Yes.
    Mr. Corzine. It does mean that you have access at financing 
arrangements with some clients that you might not otherwise 
have. You have the ability to transact business with people 
around the globe that you would not otherwise be able to 
transact business with. It does give you the chance when the 
Federal Reserve is executing its open market operations to do 
that directly without having an intermediary to do that, which 
is certainly constructive. And I would--I am not walking away 
from the fact that it is better to have than not to have in the 
context of how clients and others would see you.
    Mr. Neugebauer. Yes, but there are only I think 20 
companies------
    Mr. Corzine. I think there are 21 today, but 20, yes.
    Mr. Neugebauer. And so what would be the criteria? I mean 
that is a fairly------
    Mr. Corzine. I am sorry?
    Mr. Neugebauer. That is a fairly prestigious designation. 
What is the criteria that your company had that would have 
caused the Fed to give you that status?
    Mr. Corzine. Well, first of all, the Fed tests you for a 
very long time to see whether you are transacting business and 
treasury securities, agency securities with estimates. Are you 
financing customers? Are you doing repurchase agreements, 
reverse repurchase agreements for clients so they could 
facilitate access at the market? I am under the impression that 
they have an under--don't recall the exact number but they have 
capital requirements. They review your systems and operations 
with onsite reviews and other things and observe your 
participation in markets.
    Mr. Neugebauer. Do you think it is a little strange that a 
company that had been consistently losing money, which would 
indicate to me would be a company that is deteriorating would 
get such a status to that?
    Mr. Corzine. My own perspective on this is is that we were 
at the time and it had gone on for a better part of 18 months 
then demonstrating that we were participating with clients at 
levels that were significantly higher than some of the other 
people recognized. We had adequate capital and while--as I 
indicated in my written testimony--our historical earnings 
hadn't been so good, they had gotten slightly better.
    Mr. Neugebauer. But two of your rating agencies, the SEC 
and FINRA, had questioned whether you had adequate capital or 
not.
    Mr. Corzine. Those questions came well after the 
designation, which I believe was early in 2010; the FINRA 
challenge was in August of 2010 if I am not mistaken. And that 
was with regard to their interpretation of how the capital 
haircut charges were applied to euro sovereigns.
    The Chairman. The gentleman's time has expired.
    The chair now turns to the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. David Scott of Georgia. Mr. Corzine, welcome to the 
Committee. I must say at the outset it is really at the height 
of disbelief that you as a former Senator, former Governor, you 
are the former head of probably the premier, most prestigious 
investment banking operation in the whole world, and to sit 
there and to say that under your watch as chief executive for 
$1.2 billion of customers' money, you know nothing about it. 
Now, the key to finding out where my constituents' money went--
I represent Georgia, a lot of farmers. They are sitting here 
watching trying to figure am I going to get my money back? The 
key to this is you. You are the CEO.
    Now, Mr. Corzine, who at MF Global was ultimately 
responsible for determining which products the company invested 
in on its behalf? Now, I would think that is you as the CEO. Am 
I right about that?
    Mr. Corzine. Ultimately, the Board of Directors at the 
recommendation of management, which I was the lead manager of, 
makes those decisions. It delegated authority and then the 
company operates within those authorities.
    Mr. David Scott of Georgia. Tell me this, what did you do 
at this company? Was it run by the board? Who made these 
decisions? Who made the decision to go in------
    Mr. Corzine. Ultimate decisions are always at a board in a 
public company on the recommendation--and I take full 
responsibility for the recommendations that went before that 
board, not tried to say otherwise. And so those investment 
decisions are ones that--particularly as it relates to the 
European sovereign RTM positions--rest in my judgment.
    Mr. David Scott of Georgia. Rests in your area. Now, 
explain to me when you came in you made that decision, and when 
you came in you had been in the company a relatively short 
time. And when you came in, your holdings in foreign sovereign 
debt was about $1.5 billion. In 11 months--that was as of 
October of last year, and now October of this year, that 
holding has ballooned up to $6.3 billion in foreign sovereign 
debt at a time when each of these foreign companies that you 
get into debt from are teetering on disaster. Was that your 
decision?
    Mr. Corzine. I take responsibility for that decision.
    Mr. David Scott of Georgia. Now, let me ask------
    Mr. Corzine. In my oral statement, Congressman, though, I 
would--I tried to give--I mean not--in my written statement 
some perspective on why I thought it was at the time that we 
took those decisions somewhat different than how one might 
assess it in the current environment.
    Mr. David Scott of Georgia. Now, Mr. Corzine, did you 
commingle customer funds with your proprietary funds?
    Mr. Corzine. The------
    Mr. David Scott of Georgia. Yes or no.
    Mr. Corzine. I am going to answer this question the same 
way--there was never any directed intent to commingle those 
funds.
    Mr. David Scott of Georgia. So in other words you could 
have? Throughout this hearing I can count the times you used 
the words ``never intent,'' ``not to my knowledge,'' ``not to 
my recollection,'' ``never intended to,'' and I understand the 
position that you are in. But Mr. Corzine, we have to find that 
money. We have to get that $1.2 billion and get it back out to 
our customers and to my clients and my farmers in Georgia. And 
as I said before, we have to get better answers than this from 
you because you are the CEO.
    Well, let me ask you this, Mr. Corzine. Did you use client 
funds to pay for or to pay off MF Global's debts and bolster 
the $6.3 billion purchase of sovereign European debt that led 
to your bankruptcy?
    Mr. Corzine. I am going to repeat what I said before. I 
have no recollection whatsoever of client monies being used--
client monies out of the FCM being used to purchase euro 
sovereigns. Again, the euro sovereign positions were held in 
the broker-dealer.
    Mr. David Scott of Georgia. Did you ever use your customer 
funds to buy foreign sovereign debt?
    Mr. Corzine. Client dollars that were in the FCM to my 
knowledge were not financed out of the FCM.
    Mr. David Scott of Georgia. Then why did you lobby the CFTC 
against proposed changes to the CFTC regulations that would 
have prevented futures commission merchants from investing 
customer funds in obligations of foreign governments? If you 
never did that, had no intention to do that, why did you lobby 
when they wanted to put tighter controls on that?
    Mr. Corzine. The meeting that you are referencing I presume 
is the July 20 meeting with Mr. Gensler, which actually is a 
conference call was about the percentages that--concentration 
percentages which actually I was more in support of the CFTC's 
recommendations, thought they should be modified a bit, but I 
was more in support of, and as it related to the internal 
repurchase agreements that CFTC just ruled on this last Monday.
    Mr. David Scott of Georgia. And if you weren't the one 
responsible or had a role in playing about the misappropriation 
and the loss of this $1.2 billion, somebody is. Who would that 
be?
    The Chairman. The gentleman's time has expired. The witness 
may answer.
    Mr. Corzine. As I have said repeatedly, we had people, 
policies, and procedures, and as I have said in my testimony, I 
don't know whether this is inadvertent. I don't know whether in 
the flows of transactions that were occurring--and there were 
more flows of transactions than typically occur at MF Global in 
the last chaotic days. So whether someone held onto some of the 
funds that were rightfully to have been delivered to MF Global, 
I--without being able to look in detail into those records, 
those are our options. And I don't have the ability other than 
to speculate where they would be.
    The Chairman. The gentleman's time has expired.
    Mr. David Scott of Georgia. Thank you, sir.
    The Chairman. The chair now recognizes the gentleman from 
Texas, Mr. Conaway, for 5 minutes.
    Mr. Conaway. Governor, thank you for being here.
    You have testified that you weren't an expert in all 
aspects of any business and no one really is but help us 
understand your appreciation for the duty that FCMs have to 
maintain segregated accounts. Now, was that something that you 
were aware of------
    Mr. Corzine. Yes, sir.
    Mr. Conaway. Was there somebody in your organization that 
when the report was prepared the next morning after yesterday's 
close of business and that was out of whack, their job was to 
come hunt you down and show that to you?
    Mr. Corzine. The------
    Mr. Conaway. I mean did the issue of segregated funds rise 
to that level in your mind.
    Mr. Corzine. If the--if there were an outage------
    Mr. Conaway. Right.
    Mr. Corzine.--it would be brought up in exception------
    Mr. Conaway. Right. And------
    Mr. Corzine.--not on the------
    Mr. Conaway.--would that have been something that you would 
have been made aware of or is that somebody else in your 
organization?
    Mr. Corzine. If there had been an unreconciled------
    Mr. Conaway. Right.
    Mr. Corzine.--circumstance, I believe it would have been--
----
    Mr. Conaway. Brought to your attention?
    Mr. Corzine.--raised to my attention.
    Mr. Conaway. All right. I am just trying to get a sense of 
how important MF Global's team felt segregated accounts were. 
We obviously think they are very important. That is the one 
area of this aspect that we are supposed to be paying attention 
to.
    In terms of tone from the top, many organizations take on 
the attitude of their leadership with respect to compliance, 
with respect to regulations and those kinds of things. The Wall 
Street Journal reported that you actually placed orders 
yourself on sovereign debt which is a whole different 
conversation, but in the placing of those orders, did you go 
through all the normal routine that anybody who has authority 
to place orders on behalf of MF Global would have gone through 
or did you------
    Mr. Corzine. Congressman, I in fact didn't place orders 
although I worked with traders who would------
    Mr. Conaway. Right.
    Mr. Corzine.--place orders.
    Mr. Conaway. And------
    Mr. Corzine. And I went through normal routines and we had 
special compliance oversight of my activities.
    Mr. Conaway. Okay. Well, that is helpful.
    One of the other aspects of leading a broker-dealer at a 
company in the financial services business that you are in 
obviously is a liquidity risk.
    Mr. Corzine. Absolutely.
    Mr. Conaway. You are not telling us that just showed up in 
October------
    Mr. Corzine. No.
    Mr. Conaway.--on your radar screen. You also had some sense 
that the second quarter results were not going to be as 
favorable as you wanted to see them.
    Mr. Corzine. We were very well aware------
    Mr. Conaway. Well------
    Mr. Corzine.--that either at the end of that second quarter 
or a third quarter, fiscal quarter, that the deferred tax 
asset------
    Mr. Conaway. Right.
    Mr. Corzine.--was going to have to be reduced.
    Mr. Conaway. Okay. So you are aware that during the July-
August-September time frame that you were going to get $120 
million hit just from the deferred tax asset. And we don't have 
to worry about what that is. But the bankruptcy filing said it 
was really a contraction of your proprietary trading helped 
drive much of the loss in that second quarter. But given that 
you knew about the deferred tax and potentially--I don't want 
to get off on that rabbit trail.
    You knew that MF Global faced a liquidity risk. When did 
you begin to put in place the steps necessary to protect MF 
Global from a liquidity risk? And then into October when the 
wreck started happening and the fur started flying, margin 
calls started happening and your customers started wanting 
their money back, your lieutenants are coming to you saying 
this is what we got to do. Did you ask them where did we get 
the money to meet those calls? Where do we get those from? In 
other words, we are short $1.2 billion. Where were your 
lieutenants telling you here is how we solve the problem with 
respect to this run on the bank? What were they telling you? 
Where were you getting the money?
    Mr. Corzine. We had done stress tests about securities we 
would be able to sell in the broker-dealer for purposes of 
generating free-up of margin, repurchase agreements that we 
would be able to close. That would accomplish that. But more 
than anything else we had undrawn credit lines that were held 
in reserve for crunch time------
    Mr. Conaway. Why didn't that system work?
    Mr. Corzine. The real answer is I don't know all of the 
details of what--I really don't, Congressman. There are many 
things that were presumed to have been able to generate 
liquidity. For instance, did all the banks actually------
    Mr. Conaway. Right.
    Mr. Corzine.--live up to their delivery of the cash that 
was supposed to be available------
    Mr. Conaway. Line of credit.
    Mr. Corzine.--by the line.
    Mr. Conaway. Yes. Let me finish off. Back on the culture 
issue, when things got crazy on Wednesday, Thursday, and 
Friday, you had people in place who knew the difference between 
segregated funds and proprietary funds. They knew ahead of time 
what was right and what was wrong and character is tested in 
those crucibles. Is there anything that you think you could 
have ever done that would have said to them that that is okay, 
that in these extreme circumstances, the disaster we are in, it 
is going to be okay to breach those--the folks that actually do 
it, they can't hide behind not knowing the difference. So the 
team you put in place------
    Mr. Corzine. I don't think anyone would interpret 
anything--I don't think. You know, not on the other side of the 
phone, but there was never any intent------
    Mr. Conaway. Well, that is------
    Mr. Corzine.--in either my language or actions------
    Mr. Conaway. I understand the reasons why you keep using 
the word ``intent.'' And I am not trying to pin you down. We 
are not the prosecution in this instance. But the team failed. 
We have had testimony that the Lehman Brothers had a 
catastrophic failure and their FCM business moved the next day 
without a penny. I have to believe that the chaos surrounding 
the bankruptcy of Lehman was not dissimilar to the one that 
happened at MF Global. Why was the team at MF Global unable to 
do the right thing in the heat of the moment?
    The Chairman. The gentleman's time has expired. The witness 
may respond to the question.
    Mr. Corzine. First of all, there is a proportionality 
difference. The FCM is significantly larger------
    Mr. Conaway. Okay. I see.
    Mr. Corzine.--and global. Our FCM was a much bigger part of 
our business than theirs. That doesn't answer your question 
because I don't know the answer to that and I would be 
speculating if I did.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Connecticut for 
5 minutes.
    Mr. Courtney. Thank you, Mr. Chairman.
    Mr. Corzine, in your testimony you mentioned and you 
mentioned earlier the phone conference with CFTC regarding the 
1.25 rule, the Dodd-Frank rulemaking. And in your testimony you 
said that the principle topic of discussion was whether 1.25 
should be changed to prevent FCMs from engaging in repurchased 
transactions with related brokers and dealers. Earlier today, 
we spent a lot of time with Commissioner Sommers about the rule 
that was adopted on Monday regarding foreign sovereign debt, 
and she was repeatedly pointing out to us that that rule 
wouldn't have changed anything because it only applied to 
customer accounts. The problem was more in the broker-dealer 
accounts based on what they knew at this point.
    So I guess the question I would like to ask in looking 
again at MF Global's letter to the Commission regarding the 
rulemaking when it was a comment that they submitted was the 
rule that was adopted on Monday regarding in-house repurchase 
agreements--I mean what impact could that have had in terms of 
the events that you described in your testimony regarding 
repurchase?
    Mr. Corzine. First of all, the rule that was adopted on 
Monday--and I am not quite as well versed as I would be if I 
were still in the business--did not deal with foreign 
sovereigns other than that they were precluded without 
application for exception.
    Mr. Courtney. Right.
    Mr. Corzine. But they were never available for any purposes 
as far as I know as well as I can recollect the rules except 
for deposits that were taken from customers in foreign currency 
denominated deposits.
    Mr. Courtney. Okay.
    Mr. Corzine. This was not the issue that not only MF Global 
but the FIA, the CMA, many--most of the FCMs if not all the 
FCMs were petitioning because of the cost and inefficiency that 
would occur if that--those internal repos were not allowed to 
be able to take place.
    Mr. Courtney. Well, Chairman Gensler certainly in his 
comments on Monday felt that they had taken a great step 
forward in terms of trying to reduce the risk that is 
surrounding these repurchase agreements. I mean are you just 
saying it is irrelevant? It is a dead letter?
    Mr. Corzine. Clearly, the issues of having an FCM and a 
broker-dealer in the same entity certainly in a time of stress 
as MF Global was experiencing in the last days, I think does 
call--or raises the issue that I think Chairman Gensler was 
trying to speak to in an ongoing operating basis. I probably 
stand with the arguments I made, but at a time of stress, his 
arguments may be much stronger.
    Mr. Courtney. Well, I am glad to hear you say that because, 
having been here in 2008 and when the world was collapsing and 
frankly the process of enacting Dodd-Frank was like crawling 
over broken glass, in terms of just doing something so complex. 
I think it was our duty to try and address the fact that there 
clearly were systemic problems that exposed the taxpayer and 
the middle-class to the damage that could happen when these 
systems malfunctioned.
    And again the efforts by the Commission have just gotten 
trashed in this room frankly for the last year in terms of 
trying to implement Dodd-Frank. You know, I just think it is 
time for us to recognize that everybody can't have it the way 
they would always want it. There have to be some rules in place 
to limit the high risk that, again, exposes farmers and small 
businesses and people who are just trying to lead their lives 
and have some confidence in these markets.
    And you know what happened in this incident is that there 
are going to be lots of--I am sure investigations that are 
going to look for, along with the bankruptcy court and maybe 
other authorities, but we as lawmakers. I mean our job here is 
to try and figure out the right way to balance rules that will 
prevent these things from recurring again. And frankly I am 
just, in retrospect I just wish the Commission had moved faster 
in terms of implementing these rules because I just think it 
would have created a structure which reduces risk which, at the 
end of the day, is what we have to do if we are going to have 
any stability in this economy.
    I yield back.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Nebraska for 5 
minutes.
    Mr. Fortenberry. Thank you, Mr. Chairman.
    Thank you, Governor, for your willingness to come today and 
answer questions.
    Governor, I was recently at an Eagle Scout ceremony and one 
of the young people there stood up and he said this: he said 
America depends upon the quality of her citizens. And I was 
struck with the beauty, the simplicity, and the profundity of 
that statement. The problem here is we can't pass enough laws 
fast enough, create enough regulatory entities quick enough if 
there is a collapse of the types of values that lead to 
responsibility and commitment to the common good. We simply 
can't do it. Therefore, it is incumbent upon those of us in 
government, business, the media, education, the other 
institutions that shape our culture and give us good order, 
fairness, justice, opportunity, it is incumbent upon all of us 
to act in the public's trust. And in this regard I am going to 
ask you a few questions. Who owned MF Global? I asked the 
question of the regulator prior to this. They couldn't give me 
an answer. I would like to know.
    Mr. Corzine. MF Global is a public company. Shareholders 
broadly held the stock. There is actually a report I can give 
you exactly who those people are or institutions that were the 
owners.
    Mr. Fortenberry. Who were those institutions if you could 
identify them?
    Mr. Corzine. Well, there is a whole range of large 
institutions.
    Mr. Fortenberry. But I would like to understand the 
interconnections here of the financial industrial complex.
    Mr. Corzine. Well, fidelities, mutual fund complex, there 
are a number of other institutional holders like that. There 
are hedge fund holders. There are individual holders. I am a 
holder. There are private equity holder J.C. Flowers, which I 
mentioned inside my remarks.
    Mr. Fortenberry. Who hires you?
    Mr. Corzine. The board of MF Global.
    Mr. Fortenberry. Who?
    Mr. Corzine. The board of MF Global is the hiring--
responsible hiring authority. If you are asking who introduced 
me to------
    Mr. Fortenberry. It would helpful to know the story.
    Mr. Corzine. Some of this is in the written statement but I 
had as a private investor a holding in the private equity firm 
J.C. Flowers. The CEO of MF Global in March of 2010 abruptly 
resigned. They were about to instigate a search for a CEO at 
the board level and I presume it was suggested from the board 
member from J.C. Flowers that sat on that board that they ought 
to talk to me.
    Mr. Fortenberry. We talked a little bit about this in your 
testimony but just basically describe your job.
    Mr. Corzine. As the CEO of MF Global? First of all, set 
strategy. I think I spoke to--about--in my written testimony 
that needed to be defined not just with myself but with our 
board, needed to represent the firm externally with clients, 
counterparties, regulators, and given the business strategy 
that we were about, I needed to make sure that we had 
personnel------
    Mr. Fortenberry. And in that regard who did you hire?
    Mr. Corzine. A whole host of folks. There was significant 
change------
    Mr. Fortenberry. Main principles?
    Mr. Corzine. Well, we hired a new chief operating officer, 
new internal audit, new chief risk officer, new heads of 
Europe, new head of Asia, lots of------
    Mr. Fortenberry. Sorry, my time is running a little short. 
You have said that it was never your intention to commingle 
segregated funds. How could you, in a scenario in which you 
could unintentionally do that?
    Mr. Corzine. Well, that would be speculative on my part. 
Someone could misinterpret we have to fix this, which I said 
the evening of October 30. We have to find the money.
    Mr. Fortenberry. Mr. Chairman, my time is------
    The Chairman. Would the gentleman yield for one question on 
his line of------
    Mr. Fortenberry. From the Governor or from you?
    The Chairman. Just yield to me------
    Mr. Fortenberry. Yes, I--if I could conclude------
    The Chairman. Mr. Corzine--and then we will conclude of 
course with you--what percentage of the equity or ownership in 
MF Global did you own for curiosity's sake? Not a very large 
amount I would assume?
    Mr. Corzine. No. No.
    The Chairman. Less than ten percent, less than five 
percent, less than one percent?
    Mr. Corzine. It was I think closer to the latter than any 
of the other numbers you mentioned.
    The Chairman. So a single digit or in that range somewhere? 
Is that the typical nature for senior management of these kind 
of firms, these very small equity stakeholders in the inner----
--
    Mr. Corzine. It is not only the amount that I had bought 
but it was also how my compensation was structured, which I 
also went through.
    The Chairman. Stock options?
    Mr. Corzine. Stock options.
    The Chairman. So typically in a company like this or one 
that you would be a part of, over time your interest in the 
company would grow through the use of stock options, a reward 
for------
    Mr. Corzine. Right.
    The Chairman.--good management.
    Mr. Corzine. Correct, Mr. Chairman.
    The Chairman. So just from the perspective of asking 
questions about the nature of your business, then, a person in 
a role like that in a company just to the layman's perspective 
it would appear that the more aggressive the enterprise, the 
better those kind of rewards would be. Now, certainly most of 
the investors are very sophisticated people, correct? They 
understand the nature of the kind of enterprise that you have 
been a part of------
    Mr. Corzine. Most of these investors are strategic 
investors.
    The Chairman. In Oklahoma we would call that a high-powered 
gun. I yield back to the gentleman from Nebraska.
    Mr. Fortenberry. Mr. Chairman, I will just conclude by 
saying this: I think what we have here is another example of 
inordinate risk-taking, leveraging other people's money. We 
have the possibility of an improper commingling of funds, but 
the third point is I think we have another assault on the 
nation's trust of a financial institution. I will yield back.
    The Chairman. The gentleman yields back.
    The chair now recognizes the gentlelady from Alabama for 5 
minutes.
    Ms. Sewell. Thank you, Mr. Chairman.
    I want to begin with a brief statement or a comment before 
I start my questioning.
    You know, this hearing is important today not only because 
we are trying to get to the bottom of how thousands of farmers 
and growers and producers currently have lost their capital and 
are struggling to figure out how they are going to make ends 
meet, but we are also here because this has vastly affected 
hundreds of Americans who have lost their jobs directly and 
indirectly because of the loss. And in these trying and 
challenging economic times, it is even more important I believe 
that we who have the public trust really do become good 
stewards or try to be good stewards of the money and that 
trust. And so my hope today is that we not only get to the 
bottom of what happened to MF Global but how this affects more 
broadly the financial industry generally, and in particular, 
how it affects our farmers and growers.
    Having said that, I spent my formative professional career 
as a securities lawyer in New York City, and I can tell you 
that what differentiated me as a lawyer and the investment 
bankers that I represent is our appetite for risk. And so I 
guess I ask you, Senator Corzine, as the CEO and Chairman of MF 
Global, the direction and the appetite for risk in steering 
this company, could you speak a little bit about how MF Global 
was positioned prior to you getting there and what your hopes 
were when you assumed the responsibility of CEO, and how you 
would rate the risk appetite of the company and perhaps 
yourself?
    Mr. Corzine. Thank you, Congressman--Congresswoman, it is--
it primarily was a broker firm, commissions and earnings on the 
balances as the basic source of revenue, although there were 
some principle risk-taking. They had already begun to apply for 
that primary dealership, so they were taking broker-dealer 
risks and the government securities business did the same and 
European sovereigns in our European operations before I came. 
And one of the commonly used metrics with respect to risk is 
what we call value at risk and that was roughly $5 million 
before I came with an authorization or a delegation of 
authority at $15 million. And we were pretty much at that level 
while I was at the firm. There certainly were periods where it 
was higher and there were periods when it was lower both on 
reporting and internal basis.
    Ms. Sewell. But the use of the repo to maturity 
transactions used to mask--for lack of a better word--any 
shortfalls? I mean like what was the direction that was given 
by yourself as management with respect to those kinds of 
transactions?
    Mr. Corzine. The repo to maturity positions look like 
things that we had done on repo to maturity with U.S. 
treasuries, with U.S. agencies, with corporate--actually at 
larger amounts than what we were talking about with the euro 
sovereigns.
    Ms. Sewell. But we also knew that the euro sovereigns were 
becoming quickly insolvent. I mean the world events were 
surrounding a lot of the eurozone countries. It was obviously 
quite known to most of us, very different------
    Mr. Corzine. There is clearly a difference although they 
were still highly rated by agencies and, as I said in some of 
the earlier remarks, my other metrics that one would judge 
based on margins that were required by clearing organizations 
or individuals, it was our judgment that they were--
particularly the ones that we were involved in were less risky 
than would otherwise be the case. The point being------
    Ms. Sewell. My time is actually kind of running out and 
really my last question is what do you think would be a fair 
outcome given the state of affairs currently? If you could wave 
a magic wand and figure out how we solve this crisis that we 
are currently facing with MF Global? What do you think would be 
a fair settlement?
    Mr. Corzine. I am absolutely hopeful that a full 
understanding of what happened in those last few days will 
review the source of where these monies are. I continue to 
believe that those resources are in the hands of either 
counterparties or there has been some mistaken forwarding of 
those to some place that I wouldn't know. That is what I tried 
to write in my remarks.
    Ms. Sewell. Well, hope does spring eternal.
    And I yield back the rest of my time.
    The Chairman. The gentlelady's time is expired.
    The chair will now recognize Mrs. Schmidt for 5 minutes and 
Mr. Scott should stand ready.
    Mrs. Schmidt. Thank you.
    Mr. Corzine, I know that you said that you weren't quite 
sure about when the money was wire transferred, but Mr. 
Corzine, MF Global's 10-K for the year ending March 31, 2011, 
shows a net position in the price risk and default risk at $6.3 
billion of the debt in Belgium, Italy, Spain, Portugal, and 
Ireland, but Bloomberg reported that you pushed this foreign 
sovereign debt to $11.5 billion and your hedges were 
insufficient to dampen your risk. Based on this, some observers 
have pointed out that MF Global would have had cash problems on 
several trading days throughout 2011. Surely you were aware of 
the problem so I ask you, were you, and about the wire calls?
    Mr. Corzine. Congresswoman, first of all, the $11.5 is a 
gross of both short and longs, reverse RTMs to maturity as well 
as RTMs to maturity. And therefore, if I am reading their 
reporting, and I don't know where they got their facts, but it 
is a combination of the longs and shorts. I don't think that 
therefore the conclusion is exactly how you would see it 
because the short------
    Mrs. Schmidt. At some point you had to know that there 
wasn't enough money.
    Mr. Corzine. The only time that we could conclude there 
wasn't enough money was when the unreconciled accounts------
    Mrs. Schmidt. Well------
    Mr. Corzine.--were notified.
    Mrs. Schmidt. Okay. Were repo to maturity transactions used 
to hide or mask the risks associated with your positions in 
Europe's sovereign debt? It has been reported that the use of 
these transactions increased over your time as CEO, so did you 
personally direct the firm to use these transactions as a means 
to hide the risks?
    Mr. Corzine. Congresswoman, the disclosure that you have 
cited was in our reports to the public and our public 
disclosure documents along with its implications for gains and 
losses. And those disclosure documents were reviewed by our 
outside auditors, they were reviewed by counsel, they were 
reviewed by our audit committee, and discussions of those 
elements were a part of public discussions with analysts and 
others.
    Mrs. Schmidt. Well, it has been reported by The Wall Street 
Journal that, despite warnings from board members and from your 
own employees, you pushed forward with aggressive and highly 
leveraged positions on foreign debt, foreign sovereign debt. 
Mr. Corzine, we have all been watching the eurozone crisis 
unfold and there has been significant uncertainty about is 
resolution so why were you so confident about these bets, and 
to what degree were you willing to bet the very survival of the 
firm, its employees, and most importantly, the shareholders?
    Mr. Corzine. The investments that we had in the euro 
sovereigns were bought and financed to their maturity. And 
those positions were very difficult to be able to be unwound 
and once they were in position, they had significantly less 
liquidity than a security held that was not financed to its 
maturity, on the other hand, significantly less risky because 
financing was in place. Having financing in place diminished 
the overall risk of holding a particular security.
    Mrs. Schmidt. Well, that all sounds good but how did you 
take a company that was in existence for almost 230 years to 
bankruptcy within a year and a half of takeover? How do you 
explain to all the customers, investors the reason for the 
collapse of MF Global? I mean your answers sound so nice but 
you riskily invested people's money without their knowledge in 
a market that I wouldn't invest in.
    Mr. Corzine. Congresswoman, sitting here today with 
knowledge that the market has drawn the conclusion that it has 
drawn and the facts are what they are, it would have been 
better to have taken different judgments at the time they were 
taken. But, we and I did those things that we thought were in 
the best interest of shareholders and all of the stakeholders 
given the inability of the old business plans that the firm was 
executing on to generate the kinds of revenues that would 
protect customers as well.
    The Chairman. The gentlelady's time has expired.
    The chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    Mr. Corzine, I want to thank you for coming before the 
Committee. I don't think many people would have joined us for 
as long as you have and been willing to answer the questions. 
Thank you for being here.
    You have repeatedly said that client funds were not used to 
purchase foreign sovereigns. Were those client funds ever 
pledged as collateral on the purchase of foreign sovereigns at 
MF Global, though?
    Mr. Corzine. To my knowledge--and again this is one of 
those things that you have to get into the records to be 
absolutely precise on--I am not aware of that.
    Mr. Austin Scott of Georgia. Okay. And it is apparently 
from all the reports that there was commingling of funds. Just 
approximately when do you believe the commingling first 
occurred?
    Mr. Corzine. Given all of the transactions that were 
occurring in those closing days, Congressman, I don't want to 
speculate. I just--I know that several of senior management 
were informed at roughly the same time on Sunday night of many 
hundreds of millions of dollars being unreconciled in the 
accounts.
    Mr. Austin Scott of Georgia. Do you believe that that 
commingling started to occur in the last 10 days before the 
bankruptcy?
    Mr. Corzine. I am under the impression--and again I don't 
have records------
    Mr. Austin Scott of Georgia. Yes, sir.
    Mr. Corzine.--to confirm and so it is farther than I should 
go but I am--we have to--MF Global had to submit reports------
    Mr. Austin Scott of Georgia. Yes, sir.
    Mr. Corzine.--each day and it is, as I had suggested to one 
of the previous questioners, if we had been out of balance, it 
is my presumption that it would have been reported upward.
    Mr. Austin Scott of Georgia. Yes, sir. But those reports, 
they are not audited by anybody as I understand it. They are 
self-reported.
    Mr. Corzine. They are self-reported. I think if I am not 
mistaken a number of the regulators were on premise from the 
26th on. That doesn't mean that they audited------
    Mr. Austin Scott of Georgia. Yes, sir.
    Mr. Corzine.--all aspects but were very close------
    Mr. Austin Scott of Georgia. Yes, sir, but at that stage, 
at the point that the regulators came in, it was pretty much 
too late at that stage, wasn't it?
    Mr. Corzine. Congressman, it certainly was not my operating 
premise that it was too late at those stages. We were 
generating liquidity------
    Mr. Austin Scott of Georgia. Right.
    Mr. Corzine. We were drawing our liquidity facilities and 
to the best of my recollection, meeting our obligations.
    Mr. Austin Scott of Georgia. If I am not mistaken, you were 
still rated as investment grade less than 10 days prior to the 
filing by Moody's and Fitch both. I may not be correct about 
that.
    Mr. Corzine. That is true, sir.
    Mr. Austin Scott of Georgia. You can correct me if--sir?
    Mr. Corzine. That is true.
    Mr. Austin Scott of Georgia. Well------
    Mr. Corzine. I think the first rating change occurred on 
Monday, October 24.
    Mr. Austin Scott of Georgia. Yes, sir, and then------
    Mr. Corzine. Moody's.
    Mr. Austin Scott of Georgia. And then they happened very 
fast thereafter.
    Mr. Corzine. There was another set of rating changes------
    Mr. Austin Scott of Georgia. Two days.
    Mr. Corzine.--Thursday if I am not mistaken.
    Mr. Austin Scott of Georgia. Okay.
    Mr. Corzine. The 27th.
    Mr. Austin Scott of Georgia. Well, you have been a 
Governor, a Senator, had a very successful life, accomplished a 
lot of things. I sense the pain that you recognize. This is one 
of the things that your life will be judged by.
    What can we make good out of this? What can you tell us? 
Sitting where you are, what rules and regulations would you put 
in place if you were sitting up here to prevent an MF Global 
from ever happening again?
    Mr. Corzine. Congressman, I have given it some thought, not 
great thought. It is clear that in moments of stress, 
organizations do not always operate in the same way that they 
would in a normal operating environment. And I certainly would 
look for triggers that would enhance the oversight of 
organizations in those conditions.
    Mr. Austin Scott of Georgia. Thank you for joining us.
    Mr. Chairman, I yield back.
    The Chairman. The gentleman yields back his time.
    The chair now recognizes the gentleman from Colorado, Mr. 
Tipton, for 5 minutes.
    Mr. Tipton. Thank you, Mr. Chairman. And thank you, Mr. 
Corzine, for joining us.
    I would like to follow up on a comment that Congressman 
Scott just made. The 10 days prior to the debacle, Moody's and 
Fitch had MF Global rated as investment grade. Was that a good 
decision 10 days prior?
    Mr. Corzine. The rating agencies------
    Mr. Tipton. From your knowledge of the company, was that a 
good assessment by Moody's and Fitch that you were investment 
grade?
    Mr. Corzine. Certainly, the facts afterwards don't make 
that look effective as an assessment, but at the time that they 
had last reviewed and were intending to review around our 
quarterly earnings announcement, at least several of them had 
put new assessment directions into the works.
    Mr. Tipton. There was an assessment so it was probably a 
poor one.
    I wanted to follow up on a comment that you made earlier in 
questioning saying on October 30--and it was in regards to the 
commingling of assets--you had thrown out the statement that 
``we have to find the money.'' Was that your statement? Was 
that the corporate mentality?
    Mr. Corzine. It was all of us.
    Mr. Tipton. It was all of you?
    Mr. Corzine. Everyone felt an obligation to get the books 
reconciled.
    Mr. Tipton. Wherever it was, had to be able to find that.
    I just want to get a sense truly I guess of the corporate 
mentality. When you went on to head up Global, did you read 
through the mission statement and believe in it? I can give you 
a couple of quotes from it: ``MF Global is well capitalized and 
diversified intermediary and a strong conservative managed 
balance sheet. Because of our financial strength and 
comprehensive risk management, clients can have confidence that 
they are trading with strong counterparty.'' Was that your 
sense? Did you believe in that?
    Mr. Corzine. I believe that those statements were right at 
the time and that we needed to enhance it with a growth 
strategy that would provide for the success of the firm as 
opposed to what had been in recent years------
    Mr. Tipton. As a business guy, and I am a small 
businessman--was a small businessman until I took this job, you 
had to look at it--not trying to mix metaphors here--you had to 
look at your business globally knowing that the impact of one 
section of the business could impact another section of the 
business as well. When you made that determination given the 
comments that we were just talking about in terms of the Fitch 
Moody's rating of Global 10 days prior as being investment 
grade, looking out over the horizon into the eurozone for those 
investments, given the foreknowledge that in this country with 
$15 trillion in debt, we had had our credit rating downgraded, 
did that tie back into the corporate mantra and the beliefs 
that you were just saying was the original intent? Or was it a 
risky investment that was going to ruin the entire operation--
----
    Mr. Corzine. As I have tried to state probably more 
articulately than I will do here that with the analysis and the 
perspectives on how those particular sovereigns were looked at, 
we thought they were prudent investments.
    Mr. Tipton. Was that your personal investment? Would you 
have been willing to personally risk your funds?
    Mr. Corzine. I absolutely was willing to invest and was 
investing in MF Global up until August.
    Mr. Tipton. And I am not trying to put you on the spot and 
I know this is going to be maybe a little offensive from this 
standpoint but where you were stock-motivated, did that help 
drive some of that decision based off of the performance of the 
stock to try and get this kind of return?
    Mr. Corzine. The performance is not based--is one element 
but also protecting the value of the stock is another 
responsibility. And as a shareholder, I would expect decisions 
to reflect those concerns as well. It is not only performance.
    Mr. Tipton. Okay. And I certainly agree with Congressman 
Scott. I can sense from you some agony personally over this, 
but believe me, talking to many of our folks in rural America, 
$10,000, $20,000, $30,000, that is not a nice evening out. That 
is all they have. And when we look at it globally, I think we 
all have to be very distressed in terms of some of that 
collateral damage, particularly now when we can't find $1.2 
billion of struggling people's dollars to be able to meet their 
needs.
    So I am out of time, Mr. Chairman. I yield back. Thank you, 
sir.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Arkansas, Mr. 
Crawford, for 5 minutes.
    Mr. Crawford. Thank you, Mr. Chairman.
    Mr. Corzine, are you licensed to trade securities?
    Mr. Corzine. Yes.
    Mr. Crawford. What licenses do you hold?
    Mr. Corzine. I would have to go back. I have all of the----
--
    Mr. Crawford. Series 3, Series 7, Series 6, and some others 
or--I figured that was the case.
    Do you trade on your own account?
    Mr. Corzine. Not regularly.
    Mr. Crawford. Have you ever traded on your own account 
using customer funds?
    Mr. Corzine. On my own account using customer funds? No.
    Mr. Crawford. Okay. Is------
    Mr. Corzine. To my knowledge, I haven't.
    Mr. Crawford. Okay.
    Mr. Corzine. I don't trade for my personal account.
    Mr. Crawford. Has any employee to your knowledge of MF 
Global ever used client funds to trade on proprietary------
    Mr. Corzine. I am going to repeat what I had said------
    Mr. Crawford. Right. Okay.
    Mr. Corzine.--to the other folks.
    Mr. Crawford. Got that. If you did have knowledge of an 
employee trading on customer account, what would the penalty be 
for that employee?
    Mr. Corzine. I certainly--as far as I could ever imagine 
they would probably be terminated.
    Mr. Crawford. Okay. Have you ever dismissed an employee at 
MF Global for any kind of malfeasance that would be of that 
nature?
    Mr. Corzine. I think there is a fairly notorious trading 
situation that occurred in 2008 before I joined the firm, and 
there were other disciplinary actions that have been taken 
through the years.
    Mr. Crawford. But under your direction------
    Mr. Corzine. There were some, yes.
    Mr. Crawford. Okay. Can you describe some of that 
malfeasance that required there to be disciplinary action or 
possibly termination?
    Mr. Corzine. I really would like to have specifics about 
that so that I don't get into talking about an individual and I 
don't have my facts straight.
    Mr. Crawford. Okay. Okay. I just read an article that 
Reuters put out about a farmer who had $200,000 in an account 
with MF Global that hasn't been returned to him yet. It has 
been almost a month since MF Global filed for bankruptcy. There 
is no telling when he will get his money back. He has missed a 
deadline for buying his seed to pre-purchase discount for next 
spring's corn and soybean crops; the financial future of his 
operation is certainly in peril. Most of the farmers in my 
district--and I think this is true with farmers throughout the 
country are really one crop failure away from bankruptcy. The 
action that we have seen here with MF Global puts them that 
much closer to bankruptcy themselves. As the former head of a 
now bankrupt company that this man trusted--in fact, trusted to 
the degree that he would rather have his money in one of those 
segregated accounts than he would in a bank, what would you say 
to that farmer who now is facing bankruptcy of his own or to 
any farmer who may be in a similar situation?
    Mr. Corzine. Congressman, as I said multiple times, I think 
about this every day. I could not be more regretful of the 
stress that we are bringing to people's lives and I could not 
be more anxious to see resolution of where those unreconciled 
accounts------
    Mr. Crawford. Let me ask you this. I mean you have an 
impressive background with respect to financial services, 
banking industry, and so on. And I am going to ask you to 
speculate. I am going to ask you to think what you would do in 
this situation. In all seriousness, I would like to know what 
we tell farmers that are facing this. If you were in the 
situation where you had potentially $200,000 or more, as 
Congressman Tipton said--$20,000 or $30,000, $40,000, what 
would you do if you were that farmer? As I understand it, you 
also have a little history in farming?
    Mr. Corzine. My father was one of those folks that went to 
the grain elevator and hedged out future crops.
    Mr. Crawford. And I am really not trying to--I know you 
have expressed remorse here and I appreciate that, but I am in 
all seriousness trying to figure out how do you advise these 
farmers who are in this situation?
    Mr. Corzine. Congressman, I am not sure I have specific 
advice. I only can say that this process of seeking to find 
these funds is one that absolutely needs every resource 
possible to make sure that it is accomplished. I think I have 
to leave it there.
    Mr. Crawford. Sure. Last question. Do you have a compliance 
officer at MF Global?
    Mr. Corzine. Absolutely.
    Mr. Crawford. Sure. And at what point did he bring this to 
your attention? How often did he review the activity?
    Mr. Corzine. There are a broad set of compliance issues and 
internal audits and as I suggested Sarbanes-Oxley internal 
audits that confirm that kinds of operations are operating the 
way they are supposed to. And so those are ongoing; they are 
daily.
    Mr. Crawford. Okay. Thank you, sir. I appreciate it. I 
yield back.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentleman from Kansas for 5 
minutes.
    Mr. Huelskamp. Thank you, Mr. Chairman.
    And Senator, I will follow up on the question of the 
gentleman from Arkansas. You did mention your concern about 
that. If you were so concerned about making certain that your 
investors were whole, how come you quit 4 days after bankruptcy 
was declared?
    Mr. Corzine. In a response to a board request is why I 
resigned.
    Mr. Huelskamp. Okay. And during those 4 intervening days, 
what did you do to attempt to make the investors whole?
    Mr. Corzine. I resigned on November 3. That is correct. It 
is 2 days and I spent Tuesday at least in the early morning 
hours trying to find out some of the same questions that people 
are asking here with no particular positive results on that.
    Mr. Huelskamp. So nobody seemed to know where the funds 
were and no one would tell you?
    Mr. Corzine. There were------
    Mr. Huelskamp. Did you ask the question where those funds 
were and what was the answer?
    Mr. Corzine. People were still looking. Lots of 
transactions were in train that------
    Mr. Huelskamp. I appreciate that. I am short of time and I 
appreciate it. I think it would be the same answer as we 
received before. I want to establish a little bit of timeline. 
I am trying to understand. On the 1 year anniversary of Dodd-
Frank on July 20, you conducted numerous meetings with members 
of the CFTC------
    Mr. Corzine. I had two conference calls with the CFTC on 
those days.
    Mr. Huelskamp. I have you down--according to the records at 
the CFTC you had a meeting with a former employee at 1:00 p.m. 
on the phone with Mr. Gensler, at 2:15 you had a meeting with 
Ms. Sommers on the phone, and at 3:30 with a third 
Commissioner, Mr. Chilton. Can you describe the topics of those 
calls?
    Mr. Corzine. To my recollection I was on the phone call--
conference call with Chairman Gensler at one and Commissioner 
Chilton at the time that you brought forward. And again, as we 
have suggested in both written and my response to questions, 
primary subject of that conversation were repos between the 
broker-dealer and the FCM.
    Mr. Huelskamp. Three separate meetings according to the 
CFTC with three separate Commissioners that you participated 
in. Did you have any separate calls or conversations with Mr. 
Gensler when you took the job at MF Global to the present time 
other than what you have------
    Mr. Corzine. That has been my recollection. You have my 
calls, my meetings outlined.
    Mr. Huelskamp. Okay. You never once called his cell phone?
    Mr. Corzine. No.
    Mr. Huelskamp. Okay. Did you ever call another member of 
the Administration during this time about any of these issues?
    Mr. Corzine. I am sorry, Congressman. I couldn't hear you.
    Mr. Huelskamp. Did you ever call a member of the 
Administration? I mean you are very close to the current 
Administration. As a very generous campaign bundler, did you 
ever visit with anybody in the Administration about your 
business at MF Global?
    Mr. Corzine. To my knowledge, I have never spoken about the 
business of MF Global to anyone in the Administration.
    Mr. Huelskamp. Did you visit with anybody at the Federal 
Reserve?
    Mr. Corzine. I have visited with people at the Federal 
Reserve as I reported with respect to the primary dealer as I 
testified to, a primary dealer relationship always with staff 
and staff and never with either the President or Chairman or 
any of the Board of Governors.
    Mr. Huelskamp. On December 21 of the last year you had a 
meeting with the CFTC Commissioner again about segregation and 
bankruptcy. Do you recall the topic of those particular 
discussions which seem very appropriate given our 
conversation------
    Mr. Corzine. If I am not mistaken, Commissioner Sommers 
spoke about that meeting this morning and it had to do with 
issues on the treatment of swaps consistent with how futures 
were traded, and how Dodd-Frank would deal with those issues in 
coming CFTC discussions.
    Mr. Huelskamp. So no------
    Mr. Corzine. Frankly, I don't remember even the specifics, 
a relatively short meeting.
    Mr. Huelskamp. Well, we are lucky that at least the CFTC 
had a record there was a meeting. As we learned earlier, 
though, apparently they don't keep notes. Does your private 
secretary keep notes of these meetings that might be helpful to 
understand at the Committee?
    Mr. Corzine. To my knowledge, they did not.
    Mr. Huelskamp. Thank you, Mr. Chairman.
    And Senator, I appreciate your time and I appreciate the 
questions but again I would like to ask the question directly 
for myself. What do I tell my producers that--should I suggest 
that you were contrite, you felt sorrow, but you are not going 
to try to make them whole and that just good luck, we hope you 
find your $200,000? Is that a pretty good summary?
    Mr. Corzine. Congressman, I hope you believe that I am as 
intent in answering the question of where this money is as 
anyone in the room.
    The Chairman. The gentleman's time has expired.
    Mr. Huelskamp. Thank you, Mr. Chairman.
    The Chairman. The chair now looks to the gentleman from 
Wisconsin, Mr. Ribble, for 5 minutes.
    Mr. Ribble. I will move over here. It has been a long 
afternoon.
    How many Federal regulatory agencies have some type of 
oversight responsibilities for the type of business you are in?
    Mr. Corzine. I haven't counted them up but it is multiple--
CFTC, SEC. There are all kinds of agencies that deal with labor 
and other activities; the Federal Reserve has oversight not 
regulatory responsibility. As we have become a primary dealer, 
there are more and then there are whole host of self-regulatory 
organizations the number of which you will speak with in the 
next panel.
    Mr. Ribble. How often did you have an opportunity to visit 
with the regulators? How often were they there? You were there 
about 18 months. Was this a regular occurrence? Did the Federal 
Government have a lot of responsibility in oversight?
    Mr. Corzine. A number of them would visit the firm more 
broadly than just with me. Sometimes people more senior would 
come and visit in offices. We tried to outline some of those. 
There was one meeting which I cited where all of the regulators 
or at least most of the regulators in the U.S. visited us in 
June of 2010 where I addressed them for 10 minutes. And the 
rest of my colleagues, at least on the operations and controls 
side and finance side spoke more lengthily. I would point out 
that these aren't the only regulators. Then you have 
international regulators in multiple venues across the globe 
that also have responsibility in oversight that participate.
    Mr. Ribble. Well, then, do you think adding more 
regulations and more regulators--let me change that. Do you 
think we can regulate greed, incompetence, and fraud out of 
existence?
    Mr. Corzine. Could you repeat that question?
    Mr. Ribble. Can we regulate------
    Mr. Corzine. The incompetence------
    Mr. Ribble. Can we regulate greed, incompetence, and fraud 
out of existence? Because at the end of the day, sir, we have 
to make a decision of how, going forward, we can help protect 
consumers and investors from having another MF Global happen. 
And my fear is that we will do what government always does--
make up more rules and send more regulators and a year from now 
we will have another example. And I am wondering what the real 
solution is. I am trying to figure out was there greed, 
incompetence, and fraud at MF Global that no matter what we do 
on this side of the dais, it still would happen.
    Mr. Corzine. Whether it is for those reasons or poor 
judgment or bad judgment or--mistakes will continue to happen 
in the course of human events and that is inevitable. As it 
relates to regulation, that is one that historically has been 
more supportive rather than against. There is an enormous need 
from my view and probably doesn't amount for much at the 
moment, but my view to have it consolidated so that it is 
more--it is less complex to manage.
    Mr. Ribble. It is difficult to manage a company your size.
    Mr. Corzine. With the multiple regulators that exist and 
then we live in a global world that increases the complexity. 
The segregation rules in London are different than the 
segregation rules in U.S. futures markets. The futures markets 
are different than securities markets and so the answer is yes. 
A more integrated approach, at least from one man's point of 
view, would make this world easier.
    Mr. Ribble. I am trying to get a sense from what my 
takeaway needs to be today and so I thank you. It has been a 
long afternoon so I thank you for your time.
    And I yield back, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    The chair now recognizes the gentlelady from North Carolina 
for her 5 minutes.
    Mrs. Ellmers. Thank you, Mr. Chairman.
    Governor Corzine, I have a couple questions for you for 
clarification. The question was posed to you why did you resign 
on November 3 and you indicated that it was at the request of a 
board member or was this a------
    Mr. Corzine. The leading--the lead director.
    Mrs. Ellmers. The lead director. And that person's name?
    Mr. Corzine. Ed Goldberg.
    Mrs. Ellmers. Ed Goldberg. Thank you.
    Now, I know we have talked about where we feel and where 
the responsibility lies and you have identified that it could 
be procedural, the money is gone. Who do you hold responsible 
and accountable for this money being gone?
    Mr. Corzine. As the CEO of an organization, I hold 
responsibility that the implementation of policies, procedures 
and the people we had in place to execute on these issues 
lies--the buck stops here on that score. The details of how 
that gets executed are an organizational issue that is broad-
faced. We had people certainly were prepared and were--at least 
from all reports to me as best I can recollect--executing 
appropriately on those rules. Again, at the chaotic final days 
and hours, I think you have a different set of conditions in 
place.
    Mrs. Ellmers. I would like to go back, too, to the 
relationship that you have with Chairman Gensler. I know that 
he apparently worked for you while you were at Goldman Sachs 
and he also worked at Goldman Sachs, is that correct?
    Mr. Corzine. That is correct.
    Mrs. Ellmers. And I believe that means that there have been 
a couple of years that you have had a relationship--a couple of 
years of a relationship since that time.
    Mr. Corzine. We had--Chairman Gensler and I had other 
interactions. He was on Senator Sarbanes' staff when I was a 
Senator. I was aware of and in contact with him on an 
occasional basis but not on a frequent basis in any stretch of 
the imagination.
    Mrs. Ellmers. Would you describe your relationship as 
friendly? Would you pick up the phone and call him and just 
say, hey, how are you doing?
    Mr. Corzine. We were not the kind of folks that were 
checking in on each other week to week, month to month, maybe 
not even year to year. I think one of the newspapers reported 
he neither attended my recent wedding or I attended a tragic 
loss in his family.
    Mrs. Ellmers. Thank you.
    And my last comment I would like to associate myself with 
one of the comments that were made very recently when you said, 
``in retrospect, decisions that are made in crisis are usually 
not very good decisions.'' And that that may have had a part in 
this. And I would just like to state that I do believe that as 
well and that is one of the reasons that I believe Dodd-Frank 
is detrimental to the financial industry in this country.
    Thank you very much, Mr. Chairman. I yield back.
    The Chairman. The gentlelady yields back her time.
    The chair now recognizes the last Member for questions for 
5 minutes, the gentleman from North Carolina, Mr. McIntyre.
    Mr. McIntyre. Thank you, Mr. Chairman. And thank you for 
your patience today with the questions.
    According to Janet Tavakoli, in substance, your repo to 
maturity transactions were total return swaps which were off 
balance sheet and a type of credit derivative. MF Global 
retained the price and default risk. The head of the FCC is now 
probing the accounting treatment and the disclosure. The 
Financial Accounting Standards Board recently decided that repo 
to maturity is the only kind of repo transaction to get off 
balance sheet treatment. And Janet Tavakoli says that this is a 
form-over-substance ruse to dodge using the term ``total return 
swap'' since these transactions are well known as a means of 
using leverage. Would you say that her characterization is 
accurate and why or why not?
    Mr. Corzine. Congressman, there is a lot in that statement.
    Mr. McIntyre. Right. That is why I wanted to give you a 
chance to respond.
    Mr. Corzine. My view is that a better analogy would be 
matchbook transactions where repurchase agreements against 
reverse repurchase agreements were put on the books of a 
broker-dealer or an institution as opposed to total return 
swap. You mentioned that you retain the price movement. You 
only retain the price exposure to the extent that it implicates 
margin--variation margin in the exchange.
    The total return swap--and again I am--don't want to be 
expert and I am certainly not expert with regard to the 
accounting issues on this--would reflect the price appreciation 
or depreciation in these RTM positions, both the ones that were 
held with respect to government--U.S. Government securities, 
agencies incorporates or whether it was in these euro 
sovereigns had no price risk other than as it implicated 
margins. And you did, however--as the analyst or the consultant 
said--retain the default risk, the default and actually 
restructuring risk.
    But I think--I don't think it is a clear analogy and at 
some conditions some people would say total return swaps are a 
way to take price risk off the balance sheet. This is not a way 
to do that. This is a way to take matchbook risk, substantially 
less off balance sheet but it is not an analogy that I would 
identify with.
    Mr. McIntyre. All right. Thank you.
    And thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired. The chair 
would now like to recognize the Ranking Member for a unanimous 
consent request.
    Mr. Peterson. Mr. Chairman, I have some quick questions 
that were submitted to me by Ms. Kaptur, who spent a good part 
of the hearing today--she is interested and has some questions 
for Mr. Corzine. So without objection, I would like those 
questions be submitted and have him respond in writing.
    The Chairman. Seeing no objections, the questions will be 
accepted and submitted.
    Seeing no other questions or requests, Mr. Corzine, thank 
you for your appearance today. You are now dismissed.
    Mr. Corzine. Thank you, sir. I thank the Committee.
    The Chairman. And while the next panel is preparing to come 
to the table, I would like to note that our witnesses on the 
third panel will be Mr. John Fletcher, General Manager of 
Central Missouri AGRIService LLC, on behalf of the National 
Grain and Feed Association, Marshall, Missouri; Terrence Duffy, 
Executive Chairman of the CME Group, Incorporated, Chicago, 
Illinois; Mr. William J. Brodsky, Chairman and CEO, the Chicago 
Board Options Exchange, Chicago, Illinois; Mr. Dan Roth, 
President and CEO, National Futures Association, Chicago, 
Illinois; Mr. Stephen Luparello, Vice Chairman, the Financial 
Industry Regulatory Authority, Washington, D.C.; Mr. Gerry 
Corcoran, Chairman and CEO of R.J. O'Brien & Associates, on 
behalf of the Commodity Markets Council, Chicago, Illinois.
    Now, gentleman that you are in place, in the spirit of the 
importance and the relevance of this Committee, I would ask you 
to rise and raise your right hand. Please state your name for 
the record.
    Mr. Fletcher. John Fletcher.
    Mr. Duffy. Terrence Duffy.
    Mr. Roth. Dan Roth.
    Mr. Corcoran. Gerry Corcoran.
    Mr. Luparello. Stephen Luparello.
    Mr. Brodsky. William Brodsky.
    The Chairman. Do you solemnly swear that the testimony you 
are about to give before this Committee in the matters under 
consideration on this day, December 8, 2011, is the truth, the 
whole truth, and nothing but the truth so help you God?
    Mr. Fletcher. I do.
    Mr. Duffy. I do.
    Mr. Roth. I do.
    Mr. Corcoran. I do.
    Mr. Luparello. I do.
    Mr. Brodsky. I do.
    The Chairman. I do.
    Mr. Fletcher, begin whenever you are ready.

          TESTIMONY OF JOHN FLETCHER, GENERAL MANAGER,
       CENTRAL MISSOURI AGRIService LLC, Marshall, MO; ON
         BEHALF OF NATIONAL GRAIN AND FEED ASSOCIATION

    Mr. Fletcher. Good evening, Mr. Chairman, Ranking Member 
Peterson and Members of the Committee that are still here. My 
name is John Fletcher. I am General Manager of Central Missouri 
AGRIService LLC in Marshall, Missouri. Our firm purchases 15 
million bushels of corn and soybeans annually from about 150 
producers in our trade territory. We work closely with 
producers on marketing and risk management strategies and we 
thank you for the opportunity today to give National Grain and 
Feed Association's perspective on the MF Global bankruptcy and 
its ripple effects across agribusiness and production 
agriculture.
    After listening to the questions of previous panelists, we 
realize that most of you have a good grasp of where things are 
today, so I will keep my remarks quite short.
    MF Global Holdings bankruptcy has been a shock to our 
industry and to my firm. We have believed for decades that risk 
to segregated customer funds was virtually zero and now we have 
learned the hard way that this is not the case. Our number one 
goal at this point is the return of funds and property to the 
customers as quickly as possible. It is important to realize 
that everyone--it is important for everyone to realize that 
assets held by a brokerage firm in segregated accounts like 
warehouse receipts, treasury bills, shipping certificates for 
cash are not really debts of the brokerage firm. They are 
assets owned by the depositor and held in trust by the firm. 
And by law these funds should be segregated and not used for 
other purposes.
    It is difficult to--this is no different than if a failed 
bank held a deed of trust on a piece of property. The failure 
of the bank doesn't make the property evidenced by the deed of 
trust an asset of the failed bank. Title documents like 
warehouse receipts are property of the specific customers and 
should be returned without requiring surcharges for customers 
to buy back their own property. At the end of this, customers 
must be made whole and any outcome--any other outcome will 
result in a damaging loss of confidence in our risk management 
system.
    Looking ahead, it is very important to re-establish 
confidence in futures markets and the safety of customers' 
funds and property being held by these brokers. We need to know 
just what happened at MF Global and whether changes need to be 
made so that producers, agribusinesses, and the lenders who 
support the entire risk management process are confident that 
funds used will be available back to the customer.
    Serious questions need to be answered by regulators and 
self-regulatory organizations that they oversee. Changes may be 
needed to restore confidence in the use of exchange-traded risk 
management tools. MF Global's failure has left customers unsure 
of whether segregated funds will ever be safe. It may be that 
some other entity other than the FCMs should be responsible for 
holding and safeguarding segregated funds. Should some form of 
insurance coverage be provided to--on commodities as well as 
securities? Are additional changes needed in the ways 
segregated customer funds are allowed to be invested? Should 
exchanges bear some responsibility for customer funds lost in 
the case of bankruptcy or malfeasance by a clearing member?
    Just to be clear, we are not proposing legislation or new 
regulatory authority at this point, but these issues need to be 
examined carefully and quickly. Ultimately, our goals are 
twofold--to ensure that assets of MF Global customers are 
returned quickly and to make sure this situation does not 
happen again. We must be confident that the system works and it 
properly safeguards customer funds and that customers have full 
confidence in the exchange-traded tools.
    Again, National Grain and Feed appreciates the opportunity 
to share its views today. We--this concludes my remarks and I 
am glad to take questions.
    [The prepared testimony of Mr. Fletcher follows:]

Prepared Testimony of John Fletcher, General Manager, Central Missouri 
  AGRIService LLC, Marshall, MO; on Behalf of National Grain and Feed 
                              Association
    Good morning, Chairman Lucas, Ranking Member Peterson, and Members 
of the Committee. My name is John Fletcher. I am General Manager of 
Central Missouri AGRIService LLC in Marshall, Missouri. Our firm 
purchases about 15 million bushels of corn and soybeans annually from 
100-150 producers in our trade territory, with whom we work closely on 
marketing and risk management strategies. We also provide a range of 
feed, fertilizer, seed and crop protection products and services to our 
farmer-customers. Thank you for the opportunity today to provide the 
NGFA's perspective on the MF Global bankruptcy and its ripple effects 
across agribusiness and production agriculture.
    My firm is a member of the National Grain and Feed Association 
(NGFA), the national nonprofit trade association representing 
agribusinesses that include grain elevators, feed manufacturers, 
oilseed processors, flour mills, biofuels producers and related 
businesses. We estimate that the 1,050 NGFA-member firms nationwide 
operate more than 7,000 facilities and purchase, store, process and 
export well in excess of 70% of U.S. annual grains and oilseeds 
production. Many of our member firms are country elevators that work 
very closely with their farmer-customers to merchandise their crops and 
manage their risk.
    The MF Global Holdings bankruptcy has been a shock to our industry 
and to our firm. We have believed for decades that risk to segregated 
customer funds held by members of the clearinghouse was virtually zero. 
Now, we know that was not the case.
    Immediately following the October 31 bankruptcy filing, MF Global 
customers struggled with lack of access to futures positions, no access 
to funds in their accounts, having accounts transferred to new futures 
commission merchants (FCMs), and understanding how and why various 
adjustments to account balances took place. In those early days, there 
was a dearth of information to help customers manage their financial 
exposure and resume normal risk management activities.
    Today, former MF Global customers continue to deal with the 
aftermath of the situation. Customers now have access to hedge 
accounts, but only about sixty percent of initial margin funds needed 
for the transferred positions have been transferred to the new 
accounts. We welcomed the SIPA Trustee's proposal last week for an 
additional distribution of funds and property that would bring the 
value of customer distributions to about \2/3\ of original account 
values for all customers. However, many firms still will have 
significant amounts of margin funds and excess cash tied up with the 
Trustee--or missing. Even at a relatively small firm like Central 
Missouri AGRIService, we are trying to manage a $600,000 deficit in the 
value of our account. We are fortunate to have close relationships with 
our lenders, who have responded with strong support of their ag sector 
customers.
    We were pleased to see that the Trustee recently announced a claims 
process for former commodities customers of MF Global. However, that 
process looks to be complicated and cumbersome. Even the seemingly 
simple task of informing the Trustee of the amount a commodities 
customer is claiming is not straightforward. Should a customer use his 
account equity on October 31 when the bankruptcy was filed to establish 
a claim? Or should that customer use the account equity at the close of 
business 4 days later when the bulk account transfer took place? The 
difference can be hundreds of thousands of dollars. We need 
clarification from the Trustee and the exchanges on proper reporting of 
such claims.
    Ultimately, the number one goal of the NGFA is to advocate the 
return of funds and property to customers as quickly as possible. By 
law, these customer funds were to be segregated and not used for other 
purposes. Title documents like warehouse receipts are property of 
specific customers and should be returned without requiring a surcharge 
for customers to buy back their own property. At the end of this 
process, customers must be made whole--any other outcome will result in 
a damaging loss of confidence in our risk management system. We urge 
this Committee, regulators and exchanges, and the Trustee to make 
return of customer funds and property the highest priority.
    Make no mistake--the U.S. risk management system for agribusiness 
and producers has been one of the industry's strengths and competitive 
advantages over the last century. The ability to hedge risk on an 
exchange has allowed thousands of businesses like mine to offer 
producers a wide range of cash forward contracts that help optimize 
income from markets. Many individual producers also hedge their risk 
through use of futures and options on a regulated exchange. To this 
point, we have done so with confidence. We knew we could lose money on 
a trade, but we also thought we knew that our funds were safe with a 
member of the clearinghouse.
    Looking ahead, it will be very important to re-establish confidence 
in futures markets and the safety of segregated customer funds and 
property. As part of that process, we need to know just what happened 
at MF Global and whether changes need to be made so that producers and 
agribusiness--as well as their lenders who support the entire risk 
management process--are confident that their funds are being protected 
and always will be available.
    We suggest that serious questions need to be answered by regulators 
and the self-regulatory organizations they oversee. What customer 
protections currently are in place to safeguard segregated customer 
funds? Were audit procedures properly implemented in a timely way? How 
often were accounts audited, and who was responsible for enforcing 
compliance? Questions like these need to be examined to determine 
exactly what happened and how customer funds apparently were 
misappropriated.
    Very importantly, changes may be needed to begin restoring 
confidence in future use of exchange-traded risk management tools. 
Weaknesses in customer protections brought to light by MF Global's 
failure have left customers unsure of whether segregated funds will 
continue to be fully available. It may be that some entity other than 
FCMs should be responsible for holding and safeguarding segregated 
customer funds. Rather than a clearing firm, should the clearinghouse 
or the exchange itself or some independent third party perform that 
role? Should SIPC insurance be expanded to provide coverage for 
commodities as well as securities? Or is there some private-sector 
solution that would better provide insurance against any future losses? 
Are changes needed in the ways segregated customer funds are allowed to 
be invested? Should exchanges bear some responsibility for customer 
funds lost in the case of bankruptcy and/or malfeasance by a clearing 
member?
    We make no judgments or recommendations on these questions today--
and to be clear, we are not proposing that legislation or additional 
regulatory authority are needed--but the issues need to be examined 
carefully and quickly.
    Ultimately, our goals are twofold: to pursue all possible actions 
that will ensure that assets of MF Global customers will be returned 
quickly, and to make sure this situation never happens again. The U.S. 
agricultural sector relies heavily on regulated exchanges for risk 
management. The ability of both commercial and producer hedgers to use 
futures markets to manage price risk depends on lenders agreeing to 
meet margin calls, which demands full confidence by all lenders in the 
safety of those funds. We must be confident the system works, that it 
properly safeguards customer funds, and that customers can have full 
confidence in continuing to utilize exchange-traded tools.
    Again, the NGFA appreciates the opportunity to share its views 
today. That concludes my prepared remarks, Mr. Chairman. I would be 
happy to respond to any questions.

    The Chairman. Thank you.
    Mr. Duffy?

 TESTIMONY OF HON. TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CME 
                    GROUP INC., CHICAGO, IL

    Mr. Duffy. Chairman Lucas, Members of the Committee, I am 
Terry Duffy, Executive Chairman of the CME Group.
    Mr. Corzine's firm, MF Global, has put market users in a 
tragic position. Let me start by saying our efforts with 
respect to the unprecedented loss of customer segregated funds 
caused by MF Global have been to assist these customers and 
minimize market disruptions. My testimony summarizes reports 
from our staff who were onsite at MF Global along with the CFTC 
in the days immediately preceding this bankruptcy. My written 
testimony expands on this introductory statement and includes 
substantial background material.
    About the middle of the week of October 24, MF Global had 
announced poor earnings and was downgraded by several credit 
firms sparking rumors that it would sell its brokerage 
business. CME was the designated self-regulatory organization 
for MF Global with responsibility for auditing its futures 
business. On Thursday, October 27, two of our auditors went to 
MF Global's Chicago office to review MF Global's daily 
segregation report for the close of business on Wednesday, 
October 26. Wednesday's segregation report, which is not 
available until Thursday, showed full compliance. Our auditors 
asked for the material necessary to check the numbers on the 
report against general ledger and third-party sources and began 
the process of tying out the numbers for Wednesday's report.
    That substantial review process of the Wednesday 
segregation report continued on Thursday and Friday. MF 
Global's segregation report for Thursday, October 27, which was 
delivered to CME on Friday the 28th also stated that MF Global 
remained in full compliance with segregation requirements. In 
fact, it showed that the firm held $200 million in excess 
segregated funds.
    On Sunday, the CFTC informed us that they were aware of a 
draft segregation report for the close of business for Friday, 
October 28, which showed more than a $900 million shortfall in 
required segregation. The CFTC and the CME staff and auditors 
returned to the firm on Sunday, October 30, and were informed 
by MF Global employees that this discrepancy was caused by ``an 
accounting error.'' Our auditors working with the CFTC devoted 
the rest of the day and night on Sunday to find this so-called 
``accounting error.'' No such error was ever found. Instead, at 
about 2:00 a.m. Monday morning, October 31, MF Global informed 
both the CFTC and CME at approximately the same time that the 
shortfall was real and that customer segregated funds had been 
transferred out of segregation to the firm's broker-dealer 
accounts.
    However, on Monday, October 31, the day the SIPC Trustee 
took over, MF Global revised its segregation report for 
Thursday, October 27, indicating that the alleged $200 million 
in excess segregated funds should have been reported as a 
deficiency of $200 million. This shortfall in segregation on 
Thursday, October 27, was hidden by the inaccurate report, a 
telling sign that regulators were being kept in the dark.
    It remains to be seen whether this failure to disclose 
permitted additional segregated funds to be improperly 
transferred. Throughout this time, the firm and its employees 
were under the direction and control of MF Global's management. 
Transfers of customer funds effectuated by MF Global management 
for the benefit of MF Global constitutes very serious 
violations of our rules and that of the CFTC regulations.
    We met our obligations to all other clearing firms and 
their customers. Also, at all times, we held $1 billion in 
excess of the required amounts of customer segregated funds on 
behalf of MF Global's customers. I also want to be clear about 
the purpose of the CME's Guaranty Fund. The Guaranty Fund does 
not belong to CME. It is the property of the member firms and 
exist to prevent the systemic risk that might arise when a 
clearing firm defaults to the clearinghouse. The Guaranty Fund 
ensures that the clearinghouse can satisfy its obligations to 
its counterparties. It may not be used to cover losses suffered 
by customers of a failed clearing member firm.
    Given that, all CME Group's efforts have been directed 
towards speeding customer access to their trading accounts, 
transferring their positions, and providing the Trustee with 
the $550 million guarantee from CME Group to encourage him to 
quickly release customer funds that were securely held at CME 
Clearing.
    I also want to make mention there is not another 
clearinghouse or exchange in the United States or abroad that 
put up any such guarantee that CME did. The federally mandated 
Customer Segregation Program has been in place since 1936. In 
that time, prior to the MF Global failure, no customer has ever 
lost their segregated funds because of the failure of a 
clearing member of the CME.
    Moving forward, we intend to work with Congress, 
regulators, and industry leaders to strengthen customer 
safeguards at the firm level.
    I thank you very much and I look forward to answering your 
questions.
    [The prepared testimony of Mr. Duffy follows:]

 Prepared Testimony of Hon. Terrence A. Duffy, Executive Chairman, CME 
                        Group Inc., Chicago, IL
    Chairman Lucas, Ranking Member Peterson, Members of the Committee, 
thank you for the opportunity to testify on the events surrounding the 
recent collapse of futures commission merchant (``FCM'') and broker-
dealer (``BD'') MF Global, Inc. (``MFG''). I am Terry Duffy, Executive 
Chairman of CME Group (``CME Group'' or ``CME''), which is the world's 
largest and most diverse derivatives marketplace. CME Group includes 
four separate exchanges--Chicago Mercantile Exchange Inc. the Board of 
Trade of the City of Chicago, Inc., the New York Mercantile Exchange, 
Inc. and the Commodity Exchange, Inc. (together ``CME Group 
Exchanges''). The CME Group Exchanges offer the widest range of 
benchmark products available across all major asset classes, including 
futures and options based on interest rates, equity indexes, foreign 
exchange, energy, metals, agricultural commodities, and alternative 
investment products. CME also includes CME Clearing, a derivatives 
clearing organization and one of the largest central counterparty 
clearing services in the world; it provides clearing and settlement 
services for exchange-traded contracts, as well as for over-the-counter 
(``OTC'') derivatives transactions through CME Clearing and CME 
ClearPort'.
Introduction
    As the Committee knows, on the morning of October 31, the 
Securities Investor Protection Corporation (``SIPC'') filed a petition 
with a Federal District Court in New York to place the futures 
commission merchant/broker-dealer arm of MFG into bankruptcy, which was 
immediately granted by the court. While over the course of our 
exchanges' histories clearing members have filed for bankruptcy 
protection or been placed into bankruptcy involuntarily, the MFG 
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 result of the clearing member's 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 industry's history that 
a customer has suffered a loss as a result of a clearing members' 
improper handling of customer funds.\1\
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    \1\ As recent examples, in both Refco and Lehman, which had large 
FCM operations, while non-commodities customers of Refco and Lehman 
were significantly impacted by the bankruptcy proceedings, the 
regulated commodity customer accounts were transferred to new FCMs 
without any disruption. We had no reason to believe this situation 
would be any different at MFG until the segregation shortfall was 
discovered.
---------------------------------------------------------------------------
    MFG's customers' funds held by CME clearing house were securely 
held; in fact, we held $1 billion in excess funds on behalf of those 
customers. Our number one priority is and has been to return to every 
MFG customer its rightful property. Our ability to do that, however, is 
limited. Since MFG was placed into bankruptcy, as a matter of law, the 
bankruptcy Trustee has been in control of the process and all decisions 
regarding MFG assets and the money, securities and property of its 
customers. Indeed, we have worked diligently with the bankruptcy 
Trustee to transfer MFG customer accounts to other FCMs along with a 
portion of the customers' collateral on deposit with CME Clearing. To 
date, CME Group with the bankruptcy Trustee's permission has 
successfully transferred all (approximately 15,000) MFG customer 
accounts to other FCMs. The portion of customer collateral transferred 
to the new FCMs to margin customer positions was a decision by the 
bankruptcy Trustee and outside the control of CME Group. CME Group 
continues to take steps and work with the bankruptcy Trustee to 
facilitate the release of additional available customer funds.
    There are ongoing investigations by the Department of Justice, the 
FBI, the CFTC, and the SEC into the events surrounding the MFG 
bankruptcy, including efforts to locate the missing segregated customer 
property and determining who was responsible for permitting the removal 
of that customer property from MFG's segregated accounts. Although we 
do not yet have these details, and are affirmatively prohibited from 
publicly divulging information obtained in connection with these 
Federal investigations, I would like to share with you what CME Group 
does know and can share. To this end, I will briefly address the 
timeline of events in the days leading up to MFG's bankruptcy and the 
efforts to return to MFG's customers property that is rightfully 
theirs. Before I do that, I would like to provide the Committee with 
some background information regarding the clearing model in the futures 
industry, including the role and obligations of FCMs and derivatives 
clearing houses.
The Futures Commission Merchant
    An FCM is an individual or organization that (i) solicits or 
accepts orders to buy or sell futures contracts or options on futures 
contracts and (ii) accepts money or other assets from customers to 
support such orders. As such, FCMs are agents or intermediaries for 
their customers. Among other things, the Commodity Exchange Act 
(``CEA''), which is the main statute governing the FCM's legal 
obligations, expressly states that all money and other property of any 
customer received to margin or guarantee a derivative contract cleared 
though a derivatives clearing organization belongs to the customer and 
may not be commingled with the FCM's own trading accounts.
    With respect to ensuring that such customer collateral received by 
the FCM is segregated, the CEA, applicable regulations of the Commodity 
Futures Trading Commission (``CFTC'') and our clearing house rules 
require that money and other customer property must be separately 
accounted for and may not be commingled with the funds of the FCM or be 
used to margin, secure, or guarantee any trades or contracts of any 
person other than the person for whom the same are held. Additionally, 
CME Clearing has rules on its books directly addressing FCMs' 
obligations in this regard.
    In practice, an FCM maintains a number of customer segregated 
accounts at custodians approved by the CFTC. As a customer establishes 
positions, the FCM transfers collateral from one of its customer 
segregated accounts to a customer segregated account maintained and 
controlled by the clearing house. In many cases, the FCM collects 
margin from its customers in excess of what is required by the clearing 
house to support the customer positions cleared through the clearing 
house; this ``excess margin'' is held in an account controlled by the 
FCM for the benefit of its customers.
Derivatives Clearing Houses
    A clearing house acts as the seller to every buyer and buyer to 
every seller of every cleared contract. Twice a day it pays winners and 
collects from losers so that debt is eliminated from the system and 
systemic risk is minimized. When a firm fails to pay its losses, the 
clearing house must still pay the firms with profitable positions. The 
Guaranty Fund is one of the principal means to make such payments 
possible.
    Each clearing member contributes assets and agrees to pay an 
assessment, based on its risk profile, for the sole purpose of covering 
any loss suffered by the clearing house when it makes good on its 
commitment to honor its contracts despite the default of another 
clearing member. This guaranty is designed to protect against systemic 
risk that could arise if the default of one clearing member leads to 
the failure of other clearing members. It is worth noting that the 
assets in and committed to the Guaranty Fund do not belong to the CME, 
they belong to the clearing members who have contributed them.
    Nearly 65 different U.S. FCMs hold approximately $155 billion in 
U.S. customer collateral and nearly $40 billion in collateral held for 
trading on foreign exchanges--much of which is not placed with 
regulated clearing houses. As of March 2011, the total amount of 
customer funds held by the top 30 FCMs was more than $163 billion. No 
clearing house, however large, could effectively or economically 
guarantee all such funds and all such activity.
    CME also was the designated self-regulatory organization (``DSRO'') 
for MFG. As MFG's DSRO, CME was responsible for, among other things, 
conducting periodic audits of MFG's FCM-arm and sharing any and all 
information with the other regulatory bodies of which the firm is a 
member. CME conducted audits of MFG pursuant to standards and 
procedures established by the Joint Audit Committee (``JAC'') \2\ and 
reported such results to the CFTC. CME conducted audits of MFG, and all 
firms for which it was the DSRO, at least once every 9-15 months. The 
last audit was as of the close of business on January 31, 2011. This 
regulatory audit began subsequent to the audit date and was completed 
with a report date of August 4, 2011.
---------------------------------------------------------------------------
    \2\ The JAC is a representative committee of U.S. futures exchanges 
and regulatory organizations which participate in a joint audit and 
financial surveillance program that has been approved and is overseen 
by the CFTC. The purpose of the joint program is to coordinate among 
the participants numerous audit and financial surveillance procedures 
over registered futures industry entities.
---------------------------------------------------------------------------
    Nothing is more important to CME Group than protecting customer 
funds and this is exactly what our audits are designed to ensure. We 
reviewed the manner in which segregated funds were invested and 
required certain modifications which were immediately implemented. All 
other audit points were relatively minor and were immediately 
corrected. During this same period, MFG's accounting and management 
controls were also reviewed by its CPA, which certified its books and 
records as of March 31, 2011, and by securities regulators, who 
required certain accounting treatment changes.
The Days Preceding MFG's Bankruptcy
    During the week of October 24, 2011, MF Global announced losses and 
suffered credit rating downgrades, which sparked rumors of its efforts 
to sell its brokerage business. On Thursday, October 27th, two of our 
auditors made an unannounced appearance at MFG's Chicago offices to 
review the daily segregation report for the close of business on 
October 26th--the report stated that segregation was intact. Our 
auditors asked for the material necessary to reconcile the numbers on 
the segregation report to the general ledger and to third party 
sources. These procedures continued through Friday evening. At the time 
they left the office they had noted only immaterial discrepancies and 
we saw no indication that segregated funds were missing as of Wednesday 
October 26th. The segregation report for October 27th, which we 
received on the afternoon of the 28th, asserted that the firm remained 
in full compliance with segregation requirements.
    Our auditors returned on Sunday, October 30th because we learned 
from the CFTC that the draft segregation report for Friday, October 
28th, which had been provided to the CFTC that day, showed a $900 
million dollar shortfall in segregation caused by an ``accounting 
error.'' Our auditors, working with the CFTC, devoted the rest of the 
day and night Sunday to find the so-called accounting error. No such 
error was ever found. Instead, at about 2 a.m. Monday morning, MFG 
informed the CFTC and CME that customer money had been transferred out 
of segregation to firm accounts. Transfers of customer funds for the 
benefit of the firm constitute serious violations of our rules and of 
the Commodity Exchange Act. MFG was taken over by a SIPC Trustee on 
Monday. However, before the SIPC Trustee stepped in Monday, the 
segregation report for Thursday, October 27th, which had shown not only 
full segregation compliance but also $200 million in excess segregated 
funds, was corrected by MFG to show a deficiency of $200 million in 
segregated funds. Apparently based on MFG's segregation reports, 
additional transfers out of segregation occurred on Friday.
MFG's Bankruptcy, the Trustee and CME Group's Guarantee to the Trustee
    As previously noted, prior to MFG's bankruptcy, a shortfall was 
discovered in the customer segregated funds held at MFG. For this 
reason, unlike prior bankruptcies by FCMs, customer positions and 
property were not able to be ported to another solvent clearing firm. 
Since MFG was placed into bankruptcy, as a matter of law, the SIPC 
Trustee has been in control of the process and all decisions regarding 
MFG assets and the money, securities and property of its customers. The 
Trustee is holding and/or has control of a substantial pool of customer 
property, but must be cautious about making a distribution before he 
completes all of his forensic work.
    At the time it was placed into bankruptcy, MFG should have had 
about $5.5 billion in customer segregated money, securities and 
property, but only held $5 billion. Approximately $2.7 billion of the 
$5 billion had been transferred to clearing houses in the form of 
collateral necessary to support positions held by MFG customers. 
Approximately $2.3 billion of the $5 billion in customer segregated 
funds was subject to MFG's sole control because those funds were not 
needed to collateralize open positions on any exchange or clearing 
house. Approximately $2.5 billion was securely-held by CME Clearing. Of 
that amount, CME Clearing held nearly $1 billion of so-called excess 
collateral on behalf of MFG customers.
    The information available suggests that there might be a shortfall 
in segregated funds, which currently could be between 13% and 19% of 
segregated funds, if the information proves correct. The Trustee must 
also consider that the shortfall may be even greater and that if he 
distributes based on that assumption and it turns out to be incorrect, 
some customers might get better treatment than others, in contravention 
of the Bankruptcy Code and CFTC Regulations.
    To encourage the Trustee to make a prompt distribution of property 
to customers, CME Group made a $550 million guarantee to the Trustee. 
The guarantee is not a payment made to customers, but rather a pledge 
of funding to the Trustee to provide him the flexibility to return more 
customer assets to customers now. In the event that an interim 
distribution by the Trustee gives customers more cash than they would 
have been entitled to in the claims process under the Bankruptcy Code 
and CFTC regulations, CME Group has proposed that our guarantee would 
be used to make the customer segregation asset pool whole for the 
amount of any over-distribution, up to $550 million. As a result of the 
guarantee, we believe the Trustee should be protected if he decides now 
to distribute to every customer at least 75% of its account value. We 
believe these extraordinary measures are needed because an interim 
distribution by the Trustee could be delayed even further without them.
    On November 29, the Trustee filed a motion with the Bankruptcy 
Court seeking permission to make a third interim distribution of 
customer funds in the coming weeks. Though details of the timing and 
amount of the distributions are still being worked out, the Trustee has 
stated that CME Group's financial guarantee will enable him to return 
more than \2/3\ of the value of frozen customer segregated accounts, up 
to an additional $2.1 billion, in roughly 2 to 4 weeks. The Trustee has 
stated that this distribution will include trapped account balances, 
dishonored checks and distributions with respect to warehouse receipts 
and other customer property at MFG. Beginning next week, another $2.0 
billion+ is expected to be released in reliance on our guarantee.
    Separately, CME Group also announced that CME Trust would make its 
$50 million in assets available to CME Group market participants that 
suffered losses due to MFG's improper handling of funds held at the 
firm level. The CME Trust was established in 1969 to provide financial 
protection to customers in the event a CME Group member firm was unable 
to meet its obligations to customers. CME Trust is providing virtually 
all of its capital, $50 million, to CME Group market participants 
suffer losses as a result of MFG's improper handling of customer funds 
at the firm level. Unlike the $550 million CME Group guarantee, which 
is a limited guarantee in connection with the goal of accelerating 
interim distributions by the Trustee, the $50 million from the CME 
Trust will cover CME Group customer losses due to MFG's misuse of 
customer funds. We note that there also are civil and criminal 
penalties for misusing segregated funds as MFG did here, which, if 
recovered, would be used to address the current shortfall.
Conclusion
    Our audit and spot check of MFG were performed at the highest 
professional level; the transfer of segregated funds out of the 
appropriate accounts was disguised from all regulators. CME Group has 
and continues to take extraordinary measures to minimize the impact 
that this unprecedented event has had on the futures industry and its 
participants. MFG appears to have broken a number of rules and 
obligations to protect customer collateral resulting in customer 
losses.
    Nothing is more important to CME Group than protecting customers. 
CME has worked diligently to permit customers to liquidate positions, 
transfer accounts and recover a significant portion of the value of 
their accounts. We provided the Trustee comfort with a $550 million 
guarantee, so that he could expedite the release of funds to customers 
without loss to the bankruptcy estate. Customers, however, are 
justifiably frustrated that they do not yet have access to their own 
money.
    Some might conclude that the system failed because of this one 
instance when customers have been injured despite the prescribed system 
of segregation. Regulatory failures happen, unfortunately. Banks fail 
and the FDIC provides sometimes inadequate protection to depositors. 
The taxpayers get tapped. Securities firms fail and SIPC is irrelevant 
to any large account holders. The laws prohibit Ponzi schemes, yet 
hundreds are detected every year after the public has been robbed and 
the money evaporated. Insider trading happens every day. Enron 
explodes, Lehman fails. Insurance companies fail and policy holders 
lose. While it is clear that action is necessary to restore customer 
confidence and protect against future failures, the fact is that MFG 
broke rules by moving customer segregated funds out of an account over 
which it had control. A firm failed to comply with applicable rules, 
but that does not mean the segregation system is a failed system. To be 
clear, the customer segregation regime in the futures industry was not 
the cause of the losses that customers are suffering from today.
    We look forward to working with the industry, regulators and 
Congress to explore potential improvements to increase security of 
customer funds held by FCMs and restore confidence in the futures 
industry.

    The Chairman. Thank you, Mr. Duffy.
    Mr. Brodsky, whenever you are ready.

   TESTIMONY OF WILLIAM J. BRODSKY, J.D., CHAIRMAN AND CHIEF 
   EXECUTIVE OFFICER, CBOE HOLDINGS, INC. AND CHICAGO BOARD 
              OPTIONS EXCHANGE, INC., CHICAGO, IL

    Mr. Brodsky. Mr. Chairman, Mr. Peterson, and Chairman Lucas 
and Members of the Committee, I am William Brodsky. I am 
Chairman and CEO of the Chicago Board Options Exchange, and I 
would hope that my written statement will be entered into the 
record.
    CBOE Holdings owns and/or operates four exchanges--three 
securities exchanges and one futures exchange. Our regulatory 
division provides comprehensive regulatory services to each of 
these exchanges to a broad array of market surveillance 
mechanisms by conducting examinations of member firms and by 
conducting examinations of exchange members.
    As the Securities Exchange Commission has designated us as 
the designated examining authority for MF Global, CBOE 
continues to work closely with the SEC with FINRA and other 
regulators to critically evaluate the events leading up to and 
following the bankruptcy of MF Global. We take our self-
regulatory responsibility very seriously and we have the 
deepest sympathy for the customers of MF Global whose funds are 
currently frozen or may be missing as a result of the 
bankruptcy.
    As background, let me make note that MF Global was both a 
securities broker-dealer under the jurisdiction of the SEC and 
the futures commission merchant under the CFTC as you have 
heard earlier today. On the securities side, MF Global is also 
a FINRA member and therefore subject to FINRA's rules and 
oversight. On the futures side, as you know, CME Group serves 
as the designated self-regulatory organization of FINRA.
    Although some of MF Global's activities were on the 
securities side, the largest share by far took place on the 
futures side both by number of accounts and by value of 
customer assets of MF Global and many times more than that of 
the securities side.
    There are not only different regulators but different rules 
for trading securities and futures. CBOE's oversight role as 
DEA pertains to the securities trading at MF Global, and I will 
briefly discuss the Federal regulatory scheme that exists. And 
I think for the purpose of time I will leave that out because 
it is in my written statement.
    The customers of a failed brokerage firm on the securities 
side get back all their stocks and bonds, all the securities in 
the account registered--that are in their name or in the 
process of being registered. Once this step is taken, the 
firm's remaining customer assets are then divided on a pro rata 
basis with funds shared in proportion to the size of their 
claims. If sufficient funds are not available in the firm's 
customer accounts to satisfy the claims, then the reserve funds 
of SIPC are used to supplement the distribution up to the 
ceiling of $500,000 per customer, which includes cash of up to 
$250,000 a customer. Additional funds may be available to 
satisfy the remainder of customer claims.
    On November 30, 2011, the SIPC Trustee appointed for the 
estate of MF Global filed a Motion to Transfer the majority of 
the remaining 330 securities accounts to another broker-dealer. 
Under the terms of the proposed purchase agreement with that 
broker-dealer and approved by the Bankruptcy Court, 
approximately 85 percent of the customers assigned to MF 
Global's customer account will be fully reimbursed for the 
amount in equity claims. The remaining customers with net 
equity claims of about $1.5 million will receive recoveries 
ranging between 60 and over 90 percent, depending on the size 
of their claim. Additionally, these customers not receiving 
full refund may be able to recover the full amount of their 
remaining claim depending on the outcome of the litigation.
    This process applies to securities accounts. Commodity 
futures contracts are among the investments that are ineligible 
for SIPC protections unless they are in a portfolio margin 
account defined as customer property under the Acts.
    Now, turning to the events leading up to MF Global's 
bankruptcy as understood at this point in the ongoing 
investigation, on or about May 31 we became aware of the 
exposure of MF Global to the European sovereign debt when 
reviewing the company's audited financial statements. In the 
footnotes of the financial statements, there was a discussion 
of the accounting treatment of the repo agreements and reverse 
repo agreements when the maturity date of the underlying 
collateral is the same as the maturity date of the agreements. 
A couple of weeks later, on June 14, the SEC conducted a Rule 
17h risk assessment program with MF Global. As is ordinary 
practice, CBOE and FINRA participated in this conference call 
and throughout July and August 2011 there were a number of 
conversations, including two or more with these parties 
including MF Global, SEC, FINRA, and CBOE regarding MF 
sovereign debt exposure and discussions about how that risk of 
exposure should be accounted for by the firm in calculating its 
required net capital.
    Although there may have been some room for debate about 
whether these agreements were properly left of the balance 
sheet, CBOE, FINRA, and the SEC agreed that it was appropriate 
to apply net capital charges to these positions considering the 
significant market and credit risk. MF Global subsequently held 
further conversations with the SEC staff arguing that it should 
not have to take a capital charge for the sovereign debt, but 
by the second half of August, FINRA, CBOE, and the SEC 
ultimately affirmed that a net capital charge was appropriate.
    Because the securities regulators determined that it was 
necessary and appropriate for MF Global to apply this net 
capital charge retroactively, MF Global determined that it was 
a net capital deficiency as of the end of July 2011. However, 
the firm was able to continue to operate at this point because 
it had taken a number of preemptive steps to increase its 
capital in anticipation of the regulators affirmation that the 
net capital charge would have prevailed.
    While the securities regulators continued to discuss the 
sovereign debt exposure with MF Global, CBOE separately 
initiated its own investigation of MF Global on August 22, 
2011. And as is common practice, CBOE's examination focused on 
the most recent complete month, which was July 2011. Beginning 
in August of 2011, CBOE's staff requested and received a 
variety of financial data from MF Global and these various 
computations were received daily at least through the end of 
October 2011.
    In addition, our staff reviewed a variety of financial 
statements from the firm throughout this time determining the 
financial health of the firm. It is important to note that up 
until the end of the period, the financial information that we 
received from MF Global on a daily basis never showed a deficit 
of any kind. On September 18, CBOE formally requested documents 
pertaining to the financial investigation of the European debt 
portfolio.
    Although MF Global routinely showed significant excess 
capital, the firm was placed under a higher level of 
surveillance by CBOE beginning back in December of 2010 and for 
every month thereafter primarily as a result of repeated 
monthly and quarterly losses. CBOE shared these closer-than-
normal surveillance reports with SIPC and the SEC and the 
Options Clearing Corporation and the National Securities 
Clearing Corporation. CBOE's staff has been onsite at the firm 
every day for the past couple of months. We have spent 
significant time piecing together all the money wires and 
transfers that occurred during the week of October 24 to 
October 31, including the funding of daily settlement needs and 
the funding of customer withdrawals, bank reconciliations, and 
the manner in which margin calls on European sovereign debt was 
met.
    We shared all of this information with the SEC, the CFTC, 
and SIPC. CBOE, along with other regulators, continues to piece 
together the wires that were creating the shortfall in the 
segregated futures accounts in order to obtain a comprehensive 
understanding of the events that led to MF's bankruptcy. We and 
other regulators continue to consult with each other and share 
information as we learn it. CBOE continues to work with the 
SEC's Chicago office and in turn communicates daily with the 
SEC's headquarters.
    In conclusion, CBOE and other regulators are still 
gathering and examining information needed to make a full 
assessment of the matter and to define and address the lessons 
learned from the MF Global bankruptcy. In addition to a 
comprehensive investigation, we believe that the issues 
surrounding the MF Global also provide the impetus for 
regulators to consider whether their rules and policies that 
should be adopted or amended to add to a greater level of 
protection of customer assets in broker-dealers and FCMs during 
bankruptcy scenarios. Any such rules or policies should 
necessarily also focus on ensuring that customer assets can be 
transferred as quickly as possible in those types of events.
    We intend to take this opportunity to determine whether 
there any other improvements that should be made in terms of 
cooperation and communications among regulators when faced with 
a financially troubled firm subject to the oversight of 
multiple entities. We hope that the foregoing narrative is 
helpful to the Committee's understanding of the events leading 
up to and surrounding the bankruptcy. We are committed to 
assisting the Committee and its staff in its continued inquiry.
    [The prepared testimony of Mr. Brodsky follows:]

      Prepared Testimony of William J. Brodsky, J.D., Chairman and
Chief Executive Officer, CBOE Holdings, Inc. and Chicago Board Options 
                      Exchange, Inc., Chicago, IL
    Mr. Chairman and Members of the Committee, I am William J. Brodsky, 
Chairman and Chief Executive Officer of the CBOE Holdings, Inc. and its 
principal subsidiary, the Chicago Board Options Exchange, Incorporated 
(CBOE). For the past 37 years, I have served in leadership roles at 
major U.S. stock, futures and options exchanges, including 14 years in 
my current role as CBOE Chairman and CEO and 11 years as CEO of the 
Chicago Mercantile Exchange. I also recently completed a 2 year term as 
Chairman of the World Federation of Exchanges whose membership includes 
over fifty of the largest stock, options and futures exchanges in the 
world.
    In addition to operating CBOE, which is the leading securities 
options exchange in the United States, CBOE Holdings also operates C2, 
which is a fully electronic options exchange, runs the CBOE Stock 
Exchange as a facility of CBOE, and owns and operates CBOE Futures 
Exchange. CBOE's Regulatory Division provides comprehensive regulatory 
services to each of these exchanges by conducting a broad array of 
market surveillances on those markets, by conducting various 
examinations of members of those exchanges, and by conducting 
investigations of the members of those exchanges based on the results 
of its surveillances, its examinations, or based upon complaints. In 
addition, all of the nine U.S. options exchanges, including CBOE and 
C2, are participants of a national market system plan, i.e., the 
Options Regulatory Surveillance Authority (ORSA). ORSA was formed so 
that the U.S. options exchanges could jointly fulfill their statutory 
obligation to surveil for instances of insider trading involving listed 
options. The participants of ORSA have selected CBOE to be the 
exclusive regulatory services provider to look for insider trading in 
listed options on behalf of all of them.
    Now, turning to the specific matter that is the subject of these 
hearings, we would first like to state that we have the deepest 
sympathy and concern for those customers of MF Global, Inc. (MFGI) \1\ 
whose funds are currently frozen or may be lost or missing as a result 
of the recent MF Global bankruptcy. We take our self-regulatory 
responsibilities very seriously and, as one of the regulators 
responsible for overseeing MFGI, we have devoted many resources over 
the last few months to working with the Securities and Exchange 
Commission (SEC), the Financial Industry Regulatory Authority (FINRA), 
and other regulators to carefully evaluate the events leading up to and 
following the filing for bankruptcy by MF Global. We will attempt to 
describe in greater detail below the steps the CBOE has undertaken to 
date. In addition, we would like to assure the Committee that we will 
continue to make available all staff resources necessary to assist in 
an expeditious and thorough investigation of all matters related to the 
events at MF Global with the hopes that a resolution can be found to 
return as many customer funds as quickly as possible.
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    \1\ MF Global, Inc. is a wholly-owned subsidiary of MF Global 
Holdings USA, Inc. The ultimate parent is MF Global Holdings Ltd. MF 
Global, Inc. is a broker-dealer registered with the Securities and 
Exchange Commission. MF Global, Inc is also registered with the 
Commodities Futures Trading Commission as a futures commission 
merchant. When referencing the MF Global structure generally in this 
testimony, we will use the term ``MF Global.''
---------------------------------------------------------------------------
    Although some of MFGI's activities that are the subject matter of 
this inquiry took place in the securities markets, by far the larger 
share of its activities took place in the futures markets. To clarify 
CBOE's role in overseeing MFGI, we believe it is instructive to first 
discuss briefly the Federal regulatory scheme for the oversight of 
securities firms as established by law. There are two primary financial 
responsibility rules that are designed to protect customers' assets 
held in a securities account: the Securities and Exchange Commission's 
uniform net capital rule (Rule 15c3-1) and the SEC's customer 
protection rule (Rule 15c3-3). The net capital rule focuses on 
liquidity and is designed to protect securities customers, 
counterparties, and creditors by requiring that broker-dealers have 
sufficient liquid resources on hand at all times to satisfy claims 
promptly. Rule 15c3-3, or the customer protection rule, is designed to 
ensure that customer property (securities and funds) in the custody of 
broker-dealers is adequately safeguarded and generally segregated from 
the firm's own funds and securities. By law, both of these rules apply 
to the activities of registered broker-dealers, but not to unregistered 
affiliates. Assuming a securities firm complies in all respects with 
the operation of these two rules, securities customers should be able 
to recover all of the value of their funds and paid for securities in 
their account at that broker-dealer.
    Securities customers are afforded further protection through the 
Securities Investor Protection Corporation (SIPC), which was created in 
1970 as a nonprofit, non-government, membership corporation, funded by 
member broker-dealers. The primary role of SIPC is to return funds and 
securities to investors if the broker-dealer holding those assets 
becomes insolvent. Customers of a failed brokerage firm get back all 
securities (such as stocks and bonds) that already are registered in 
their name or are in the process of being registered. Once this step is 
taken, the firm's remaining customer assets are then divided on a pro 
rata basis with funds shared in proportion to the size of claims. If 
sufficient funds are not available in the firm's customer accounts to 
satisfy claims within these limits, the reserve funds of SIPC are used 
to supplement the distribution, up to a ceiling of $500,000 per 
customer, including a maximum of $250,000 for cash claims. Additional 
funds may be available to satisfy the remainder of customer claims 
after the cost of liquidating the brokerage firm is taken into account.
    SIPC generally covers notes, stocks, bonds, mutual funds and other 
investment company shares, and other registered securities. Among the 
investments that are ineligible for SIPC protections are commodity 
futures contracts (unless in portfolio margining accounts and defined 
as customer property under the Securities Investor Protection Act). As 
the Committee knows, a SIPC Trustee has been appointed for the estate 
of MF Global. On November 30, the SIPC Trustee filed a motion to 
transfer the majority of the remaining approximately 330 non-affiliate 
securities accounts to another broker-dealer. Under the terms of the 
proposed purchase agreement with the acquiring broker-dealer, if 
approved by the bankruptcy court, approximately 85% of customers with 
MFGI custody securities accounts will be fully reimbursed for the 
amount of their net equity claims. The remaining customers with net 
equity claims above $1.25 million would receive recoveries ranging from 
60% to over 90% of those claims, depending upon the size of their 
claim. Additionally, these customers not receiving a full refund may 
yet be able to recover up to the full amount of their remaining claim 
depending on the outcome of the SIPC liquidation.
    Supporting the Federal securities regulatory scheme, of course, is 
the oversight of the securities firms by securities exchanges and FINRA 
to check that firms are, in fact, complying with the financial 
responsibility rules. Section 19(g)(1) of the Securities Exchange Act 
of 1934 (Act) requires every self-regulatory organization (SRO) 
registered as either a national securities exchange (e.g., CBOE) or a 
national securities association (e.g., FINRA) to examine its members 
and persons associated with its members to ensure compliance with the 
Act, the rules and regulations thereunder, and the SRO's own rules, 
unless the SRO is relieved of this responsibility pursuant to Section 
17(d) or Section 19(g)(2) of the Act. With respect to a common member 
(i.e., one that is a member of more than one SRO), Section 17(d)(1) 
authorizes the Commission to relieve an SRO of the responsibilities to 
receive regulatory reports, to examine for and enforce compliance with 
applicable statutes, rules, and regulations, or to perform other 
specified regulatory functions.
    To implement Section 17(d)(1), the Commission adopted Rule 17d-1 
under the Act. Rule 17d-1 authorizes the Commission to designate a 
single SRO as the designated examining authority (DEA) to examine 
common members for compliance with the financial responsibility 
requirements imposed by the Act, or by Commission or SRO rules. When an 
SRO has been designated as a common member's DEA, all other SROs to 
which the common member belongs are relieved of the responsibility to 
examine the firm for compliance with the applicable financial 
responsibility rules. On its face, Rule 17d-1 deals only with an SRO's 
obligations to enforce member compliance with financial responsibility 
requirements.\2\
---------------------------------------------------------------------------
    \2\ Rule 17d-1 does not relieve an SRO from its obligation to 
examine a common member for compliance with the SRO's own rules and 
provisions of the Federal securities laws governing matters other than 
financial responsibility, including sales practices and trading 
activities and practices. As such, CBOE also has responsibility to 
oversee MFGI's trading activity on the CBOE. CBOE is also a party to a 
Rule 17d-2 agreement with FINRA by which FINRA has assumed 
responsibility under the Act for overseeing the sales practice 
activities of common members, including MFGI.
---------------------------------------------------------------------------
    The Commission designated CBOE to act as the DEA for MF Global, 
Inc. and CBOE has acted in this capacity with respect to MFGI (and its 
predecessors) since March 2003. CBOE is currently the designated 
examining authority for 160 registered broker-dealers. As a designated 
examining authority, the CBOE is responsible for enforcing the 
financial, margin, and books and records requirements of the SEC, the 
Federal Reserve Board and CBOE. This is accomplished through routine 
financial monitoring (on, at minimum, a monthly basis), routine main 
office examinations, and special investigations. During the time CBOE 
has served as the DEA for MFGI (and its predecessors), CBOE has 
conducted nine routine examinations of MFGI and three financial 
investigations to investigate specific matters. CBOE has taken 
disciplinary action against MFGI five times as a result of these 
examinations and investigations.
    Of course, MFGI is both a broker-dealer under the jurisdiction of 
the SEC and a futures commission merchant under the jurisdiction of the 
Commodities Futures Trading Commission. Consequently, MFGI has been 
subject to examination by both securities and futures regulators, but 
the number of accounts and the value of the customer assets are many 
times greater on the futures side than they are on the securities side. 
On the futures side, the Chicago Mercantile Exchange (CME) serves as 
the Designated Self Regulatory Organization (DSRO). In addition, FINRA 
has been involved in overseeing MFGI on the securities side as MFGI is 
a member of FINRA and is subject to FINRA's rules and oversight.
    For the benefit of the Committee, I would like to discuss our 
understanding of how the issue of MF Global's exposure to European 
sovereign debt in the form of repurchase agreements came to be known 
and the various steps that were taken by CBOE and other regulators to 
oversee the risk of that exposure. CBOE became aware of the exposure of 
MF Global to European sovereign debt on or about May 31, 2011 from 
reviewing the company's annual audited financial statements. In the 
footnotes to the financial statements there was a discussion of the 
accounting treatment for repurchase agreements and reverse repurchase 
agreements when the maturity date of the underlying collateral is the 
same as the maturity date as the agreements. The firm believed that 
generally accepted accounting principles allowed these agreements to be 
treated as sales and not to be recognized as assets and liabilities on 
MFGI's balance sheet. Because the repurchase agreements did not appear 
on the financial statements, those agreements did not appear on the 
FOCUS Report \3\ submitted to regulators.
---------------------------------------------------------------------------
    \3\ FOCUS Report is an acronym for Financial and Operational 
Combined Uniform Single Report. The uniform regulatory report (Form X-
17A-5) filed periodically by all broker-dealers pursuant to SEC Rule 
17a-5. The reports detail capital, earnings and other pertinent 
information.
---------------------------------------------------------------------------
    A couple of weeks later, on June 14, 2011, the SEC conducted its 
Rule 17h risk assessment program meeting with MFGI.\4\ Pursuant to 
ordinary practice, CBOE and FINRA participated in this conference call 
meeting. At this meeting, MF Global discussed organizational and 
management changes within the Firm, its strategic direction, financial 
information, risk management, current litigations, and some information 
about the European sovereign debt. Throughout July and August 2011, 
there were a number of conversations held involving two or more of 
these parties (MFGI, SEC, FINRA, and CBOE) regarding the sovereign debt 
exposure and discussions about how the risk of this exposure should be 
accounted for by the firm in calculating the required net capital, 
which the firm was required to keep to protect against market risk. It 
is our understanding that the SEC staff indicated that MFGI would need 
to take a net capital charge for these repurchase agreements due to the 
market risk exposure that they created for the MF Global entity. 
Although there may have been some room for debate about whether these 
agreements were properly left off of the balance sheet, CBOE 
nonetheless agreed with FINRA and the SEC that it was appropriate to 
apply a net capital charge to these positions given the significant 
market and credit risk posed by them.
---------------------------------------------------------------------------
    \4\ Rules adopted under Section 17(h) of the Securities and 
Exchange Act of 1934 require broker-dealers that are part of a holding 
company structure with at least $20 million in capital to file with the 
Commission disaggregated, non-public information on the broker-dealer, 
the holding company, and other entities within the holding company. The 
purpose of the Broker-Dealer Risk Assessment program is for staff in 
the SEC's Division of Trading and Markets to assess the risks to 
registered broker-dealers that may arise from affiliated entities, 
including holding companies and keep apprised of significant events 
that could adversely affect broker-dealers, customers and the financial 
markets.
---------------------------------------------------------------------------
    The firm held further conversations with SEC staff in August 
suggesting that it should not have to take a net capital charge for the 
sovereign debt exposure. Ultimately, by the second half of August, 
however, FINRA, CBOE and the SEC all affirmed the determination that a 
net capital charge was appropriate. Because the securities regulators 
determined that it was necessary and appropriate for MFGI to apply this 
net capital charge retroactively, MFGI determined that it was in net 
capital deficiency at the end of July 2011. MFGI, however, was able to 
continue to operate at this point because the company had taken a 
number of steps to increase its net capital in anticipation that 
affirmation of a net capital charge would prevail. Among the steps that 
MFGI took to remain in net capital compliance included: a capital 
infusion from its parent company (MF Global Holdings USA, Inc.), the 
transfer of some sovereign bond positions to MF Global Finance USA, Inc 
as a reverse repo-to-maturity transaction, and the liquidation of 
foreign affiliates' open futures positions, which had the effect of 
reducing the firm's required net capital. It should also be noted that 
on August 31, 2011, CBOE joined CME in a meeting with MF Global for an 
overview of the transactions and the charge. CME agreed with the 
decision that had been made by the securities regulators requesting the 
adjustment to the firm's net capital.
    During the time that the securities regulators were discussing the 
sovereign debt exposure issue with MFGI, CBOE separately initiated its 
own examination of MFGI on August 22, 2011. CBOE determined that it 
would review the European sovereign bond portfolio dating back to the 
beginning of 2011 to check whether the retroactive application of the 
increased capital charge would have had the effect of causing MFGI not 
to be in compliance with its financial responsibility rules 
retroactively. CBOE staff was on-site in MFGI's offices starting on 
September 7th and as is common practice, CBOE's examination focused on 
the most recent month in which all of the books have been closed, in 
this case July 2011. CBOE sent a formal request for documents 
pertaining to the financial investigation of the European Sovereign 
Debt portfolio on September 19, 2011. MF Global provided the requested 
documents on September 23, 2011.
    Another primary focus of CBOE's examination (as is the case with 
all annual financial and operational examinations of this type) was to 
determine whether MFGI was appropriately segregating its customer funds 
in securities accounts in compliance with SEC Rule 15c3-3. CBOE spent 
considerable time looking closely at these issues. Any potential rule 
violations that the CBOE and SEC may identify to date could become the 
subject of disciplinary action against individuals at MFGI through the 
ongoing investigation.
    Beginning on August 26, 2011, CBOE staff requested and received a 
variety of daily financial information from MFGI. These various 
computations were received daily through the end of October 2011. In 
addition, CBOE staff reviewed a variety of financial documents from the 
firm throughout this time to determine the financial health of the 
firm. It should also be noted that the financial information we 
received from the firm on a daily basis never showed a deficit of any 
kind. In fact, until the bankruptcy filing, MFGI never reported excess 
net capital of less than $100 million for any month-end since April 
2008 (with the exception of its July 2011 revised net capital 
calculation mentioned above) and always maintained open funding from 
its parent if needed. Although MFGI routinely showed significant excess 
net capital, through CBOE's monthly closer-than-normal (CTN) 
surveillance reports (which CBOE generates from the monthly FOCUS 
reports), MFGI has been on a level of higher surveillance by CBOE for 
every month since December 2010 for various reasons. These monthly CTN 
write-ups are shared with SIPC, the SEC, the Options Clearing 
Corporation, the National Securities Clearing Corporation, and other 
securities self-regulatory organizations. During the final days of 
October, however, news about MF Global's exposure to sovereign debt 
surfaced, its stock price declined, and its credit rating was 
downgraded. Nevertheless, we received a preliminary net capital 
computation for Friday, October 28th on Saturday, October 29th which 
indicated the firm was still in net capital compliance. Just two days 
later, on Monday, October 31, staff at MF Global sent an e-mail stating 
a ``significant shortfall in segregated futures accounts.'' That same 
day MF Global Holdings, Ltd. and MF Global Finance filed for 
bankruptcy.
    Almost every day for the last couple of months, CBOE staff has been 
on site at the firm continuing to review all elements of the firm's 
Rule 15c3-3 computation. We have also spent significant time piecing 
together all the money wires and transfers that occurred during the 
week of October 24th to 31st, 2011, including the funding of daily 
settlement needs, the funding of customer withdrawals, bank 
reconciliations, and the manner in which margin calls on the European 
Sovereign debt was met. We also have shared this information with the 
SEC, the CFTC, and SIPC. We, along with the other regulators, have been 
piecing together the wires that created the shortfall of the Segregated 
Futures accounts and have been consulting with each other on the events 
as we learn them. We are continuing to work with the SEC Chicago 
office, which in turn communicates daily with staff in SEC 
headquarters.
    In conclusion, CBOE is still gathering information and we will need 
to learn more before we are able to make a full assessment of this 
matter and to be able to define and address any ``lessons learned.'' We 
believe that the issues surrounding the MF Global bankruptcy provides 
an impetus for CBOE, FINRA, and the statutory regulators to discuss 
amongst ourselves whether there are rules or policies that should be 
adopted or amended to add a greater level of protection to customer 
assets in broker-dealer or FCM bankruptcy scenarios. Any new or amended 
rules or policies should necessarily also focus on ensuring that 
customer assets can be transferred as quickly as possible in these 
types of events. We also intend to take this opportunity to determine 
whether there can be any improvements in the nature of the cooperation 
among regulators when faced with a financially troubled firm subject to 
oversight by multiple entities.
    We hope that the foregoing narrative was helpful to the Committee's 
understanding of the events leading up to and surrounding the 
bankruptcy of MFGI. We stand ready to continue to assist the Committee 
and its staff with its continued inquiry.

    Mr. Conaway [presiding.] Thank you, Mr. Brodsky.
    Mr. Roth for 5 minutes.

        TESTIMONY OF DANIEL J. ROTH, PRESIDENT AND CHIEF
  EXECUTIVE OFFICER, NATIONAL FUTURES ASSOCIATION, CHICAGO, IL

    Mr. Roth. Thank you, Mr. Chairman.
    My name is Dan Roth and I am the President of National 
Futures Association and I appreciate the opportunity to be here 
today to talk about the types of regulatory changes which might 
be necessary in light of MF Global. And clearly, Mr. Chairman, 
some regulatory changes are going to be necessary.
    Congress recognized a long time ago that efficient futures 
markets are vital to our economy, that efficient futures 
markets depend on liquidity, and that that depends on public 
confidence. The whole point of the regulatory structure for the 
U.S. futures industry is to ensure that that public confidence 
is intact.
    For a long time, the futures industry enjoyed a great 
reputation for financial integrity, a reputation that survived 
the crisis of 2008. But now, as a result of MF Global, that 
reputation and public confidence has taken a great hit and it 
is up to all of us that are involved in the regulatory process 
to take a top-to-bottom look at what we do and how we do it and 
try to figure out a better way to do it and try to make sure 
that we re-earn that public confidence.
    I think that that inquiry about how we can do things better 
falls into two separate categories. I think we have to look at 
the steps that we can take to try to prevent insolvencies from 
occurring in the future; and second, how we deal with those 
insolvencies when they do occur. I have outlined in my written 
testimony what NFA's role in the current regulatory structure 
and how we monitor our firms for seg compliance. What I would 
like to do today is just basically talk about a couple of the 
seven or eight ideas that I included in my written testimony.
    With respect to preventing insolvencies, I think the two 
points to start out with are obvious and I am sorry to take 
time to restate the obvious. But first, if a person is intent 
upon violating the law, if a person is intent upon committing a 
felony, there is no regulatory practice that will in every 
instance prevent that person from doing just that. And second, 
I think one of the best tools that we have to prevent this type 
of conduct is to deter that type of conduct through vigorous 
enforcement of the existing law. Just under the Commodity 
Exchange Act, it is a violation--it is a felony violation to 
misappropriate customer segregated funds punishable by up to 10 
years in prison. And I know we have an ongoing investigation 
but I am hopeful and confident that if that investigation 
uncovers criminal activity, that that activity will be 
prosecuted vigorously.
    But vigorous prosecution of the existing rules isn't going 
to be enough to get us where we want to go. That is not going 
to be enough to restore public confidence in the financial 
integrity of these markets. I have again outlined a couple of 
different things that I think need to be discussed and 
considered in my written testimony.
    I think we have to look at how we monitor our firms for 
compliance with segregated fund requirements. We are the DSRO 
for about 26 non-clearing FCMs. Those firms file daily 
segregation reports with us. We get more detailed reports on a 
monthly basis outlining not only what their seg funds numbers 
are but where those funds are invested and what type of 
instruments. We spot-check for compliance with seg funds 
requirements by verifying to outside depositories of the 
balances that are reported to us. We do that in the course of 
our regular audits of FCMs, and we do that when we are doing 
the audit for a number of date that we spot-check throughout 
the year.
    I think we could do more on that. I think we could do more 
systematic and more regular surprise spot-checks of that type 
of stuff. And we would be happy to talk with the Commission and 
with Congress to see how that could be improved. We also 
discuss in the written testimony ideas such as requiring FCMs 
to maintain a certain amount of excess segregation possibly the 
idea of a third-party depository. And there are a number of 
different items. And I think my basic point is that I am not 
advocating any of the items that are listed in the testimony, 
but they are all items which require very serious, very 
thoughtful consideration so that we can try to restore public 
confidence to these markets.
    With respect to handling insolvencies when they do occur, 
in 1985, the CFTC asked NFA to do a study of customer account 
protection issues in the light of a failure of a firm called 
Volume Investors. And in 1986 we submitted that report to the 
CFTC. That data that was in that report I think made clear that 
no customer funds had ever been lost to--due to insolvency by a 
clearing FCM. With respect to non-clearing FCMs, the report 
presented that that I think--from which people concluded that 
the losses had been so infrequent and so small that a 
formalized response mechanism like an insurance program might 
not be appropriate.
    Well, that was then and this is now and things may have 
changed and I think all of the issues that were discussed in 
that 1986 report have to be revisited and have to be revisited 
in some detail.
    With that, Mr. Chairman, we look forward to working with 
the industry, with the Commission, and with Congress to try to 
restore that public confidence that is so vital to our markets. 
Thank you.
    [The prepared testimony of Mr. Roth follows:]

  Prepared Testimony of Daniel J. Roth, President and Chief Executive 
           Officer, National Futures Association, Chicago, IL
    My name is Daniel Roth and I am the President and Chief Executive 
Officer of National Futures Association. NFA is the industry-wide, 
self-regulatory organization for the futures industry. Our 4,000 Member 
firms include futures commission merchants, commodity pool operators, 
commodity trading advisors and introducing brokers. 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.
    All of us involved in the regulatory process have to work to 
restore that confidence and that effort must begin with identifying and 
implementing regulatory changes to try to prevent such insolvencies 
from occurring and to better respond to them when they do occur. Even 
while the MF Global investigation is ongoing, we should be able to 
identify certain frailties of the current structure that will need to 
be addressed. No ideas should be off the table in this process. At the 
same time, though, we should not hastily discard regulatory approaches 
that have been historically sound and I would note that the basic 
concept of self-regulation has served our markets and our nation very 
well for a very long time. Until this investigation is complete, we 
will not know the full facts of exactly what went wrong at MF Global. 
What I do know, though, is that no system of regulation can in every 
instance prevent people intent on breaking the law from doing so, and 
that is why the Commodity Exchange Act provides that stealing customer 
funds is a felony punishable by up to 10 years in prison. With that in 
mind, I would like to outline today some of the possible regulatory 
changes that need to be considered.
    First, though, let me describe NFA's current role in the regulatory 
structure, in particular with regard to FCMs. Our 4,000 Member firms 
include approximately 70 FCMs that hold customer funds. The largest of 
these are members of one or more exchanges and therefore members of 
multiple Self-Regulatory Organizations (SROs). Pursuant to CFTC rules, 
the SROs have formed a Joint Audit Committee. For FCMs that have 
multiple SROs, the Joint Audit Committee assigns one SRO to be the 
primary regulator, what is referred to as the Designated Self-
Regulatory Organization or DSRO. With very limited exceptions, NFA acts 
as the DSRO for 26 FCMs that hold customer funds and that are not 
clearing members of any exchange. On a daily basis each of these firms 
must report to NFA the amount of funds required to be held in 
segregation; the amount actually held; customer debit information; open 
trade equity for both customer and proprietary futures trading; long 
and short option value for customer accounts; and debits and deficits 
for non-customers such as employees or affiliates of the firm. Firms 
for which NFA is the DSRO must also file a Segregated Investment Detail 
Report (SIDR report). This report lists the types of investments in 
which customer segregated funds are held. These reports must be filed 
either monthly or whenever there is a material change in the 
information. Our systems for the daily segregation reports and the SIDR 
reports generate alerts whenever there is a change in information 
regarding segregated funds that could signal a problem with the firm.
    Each FCM is also subject to two annual examinations, one by an 
outside CPA that produces an annual certified report and the other by 
its DSRO. Let me assure you that those annual examinations focus 
extensively on testing for segregation compliance and confirming to 
outside sources the segregated fund balances reported by the FCM. We 
also act as the exclusive SRO for all commodity pool operators, 
commodity trading advisors and most introducing brokers.
    Although we were not the DSRO for MF Global, we participated with 
other members of the Joint Audit Committee to receive regular updates 
on MF Global's condition in the week prior to its bankruptcy. When the 
shortfall in customer segregated funds became known, we focused on the 
five FCMs for which we are the DSRO that had customer funds on deposit 
with MF Global. Our goal was to ensure that those FCMs could satisfy 
their obligations to their customers and that they were in compliance 
with all segregation and capital requirements. We worked closely with 
the CFTC in that effort and continue to monitor those firms, all of 
which appear to be in compliance.
    We have also identified 150 commodity pools operated by NFA Member 
firms that had funds on deposit with MF Global. We have worked with 
those Member firms to ensure that their pool participants are receiving 
adequate disclosures regarding the impact of MF Global's failure on the 
pools and to ensure that redemption requests from participants are 
being handled fairly. We also have 261 introducing broker Members who 
either had a portion of their own capital on deposit with MF Global or 
who satisfied their capital requirements by operating pursuant to a 
guarantee agreement with MF Global. Introducing brokers do not hold 
customer funds. We have, though, monitored those IBs to ensure that 
they either have new guarantee agreements or have sufficient net 
capital to satisfy their regulatory requirements.
    With respect to the regulatory changes that have to be considered, 
there are two broad issues to be addressed. First, what changes can be 
made to rules or regulatory practices that would be better designed to 
prevent customer losses due to an FCM's insolvency. Second, since we 
cannot completely eliminate the possibility of FCM insolvencies, how 
can we improve the way we handle those insolvencies to limit the impact 
on customers and the markets. The following list of topics is certainly 
not exhaustive but should be among the topics under discussion.
Prevention of FCM Insolvencies
    Gross Margining--Should the CFTC require all clearinghouses to 
    collect margin on a gross rather than net basis?
    Commingling of Customer Segregated Funds--FCMs are prohibited from 
    commingling customer funds with the firm's assets but may commingle 
    funds from different customers in the same segregated account. 
    Though not an issue in MF Global, this can expose customers to loss 
    due to the default of another customer. Various alternatives to 
    this approach have been discussed.
    Monitoring for Segregation Compliance--Should SROs change the 
    manner in which they monitor Member firms for compliance with 
    segregation requirements? Should SROs perform unannounced spot-
    checks to confirm balances to outside sources more frequently? 
    Should FCMs be required to have an independent CPA conduct 
    unannounced segregation compliance exams annually? Should SROs 
    periodically test to see if there have been intraday transfers of 
    customer segregated funds that could arouse suspicion? Should 
    information be made publicly available about how each FCM invests 
    its customer funds?
    Mandatory Excess Segregation--Most FCMs deposit some of their own 
    funds as excess customer segregated accounts to act as a buffer in 
    case some customers go into a debit position. Should FCMs be 
    required to maintain a certain minimum in excess segregated funds?
    Internal Controls--Should there be either specified requirements or 
    best practice guidance on the types of internal controls that 
    should be in place for the authorization to transfer segregated 
    customer funds above a certain threshold level?
    Third Party Depositories--Some have suggested that customer funds 
    not needed to margin positions at the clearinghouse should be held 
    not by the FCM but by a third party depository.
    Notice to Regulators--Should an FCM be required to give notice to 
    either its DSRO or the CFTC when the firm makes any transfer of 
    customer segregated funds, including intraday transfers, above a 
    certain threshold?
Responding to FCM Insolvencies
    Implementation of some of the changes described above could obviate 
the necessity of a formalized response mechanism, such as some form of 
customer account insurance. On the other hand, the changes described 
above may not be sufficient to restore public confidence, and we need 
to examine the pros and cons of establishing a formalized mechanism to 
address customer losses due to an FCM insolvency. Any such study will 
have to address each of the following broad issues:

    Goal of the Insolvency Response Mechanism--Would the mechanism be 
    designed to compensate customers for their losses, along the lines 
    of a SIPC type program, or to facilitate the immediate transfer of 
    open positions to a financially stable FCM?
    Administration of the Mechanism--If there should be a formalized 
    insolvency response mechanism in place, should it be government 
    sponsored, administered by an industry organization or accomplished 
    through private insurance?
    Funding the Mechanism--If the response mechanism is some form of 
    industry administered fund, the question of how to fund it depends 
    on who would be covered. Would it be desirable to limit the 
    beneficiaries to the public customers, i.e., non-members of the 
    exchange of the insolvent FCM?
    Limitations on Compensation--Regardless of whether the mechanism is 
    administered by an industry group or by the government, what 
    restrictions or limitations on customer compensation would be 
    appropriate? Should such a mechanism follow the SIPC model and 
    compensate 100% of customer losses up to a certain limit? Would 
    that form of protection address the needs of the institutional 
    participants that form the bulk of the industry's customer base? 
    Should the mechanism make a pro rata distribution to customers? 
    Should there be a limit as to the amount of coverage related to any 
    one FCM insolvency?

    We should also consider how the bankruptcy laws should apply to a 
firm that is both an FCM and a broker-dealer but is primarily engaged 
as an FCM. That is the fact pattern here and we should consider whether 
a SIPC administered bankruptcy proceeding is the most appropriate means 
of dealing with such an insolvency.
    The basic point here, Mr. Chairman, is that there is work to be 
done. The failure of MF Global will require significant regulatory 
changes to bolster public confidence in our markets. The list of 
possible options is long. The issues are complex and their importance 
is profound. The process of weighing those choices must be deliberate 
and careful but we must not lose time in starting that review. NFA 
hopes to play a constructive role in that process and we look forward 
to working with the industry, the CFTC and with Congress to ensure that 
what emerges is a better regulatory model.

    Mr. Conaway. Thank you, Mr. Roth.
    Mr. Luparello?

         TESTIMONY OF STEPHEN LUPARELLO, VICE CHAIRMAN,
            FINANCIAL INDUSTRY REGULATORY AUTHORITY,
                        WASHINGTON, DC.

    Mr. Luparello. Chairman Lucas, Ranking Member Peterson, and 
Members of the Committee, thank you for the opportunity to 
testify today.
    My name is Steve Luparello and I am the Vice Chairman of 
the Financial Industry Regulatory Authority, or FINRA. When a 
firm like MF Global fails, there is great value in reviewing 
the events leading up to that failure and examining where rules 
and processes might be improved. I commend the Committee for 
having this hearing to do just that. Clearly, the continued 
impact of MF Global's failure on customers who cannot access 
their funds is of great concern and every possible step should 
be taken to transfer and restore these accounts as quickly as 
possible.
    With respect to oversight of MF Global's financial and 
operational compliance, which is most relevant to today's 
hearing, FINRA shares oversight responsibilities with the 
Chicago Board Options Exchange and the SEC. For broker-dealers 
that are members of multiple SROs, the SEC assigns a designated 
examining authority, or DEA, to examine for, among other 
things, the firm's compliance with the Commission's net capital 
and customer protection rules. For MF Global, that DEA is CBOE.
    When FINRA is not the DEA for one of its registered broker-
dealers, we work closely with the DEA and routinely analyze the 
firm's FOCUS report filings and annual audited financial 
statements as part of our ongoing oversight of the firm. While 
that monitoring focus is on a broad range of issues, it is 
particularly relevant to note that our financial surveillance 
team placed a heightened focus on exposure to European 
sovereign debt beginning in spring 2010. During April and May 
of that year, our staff began surveying firms as to their 
positions in European sovereign debt as part of our monitoring 
in this area.
    In a review of MF Global's audited financial statements 
filed with FINRA on May 31 of this year, our staff raised 
questions about a footnote disclosure regarding the firm's repo 
to maturity portfolio. During discussion with the firm, FINRA 
learned that a significant portion of that portfolio was 
collateralized by approximately $7.6 billion in European 
sovereign debt. According to U.S. GAAP, RTMs are afforded sale 
treatment and therefore not recognized on the balance sheet. 
Notwithstanding that accounting position, the firm remained 
subject to credit risk throughout the life of the repo.
    Beginning in mid-June, FINRA along with CBOE had 
discussions with the firm regarding the proper treatment of the 
RTM portfolio. Our view was that while reporting the repos of 
sale may have been consistent with GAAP, this should not be 
treated as such for purposes of capital rule given the market 
and credit risk these positions carried. As such, we asserted 
that capital needed to be reserved against the RTM position.
    FINRA and CBOE also had discussions with the SEC about our 
concerns. The SEC agreed with our assertion that the firm 
should be holding capital against these positions. The firm 
fought that interpretation through the summer appealing 
directly to the SEC before eventually conceding in late August.
    MF Global infused additional capital and made regulatory 
filings on August 31 and September 1 that notified regulators 
of the identified capital deficiency and the change in the 
capital treatment of the RTM portfolio. Following this, FINRA 
added MF Global to alert reporting, they heightening monitoring 
process whereby we require firms to provide weekly information 
on net capital and reserve formula computations.
    During the week of October 24, as MF Global's equity price 
declined and its credit rating was cut, FINRA increased the 
level of surveillance on the firm. At the end of that week, 
FINRA was onsite at the firm with the SEC and CBOE as it became 
clear that MF Global was unlikely to continue to be a viable 
standalone business. Our primary goal was to gain an 
understanding of the custodial locations of customer securities 
and worked closely with potential acquirers in hopes of 
avoiding SIPC liquidation. As it has been widely reported, the 
discrepancy discovered in the segregated funds on the futures 
side of the firm ended those discussions.
    While FINRA believes that financial security rules of the 
SEC combined with SIPC create a good structure for protecting 
customer funds, firm failures provide opportunities for review 
and analysis of where improvements may be warranted. FINRA has 
proposed two rules that we believe would assist us in our work 
in monitoring the financial status of firms. One of the 
proposals would expedite the liquidation of a firm, and most 
importantly, the transfer of customer assets. Firms would need 
to contractually require their clearing banks and custodians to 
provide transaction fees to the firm, regulators, and SIPC 
after the commencement of a liquidation. The rule would also 
require firms to maintain current records in a central 
location. The other proposal would require FINRA-regulated 
firms to file additional financial and operational schedules or 
reports as we deem necessary to supplement the FOCUS filing 
report.
    FINRA shares your commitment to reviewing MF Global's 
collapse. We will review our rules and our procedures but would 
also participate in a coordinated review with our fellow 
regulators to provide a broader assessment of where current 
processes may be enhanced.
    Again, thank you for the opportunity to share our views and 
I would be happy to answer any questions.
    [The prepared testimony of Mr. Luparello follows:]

   Prepared Testimony of Stephen Luparello, Vice Chairman, Financial 
             Industry Regulatory Authority, Washington, DC.
    Chairman Lucas, Ranking Member Peterson and Members of the 
Committee:

    I am Steve Luparello, Vice Chairman of the Financial Industry 
Regulatory Authority, or FINRA. On behalf of FINRA, I would like to 
thank you for the opportunity to testify today.
    When a firm like MF Global fails, there is always value in 
reviewing the events leading to that failure and examining where rules 
and processes might be improved. I commend the Committee for having 
this hearing to do just that. Clearly the continued impact of MF 
Global's failure on customers who cannot access their funds is of great 
concern, and every possible step should be taken to transfer and 
restore those accounts as quickly as possible.
    Like many other financial firms today, MF Global's operations 
included multiple business lines, engaging multiple regulatory schemes 
and crossing national boundaries. We and the other regulators here 
today will explain our roles in overseeing the various parts of the 
firm. We all share the goal of restoring funds to customers. While 
FINRA's role in that process is limited at this stage, we are committed 
to continuing to provide assistance wherever we can.
FINRA
    FINRA is the largest independent regulator for all securities firms 
doing business in the United States, and, through its comprehensive 
regulatory oversight programs, regulates both the firms and 
professionals that sell securities in the United States and the U.S. 
securities markets. FINRA oversees approximately 4,500 brokerage firms, 
163,000 branch offices and 636,000 registered securities 
representatives. FINRA touches virtually every aspect of the securities 
business--from registering industry participants to examining 
securities firms; writing rules and enforcing those rules and the 
Federal securities laws; informing and educating the investing public; 
providing trade reporting and other industry utilities and 
administering the largest dispute resolution forum for investors and 
registered firms.
    In 2010, FINRA brought 1,310 disciplinary actions, collected fines 
totaling $42.2 million and ordered the payment of almost $6.2 million 
in restitution to harmed investors. FINRA expelled 14 firms from the 
securities industry, barred 288 individuals and suspended 428 from 
association with FINRA-regulated firms. Last year, FINRA conducted 
approximately 2,600 cycle examinations and 7,300 cause examinations.
    One of our regulatory programs that is particularly relevant to 
today's hearing is our financial and operational surveillance. Through 
this program, FINRA reviews FOCUS (Financial and Operational Combined 
Uniform Single) reports that broker-dealers file on a monthly basis as 
required by the Securities and Exchange Commission (SEC). These reports 
detail a firm's financial and operational conditions and allow FINRA to 
closely monitor a firm's net capital position and profitability for 
signs of potential problems.
    FINRA's activities are overseen by the SEC, which approves all 
FINRA rules and has oversight authority over FINRA operations.
Oversight of MF Global
    Like many financial firms today that operate simultaneously in 
multiple channels, MF Global was not solely a broker-dealer, but also a 
futures commission merchant or FCM. As such, multiple government 
regulators and self-regulatory organizations (SROs), including FINRA, 
had a role in overseeing various parts of the firm's operations.
    With respect to oversight of MF Global's financial and operational 
compliance, which is most relevant to today's hearing, FINRA shares 
oversight responsibilities with the Chicago Board Options Exchange 
(CBOE) and the SEC, especially in terms of the firm's compliance with 
the net capital rule. For broker-dealers that are members of multiple 
SROs, the SEC assigns a Designated Examining Authority, or DEA, to 
examine the firm's financial and operational programs, including the 
firm's compliance with the Commission's net capital and customer 
protection rules. For MF Global, that DEA is the CBOE. As such, CBOE 
conducted the regular examinations of the firm for capital compliance.
    There are two primary SEC rules for which financial examinations 
evaluate compliance, the net capital and customer protection rules. The 
primary purpose of the SEC's net capital rule, 15c3-1, is to protect 
customers and creditors of a registered broker-dealer from monetary 
losses and delays that can occur if that broker-dealer fails. It 
requires firms to maintain sufficient liquid assets to satisfy customer 
and creditor claims. It accomplishes this by requiring brokerage firms 
to maintain net capital in excess of certain minimum amounts. A firm's 
net capital takes into account net worth, reduced by illiquid assets 
and various deductions to account for market and credit risk. This 
amount is measured against the minimum amount of net capital a firm is 
required to maintain, which depends on its size and business. The net 
capital rule is intended to provide an extra buffer of protection, 
beyond rules requiring segregation of customer funds, so that if a firm 
cannot continue business and needs to liquidate, resources will be 
available for them to do so.
    The SEC's customer protection rule, 15c3-3, has two components, 
reserve formula computation and possession or control, and was designed 
to ensure the safety of customers' assets. The objective of the reserve 
formula computation is to protect the customer funds in the event the 
broker-dealer becomes financially insolvent. Possession or control 
requires that the broker-dealer obtain prompt possession or control of 
customers' fully paid for and excess margin securities, ensure that 
customers' assets held by a broker-dealer are properly safeguarded 
against unauthorized use and separate firm and customer related 
business.
    Fewer than 20 FINRA-regulated broker-dealers have a DEA other than 
FINRA, but in those cases, we work closely and cooperatively with the 
DEA when questions or issues arise. Even when we are not the DEA for 
one of our regulated broker-dealers, FINRA monitors and analyzes the 
firm's FOCUS report filings and annual audited financial statements as 
part of our ongoing oversight of the firm. That was the case with MF 
Global.
    While that monitoring focuses on a broad range of issues, it is 
particularly relevant to note that our financial surveillance team 
placed a heightened focus on exposure to European sovereign debt 
beginning in spring 2010. During April and May, our staff began 
surveying firms as to their positions in European sovereign debt as 
part of our ongoing monitoring of regulated firms.
    In response to our outreach on this issue, MF Global indicated in 
late September 2010 that the firm did not have any such positions. We 
later learned that the firm began entering into transactions that 
carried European debt exposure in mid-September 2010. While the firm's 
response was consistent with GAAP accounting rules that repo-to-
maturity (RTM) transactions are treated as a sale for accounting 
purposes, the lack of a complete response delayed us in detecting the 
firm's exposure.
MF Global's Exposure to European Sovereign Debt
    In a routine review of MF Global's audited financial statements 
filed with FINRA on May 31 of this year, our staff raised questions 
about a footnote disclosure regarding the firm's RTM portfolio. RTMs 
are essentially transactions whereby the maturity date of a firm's bond 
position held in its inventory matches the maturity date of the repo. 
During the course of discussions with the firm, FINRA learned that a 
significant portion of that portfolio was collateralized by 
approximately $7.6 billion in European sovereign debt. According to 
U.S. GAAP, RTMs are afforded sale treatment and therefore not 
recognized on the balance sheet. Notwithstanding that accounting 
position, the firm remained subject to market and credit risk 
throughout the life of the repo.
    Beginning in mid-June, FINRA had detailed discussions with the 
firm, in which CBOE also participated, regarding the proper treatment 
of the RTM portfolio and we asserted that not enough capital was 
reserved against the RTM. While the SEC has issued guidance clarifying 
that RTMs collateralized by U.S. Treasury debt do not require capital 
to be reserved, there is no such relief for RTMs collateralized by debt 
of non-U.S. governments. We researched whether the firm retained 
default risk on the positions, and concluded that it did. Our view was 
that while recording the RTMs as sales was consistent with GAAP, they 
should not be treated as such for purposes of the capital rule given 
the market and credit risk those positions carried. As a result, we 
asserted that capital needed to be reserved against the RTM.
    FINRA and CBOE also had discussions with the SEC about our concerns 
that the firm was not holding capital against its RTM portfolio. The 
SEC agreed with our assertion that the firm should be holding capital 
against the positions. The firm fought this interpretation throughout 
the summer, appealing directly to the SEC, before eventually conceding 
in late August.
    The firm infused additional capital and filed an amended July FOCUS 
report on August 31 to report a $150 million capital deficiency in 
July. The firm also provided notification, pursuant to SEC Rule 17a-11, 
of its capital deficiency to the SEC, CBOE and FINRA as well as to the 
Commodity Futures Trading Commission (CFTC), pursuant to CFTC Rule 
1.12. The net capital deficiency in the amended July FOCUS report was 
reported on the CFTC's website. In addition, on September 1, the firm 
amended its Form 10-Q filing with the SEC to identify the change in net 
capital treatment of the RTM portfolio.
    In September, FINRA added MF Global to ``alert reporting,'' a 
heightened monitoring process whereby we require firms to provide 
weekly information on net capital, inventory, profit and loss as well 
as reserve formula computations.
    On October 19, the Intermarket Financial Surveillance Group (IFSG), 
which is comprised of securities and futures regulators and self-
regulatory organizations, had its annual meeting. The IFSG was 
established in 1989 in order to enhance the coordination and monitoring 
efforts of both securities and commodities regulators. Through an 
information sharing agreement, SROs provide each other with financial 
surveillance data and related information on an as-needed basis. In 
addition, SRO representatives meet annually to discuss relevant capital 
and customer protection issues. Exposure to European sovereign debt was 
one of the topics at the October meeting and FINRA raised MF Global's 
positions during the discussions.
    During the week of October 24, as MF Global's equity price declined 
and its credit rating was cut, FINRA increased the level of 
surveillance over the firm. We requested detailed information about the 
firm's balance sheet and liquidity; we received updates about the loss 
of lending counterparties and customers; and we spoke to clearing 
organizations about the margin required to settle trades. At the end of 
that week, FINRA was on site at the firm, with the SEC, as it became 
clear that MF Global was unlikely to continue to be a viable standalone 
business. Our primary goal was to gain an understanding of the 
custodial locations for customer securities and to work closely with 
potential acquirers in hopes of avoiding SIPC liquidation. As has been 
widely reported, the discrepancy discovered in the segregated funds on 
the futures side of the firm ended those discussions.
MF Global Bankruptcy and Liquidation Proceeding
    On October 31, 2011, MF Global Holdings, Ltd. and MF Global, Inc. 
filed for bankruptcy and entered into SIPC liquidation. Since that 
time, FINRA has provided assistance as requested by the SEC and the 
Trustee.
    On November 4, 2011, FINRA assisted the Trustee in alerting broker-
dealer firms via e-mail that the Trustee was accepting proposals for 
the transfer of approximately 450 customer securities accounts of MF 
Global to another member of SIPC.
    We have also assisted the Trustee by providing information about 
other broker-dealers to which MF Global securities customer accounts 
may be transferred.
Proposed Rules to Enhance Financial Surveillance and Expedite the 
        Return of Customer Funds and Securities in the Event of 
        Liquidation
    While FINRA believes that financial oversight rules of the SEC, 
combined with SIPC, create a good structure for protecting customer 
funds, firm failures provide opportunities for review and analysis of 
where improvements may be warranted. FINRA has proposed two rules that 
we believe would assist us in our work to monitor the financial status 
of firms. One of the proposals, approved by FINRA's Board in September 
of this year, would expedite the liquidation of a firm and most 
importantly, the transfer of customer assets. This rule is focused on 
enabling a more orderly resolution when a firm must cease operations. 
Specifically, it would require firms to contractually require their 
clearing banks and custodians to continue providing transaction feeds 
to the firm after the commencement of liquidation avoiding the recent 
reconciliation problems experienced by MF Global in its final days of 
business.
    The rule would require the clearing agencies and custodians to 
provide read-only access to the firm's records to the regulators and 
SIPC, with the goal of providing a more timely transfer of customer 
assets. The rule would also require carrying or clearing firms 
regulated by FINRA to maintain and keep current certain records in a 
central location to facilitate a more rapid and orderly transfer of 
customer accounts to another broker-dealer as well as a more orderly 
liquidation in the event the firm can no longer continue to operate.
    The other proposed rule, approved by FINRA's Board in July 2010, 
would require that FINRA-regulated firms file additional financial or 
operational schedules or reports as we deem necessary to supplement the 
FOCUS report. The rule would provide FINRA with the framework to 
request more specific information regarding, among other things, the 
generation of revenues and allocation of expenses by business segment 
or product line, the sources of trading gains and losses, the types and 
amounts of fees earned and the nature and extent of participation in 
securities offerings. As part of the rule filing, we have proposed a 
supplemental statement of income to the FOCUS reports, in order to 
capture more granular detail of a firm's revenue and expense 
information.
    We are also working to develop an off balance sheet schedule, which 
could highlight exposures to regulators on a more timely basis.
    We believe these proposals would enhance our ability to closely 
oversee the financial operations of firms we regulate and to more 
quickly and efficiently assist in transfers or liquidations when firms 
must close their doors.
Conclusion
    FINRA will continue to work with our fellow regulators and Congress 
as the liquidation process for MF Global proceeds. We share your 
commitment to reviewing the events involved in the firm's collapse, 
relevant rules and coordination with other regulators to identify the 
lessons learned and potential policy or procedural adjustments that may 
be warranted.
    We realize that it is critical to continually evaluate the customer 
protection regime to ensure that it is designed as well as it can be to 
ensure prompt restoration of customer funds in the event of a firm 
collapse. To that end, we would be glad to participate in a broader 
review, in coordination with the SEC, CFTC, self-regulatory 
organizations and others to provide an overall assessment of where 
current rules and processes may need enhancements.
    Again, I appreciate the opportunity to testify today. I would be 
happy to answer any questions you may have.

    Mr. Conaway. Thank you, Mr. Luparello.
    Mr. Corcoran?

  TESTIMONY OF GERALD F. CORCORAN, CHAIRMAN OF THE BOARD AND 
            CHIEF EXECUTIVE OFFICER, R.J. O'BRIEN &
ASSOCIATES, CHICAGO, IL; ON BEHALF OF COMMODITY MARKETS COUNCIL

    Mr. Corcoran. Chairman, Members of the Committee, good 
evening. My name is Gerry Corcoran and I am the Chairman and 
Chief Executive Officer of R.J. O'Brien & Associates, a duly 
registered FCM.
    Today, I am honored to speak on behalf of both RJO and the 
Commodity Markets Council. I would like to thank you for 
hosting this critical hearing and for including RJO and CMC.
    The CMC is a trade association bringing together commodity 
exchanges with their industry counterparts. The activities of 
CMC members represents the complete spectrum of commercial 
users for all futures markets.
    At R.J. O'Brien, we are especially proud of our 
agricultural roots, our commitment to the agricultural 
community, and our leadership in the futures industry. We are 
passionate about the business and the important role we play in 
helping individuals, farmers, agribusinesses, corporations, and 
institutions manage their risk. Founded in 1914, RJO is a 
privately owned futures commission merchant. With our origins 
in the cash butter and egg business, today we are the oldest 
and largest independent futures brokerage and clearing firm in 
the United States. We are the only remaining founding member of 
the Chicago Mercantile Exchange, and our Chairman emeritus, 
Robert J. O'Brien, served on the board during the years when 
agricultural future markets blossomed and the financial futures 
markets were born.
    Throughout our history, RJO has stood side by side with our 
clients, exchanges, and regulators during every significant 
market event this industry has seen.
    Since the MF Global bankruptcy filing and default, RJO has 
worked hand in hand with the CME Group and the other domestic 
exchanges to provide a home for a substantial number of MF 
Global accounts and brokers. In a matter of days, we assumed a 
bulk transfer of over 20,000 accounts without incident, and our 
shareholders provided an infusion of approximately $50 million 
of capital to ensure that we would be sufficiently capitalized 
for this unexpected event.
    At the same time, we worked very hard to ensure that our 
long-standing clients continued to receive the outstanding 
service to which they are accustomed to. Our management and 
staff worked literally around the clock for 25 straight days in 
a massive effort that involved coordination of systems, 
processes, and people and sometimes working with incomplete 
data and rapidly changing circumstances. We fully recognized 
that the clients of MF Global had just experienced a traumatic 
event, and we did everything we could to provide vehicles for 
addressing their questions and providing reassurances as soon 
as we had answers.
    And so while the investigation continues into the causes of 
the MF Global bankruptcy and the whereabouts of segregated 
assets, I am certain, very certain we cannot let this event 
destroy the long-term trust and confidence upon which the 
market participants rely. This is an industry that is vitally 
important not only to the interests of the agribusiness 
community but to the world. Obviously, the industry must move 
quickly to restore trust and confidence but in a measured and 
thoughtful fashion. It is incumbent on all interested parties--
whether you are a legislator, a regulatory organization, an 
exchange, an FCM, or even a customer--to work together to 
strengthen the financial safeguards of the futures industry.
    To that end, I am going to briefly offer some suggestions 
which are further detailed in my written testimony that is 
available to you.
    So how can an FCM fail? The catastrophic failures of FCMs 
in my experience are surrounding two events: either a 
proprietary trading loss--large proprietary trading loss or 
catastrophic loss by a customer, in both cases, erode the 
entire capital of the futures firm and puts them 
undercapitalized and in many cases out of business. This is the 
only case in the history of the futures industry where customer 
segregated funds were violated.
    The R.J. O'Brien model of business is principally an 
agency-only model. We do not participate in any material 
proprietary trading and so we believe that that is a very, very 
safe way to operate a business where its customers cannot be 
violated by proprietary trading losses of a firm.
    The second event that could cause an FCM default is a very 
catastrophic customer loss. That is a case where a customer 
lost an excessive amount of money on the balance sheet of an 
FCM and failed to meet their margin requirement to answer that 
call or to fulfill that loss. We believe that it should be 
seriously considered whether FCMs should maintain an agency-
only model. And we also believe and recommend that regulation 
should be prescribed that customers that have very large margin 
calls in excess of a threshold would have to meet those margin 
calls within 24 hours. This would ensure that an FCM would not 
be waiting more than 24 hours to find out if a customer's 
default was going to exist.
    Another suggestion that we have is that in some cases and 
in the cases of MF Global, MF Global was a combined FCM broker-
dealer. We might suggest and we might consider that being a 
combined broker-dealer and an FCM is a model that should no 
longer exist. One of the reasons I say this is because 
operating as a combined broker-dealer FCM, there are certain 
capital advantages that a combined entity may receive compared 
to the capital requirements of a separately owned broker-dealer 
and a separately owned FCM. In some parlance this might be 
called double-dipping on the capital base or even one might 
call it a leverage on the capital base of a combined company.
    Another suggestion--and it has been spoken to--the NFA has 
this in place already--is the daily reporting of segregation 
reports to all the DSROs. I mean it has been duly noted here 
that it is the obligation of the FCM to report a failure of 
segregation, but I think in the age of technology and the 
abundance of caution, it would be no problem for FCMs to submit 
daily segregation reports electronically to their DSRO.
    And finally, I would say this: in the case of R.J. O'Brien, 
since we are principally an agency model, the vast majority of 
our capital is invested in the segregated--with and along with 
the segregated assets of our customers. Today, we have over 
$175 million of excess segregated assets, all of which is the 
capital of our firm. We believe there should be a threshold 
that all FCMs contribute a portion of their capital into the 
customer segregated asset domain. In doing so, it would be 
protecting the customers further, you would be protecting the 
assets of the FCM that protects the underlying customers 
because these assets would also be subject to being invested 
under Rule 1.25 as amended.
    This concludes my thoughts for this evening. I thank you 
and I compliment you and the Committee for putting this 
together. RJO and CMC will work alongside with regulators, 
legislators, customers, and exchanges alike to find the best 
ways to strengthen the financial safeguards of the futures 
industry.
    [The prepared testimony of Mr. Corcoran follows:]

  Prepared Testimony of Gerald F. Corcoran, Chairman of the Board and 
  Chief Executive Officer, R.J. O'Brien & Associates, Chicago, IL; on 
                  Behalf of Commodity Markets Council
I. Introduction
    Chairman Lucas, Members of the Committee, good morning. My name is 
Gerry Corcoran, and I am the Chairman and Chief Executive Officer of 
R.J. O'Brien & Associates (``RJO''). Today I am honored to speak on 
behalf of both RJO and the Commodity Markets Council (``CMC''). I would 
like to thank you for hosting this critical hearing and for including 
RJO and the CMC.
    The CMC is a trade association bringing together commodity 
exchanges with their industry counterparts. The activities of CMC 
members represent the complete spectrum of commercial users of all 
futures markets. CMC member firms trade regularly on CME Group, ICE 
Futures U.S., the Kansas City Board of Trade and Minneapolis Grain 
Exchange. CMC provides the access, forum and action for exchanges and 
exchange users to take a leadership role in addressing global market 
and risk management issues in various sectors, including agriculture, 
energy, finance, transportation and infrastructure.
    At R.J. O'Brien, we are especially proud of our agricultural roots, 
our commitment to the agricultural community and our leadership in the 
futures industry. Personally, I am passionate about this business and 
the important role we play in helping individuals, farmers, 
agribusiness, corporations and institutions manage their risk.
    Founded in 1914, RJO is a privately owned futures commission 
merchant (``FCM''). With our origins in the cash butter and egg 
business, today we are the oldest and largest independent futures 
brokerage and clearing firm in the United States. We are the only 
remaining founding member of the Chicago Mercantile Exchange, and our 
Chairman Emeritus, Robert J. O'Brien, served on its Board during the 
years when agricultural futures products blossomed and the financial 
futures markets were born. Throughout our history, RJO has stood side 
by side with our clients, exchanges and regulators during every 
significant market event this industry has seen.
II. Impact of the MF Global Bankruptcy on RJO, its Customers and the 
        Futures Industry in General
    The primary purpose of statutory segregation requirements for FCMs 
under the Commodity Exchange Act (``CEA'') is to ensure FCM obligations 
are not met with customer funds; and, in the case of an FCM insolvency, 
segregation requirements are also designed to protect customer monies. 
When a futures broker such as MF Global defaults, the entire industry 
is affected--the customers of the defaulting broker, the clearing 
organizations in which the defaulting broker participates, as well as 
other brokers that are members of the clearing organization. Typically, 
customer trades and the associated collateral held at a defaulting FCM 
must be moved to a new FCM. Moving customer trades and collateral 
requires significant coordination by affected participants throughout 
the industry, and transparency with respect to the location and booking 
of customer accounts and collateral is a crucial ingredient for a 
successful response to the default of an FCM.
    MF Global was required by Federal law [CEA and Commodity Futures 
Trading Commission (``CFTC'') regulations] to maintain adequate 
segregated funds to cover its liability to all of its customers who had 
a positive net liquidating value in their segregated account balances. 
As has been reported, the total pool of MF Global segregated funds is 
insufficient to cover that customer liability, and though the precise 
amount of the deficiency is at present unknown, all indications point 
to the amount exceeding $600 million. Part 190 of the CFTC regulations 
sets forth the process for handling the pro rata distribution of funds 
to customers in the event its FCM is the subject of a U.S. bankruptcy 
liquidation proceeding and has a shortfall in segregated funds held to 
keep its customers whole. This is the process that is currently 
underway and overseen by the Trustee.
    This process is completely different from and bears no relationship 
to clearinghouse default rules.
    Clearinghouse default rules and procedures are in place to protect 
the financial integrity of the clearing members on the opposite sides 
of trades in the event a defaulting clearing member fails to pay the 
variation call necessary to satisfy and make whole the opposite parties 
to the defaulting firm's trades. These rules ensure that, in the case 
of MF Global, had the firm not been able to meet its margin call to the 
clearinghouse and had there been a shortfall of margin collateral on 
deposit at the clearinghouse to satisfy all clearing members on the 
opposite sides of MF Global's customer positions, then in accordance 
with each clearinghouse's rules, other financial resources would be 
deployed to cover the shortfall.
    MF Global did not default to any clearinghouse.
    Clearinghouses met their obligations to all other clearing member 
firms and their customers and have undertaken welcomed efforts toward 
speeding customer access to their trading accounts, transferring their 
positions and providing the Trustee with support to encourage him to 
quickly release customer funds. Transfers of customer funds, 
effectuated by MF Global for the benefit of the firm and resulting in a 
segregated fund deficiency, constitute very serious violations of CFTC 
and Self-Regulatory Organization (``SRO'') rules and regulations.
    Since the MF Global bankruptcy filing and default, RJO has worked 
hand in hand with the CME Group and the other domestic exchanges to 
provide a home for a substantial number of MF Global accounts and 
brokers. In a matter of a few days, we assumed a bulk transfer of 
20,000 accounts without incident, and our shareholders provided an 
infusion of approximately $50 million of capital to ensure that we 
would be sufficiently capitalized for this unexpected event. At the 
same time, we worked very hard to ensure that our long-standing clients 
continued to receive the outstanding service to which they are 
accustomed. Our management and staff worked literally around the clock 
for 25 days straight in a massive effort that involved coordination of 
systems, processes and people, and sometimes working with incomplete 
data and rapidly changing circumstances. We fully recognized that the 
clients of MF Global had just experienced a traumatic event, and we did 
everything we could to provide vehicles for addressing their questions 
and providing reassurances as soon as we had answers. This effort 
included tripling the size of our client services staff, creating a 
dedicated hotline to answer questions from incoming clients and 
brokers, and establishing a website with continuous updates on the 
changing circumstances.
    Unfortunately, these efforts, along with those of the Trustee, the 
CFTC and Designated Self-Regulatory Organizations (``DSROs''), have not 
mitigated the substantial loss of trust and confidence by market 
participants as a result of the MF Global bankruptcy. I believe that 
FCMs, exchanges and regulators alike would acknowledge that trust in 
the futures industry has been severely impaired. In the past 5 weeks, 
at our firm alone, we've received more requests from clients for our 
financial data than we have in the last 3 years combined. We have 
addressed more than 1,000 inquiries seeking assurances that this won't 
happen at our firm. We continue to witness cash withdrawals to remove 
excess balances because there is a lack of confidence in the system as 
a whole.
    So while the investigation continues into the causes of the MF 
Global bankruptcy and the whereabouts of segregated assets, one thing 
is clear. MF Global did not respect the sanctity of the segregated 
funds system. This violation forces us to engage in a discussion of 
policy recommendations which would not otherwise have been necessary. 
Looking ahead, I am certain, very certain of this: we CANNOT let this 
event destroy the long-term trust and confidence upon which market 
participants rely. This is an industry that is vitally important not 
only to the interests of the agricultural community, but to the world. 
In order to restore trust, we strongly encourage the MF Global 
Bankruptcy Trustee to conclude its investigation and facilitate the 
prompt return of all available customer segregated funds as soon as 
possible. We also believe the industry must move quickly to restore 
trust and confidence but in a measured and thoughtful fashion. It is 
incumbent on all interested parties--whether you are a legislator, a 
regulatory organization, an exchange, an FCM or even a customer--to 
work together to strengthen the financial safeguards of the futures 
industry.
III. The Cause of MF Global's Failure is Uncertain
    RJO and CMC believe the businesses of all CMC members depend upon 
the reliable implementation of customer asset protection requirements 
by FCMs, clearing agencies and depositories. We likewise opine it is 
crucial for regulators, the MF Global Trustee and law enforcement 
authorities to conduct a full investigation. At this point, facts 
indicate there may be a shortfall of customer funds that could exceed 
$600 million. Again, reestablishing trust and confidence in the futures 
markets is of paramount importance. Fact-finding investigations should 
focus on this issue and seek to determine whether the asset protection 
shortfall was the result of abuse by MF Global or others. CMC and RJO 
urge Congress, the MF Global Trustee, and the applicable regulatory 
authorities to examine closely the circumstances surrounding the 
movement of customer collateral at MF Global to determine whether any 
abuse took place. If segregation violations occurred, measures should 
be carefully considered to enhance oversight, enforcement, or sanctions 
to further deter such violative behavior in the future.
    Although we offer several ideas for thoughtful consideration and 
discussion, we urge Congress and the regulators to be cautious in any 
steps you may take to address the MF Global bankruptcy. We recommend 
you carefully measure the cost and market implications that may be 
associated with any changes.
IV. Strengthening the Customer Asset Protection Regime in the Futures 
        Industry
    At this early stage of the process and after a dialogue with CMC 
members and RJO customers, we are certain there are no possible 
``fixes'' for the asset protection regime that would ensure safety of 
customer assets with 100% certainty. The ideas we raise today all offer 
some advantages and some disadvantages, and we highlight them for 
consideration by policymakers and regulators; however, we do not wish 
to endorse any specific proposal until all stakeholders have the 
appropriate factual information available.
A. Separation of Proprietary Trading by FCMs
    On this point, I am speaking strictly on behalf of RJO, which 
operates on an ``agency'' only model and does not engage in proprietary 
trading. This model has served our customers well for almost 100 years. 
Customer protection should continue to be the bedrock upon which the 
industry has been built. We at RJO suggest those FCMs who want to 
conduct proprietary trading utilize other FCMs or create a separately 
capitalized special purpose FCM for this activity. Doing so will 
require the same oversight afforded to customer accounts, including 
proper margining at all times.
B. Improvements to the FCM Net Capital Regime
    The remainder of my testimony reflects the views of both RJO and 
CMC. In the absence of a finding of abuse of the customer asset 
protection regime, the industry should evaluate the adequacy of the 
current FCM capital regime in terms of whether the risk capital 
required adequately reflects the risk of an FCM default. We offer the 
following ideas for consideration towards more accurately reflecting 
that risk.
1. ``Double-Counting'' of Funds by Dually Registered FCM/Broker-Dealers 
        to Satisfy Capital Requirements
    FCMs are required to maintain liquid assets in excess of their 
liabilities to provide resources for the FCM to meet its financial 
obligations as a broker in the futures market. These capital 
requirements also are intended to ensure an FCM maintains sufficient 
liquid assets to wind-down its operations by transferring customer 
accounts in the event the FCM defaults.
    Currently, FCMs that are dually registered as a broker-dealer are 
permitted to rely on the same funds to satisfy the broker-dealer's net 
capital requirement and the FCM's capital requirement. The rules of the 
CFTC generally permit an FCM that is dually registered as a broker-
dealer to satisfy its capital requirement through compliance with the 
capital requirements imposed on the firm by the Securities and Exchange 
Commission (``SEC'') in light of the firm's registration as a 
securities broker-dealer. The CFTC's rules therefore tend to treat the 
capital requirements of FCMs and broker-dealers as equivalent, yet such 
equivalent treatment may not be appropriate.
    The amount of risk capital that may be reasonable for a particular 
FCM, in light of the credit and market risks faced by the FCM in its 
house and customer accounts, may be lower or much higher than the 
comparable risk capital requirements applicable to the firm as a 
broker-dealer. The deemed equivalence of broker-dealer capital 
requirements, which generally do not turn on risk associated with 
customer futures positions as do FCM capital requirements, may require 
reevaluation.
2. Maintaining Capital in Segregation
    The inquiry into the role of capital of an FCM in protecting 
futures customers should also evaluate whether a certain proportion of 
funds designated as capital (e.g., 50%) should be required to be placed 
in a segregated account dedicated to capital protection. Maintaining 
capital in segregation could generally contribute to the liquidity 
position of FCMs.
3. Low Concentration Risk Charges May Incentivize FCMs to Leverage 
        Exposures to Single Credit Risks
    Where the concentration risk capital charge associated with 
exposures to a single issuer is too low, FCMs may have inappropriate 
incentives to leverage their exposure to such issuers. As the 
bankruptcy of MF Global made clear, excessive concentration of a firm's 
exposure to specific credit risks--in the case of MF Global, European 
sovereign debt--significantly increases risk to a firm's capital base. 
When evaluating whether the current mix of risk capital considerations 
(including legal risk, credit risk, liquidity risk, custody and 
investment risk, concentration risk, default risk, operational risk, 
market risk and business risk) adequately delivers a risk capital 
requirement and protects the firm and its customers against losses, 
regulatory agencies should take care to consider whether the 
concentration risk ratio should be limited to 50% of excess adjusted 
net capital for all credit risk exposures, excluding U.S. Treasury 
securities.
C. Enhanced Monitoring and Reporting With Respect To FCM Segregation 
        Practices
    It may be worth discussing whether SROs and regulators should 
conduct more frequent audits of FCM segregation practices. Such 
exercises might increase transparency to customers of potential asset 
protection issues an FCM may be experiencing, promote enhanced risk 
management practices, and potentially provide the regulators with an 
early-warning mechanism. Accordingly, policymakers might consider 
imposing discrete reporting obligations that would mandate regulatory 
reporting by FCMs in the event of a decline below specified thresholds 
(e.g., 25%) of customer-segregated to customer non-segregated assets.
D. Customer Trading Practices Also Impact Customer Asset Protection
    While this point does not directly relate to the MF Global 
situation, it is worth considering in the context of the financial 
stability of FCMs. Significant losses by a customer of an FCM can also 
result in catastrophic losses to the FCM itself. Improved customer 
collateral management could potentially be achieved by ensuring the 
adequate maintenance of customer collateral levels. An idea we offer 
for deliberation is to require accounts which exceed certain margin 
thresholds on an intra-day basis to fund their account through direct 
wire transfer, thereby ensuring intra-day margin calls are met.
E. A Potential Requirement for Individual Segregation of Customer 
        Accounts
    The industry's objective must be to establish safe, liquid markets 
and to protect the assets of customers who rely on futures brokers to 
access the market. We believe the industry has spent considerable time 
discussing full physical segregation of customer accounts. While such a 
concept is worthy of study, it is too complicated to help in the near 
term, and resources would be better spent on solutions that are 
achievable and deployable in relatively short order to increase the 
safety and stability of the market today.
V. Conclusion
    In summary, I would state that the failure of MF Global has had a 
great impact on futures markets, and the need to restore market 
confidence is urgent. However, the cause of the collapse is 
unascertained at this moment, and there is currently an investigation 
underway to determine the same. The facts need to unearthed before 
concrete policy measures, if any, are taken. Meanwhile, in the spirit 
of discussing constructive and thoughtful ideas with lawmakers and 
regulators, CMC and RJO offer for your consideration, the following 
ways to strengthen the customer asset protection regime in the futures 
industry:

   Improving the FCM net capital regime,

   Enhancing monitoring and reporting with respect to FCM 
        segregation practices,

   Considering the impact of customer trading practices on 
        customer asset protection, and

   Potentially requiring individual segregation of customer 
        accounts.

    CMC and RJO thank the House Agriculture Committee for the 
opportunity to testify on this important matter. We look forward to 
working with Congress and the regulatory authorities as we learn more.
    Mr. Chairman, we compliment you and the Committee's efforts, and we 
look forward to answering any questions you may have on this vital 
topic that impacts our industry.
    Please do not hesitate to contact Christine Cochran of CMC at 
[Redacted] or via e-mail at [Redacted], or Gerry Corcoran of RJO at 
[Redacted].
    Thank you again for the opportunity to testify.

    Mr. Conaway. Well, thank you, gentlemen. I appreciate that. 
Under leave of the Chairman, I will go first.
    First off, my compliments to all six of you for sitting 
here from 9:30 until this afternoon and during this. It shows 
your commitment to this business, so thank you very much for 
doing that.
    Mr. Duffy, just as an aside, I don't know that I have ever 
had a more straightforward statement as to things that you 
think happened that didn't happen. So thank you for that 
straightforwardness.
    Both Mr. Duffy and Mr. Luparello, you had auditors and/or 
representatives watching the fight. You heard the Chairman say 
it was chaotic, those last 2 or 3 days. Did you get anecdotal 
evidence back from your folks who observed that in terms of 
just--if you listen to Mr. Corzine, he has a scene that is 
almost unimaginable. That is obviously auditors looking for 
those kinds of panics. Did your people see that, Mr. Duffy? Did 
your folks see that?
    Mr. Duffy. I did not receive any reports back from any of 
the auditors that were in there the last final days that there 
was chaos or panic until when they were notified that the 
accounting--supposedly accounting error was now transferred 
into--from the segregated pool to the broker-dealer. When MF 
Global told us that, I think that is more when the panic set 
in.
    Mr. Conaway. So your statement that that happened came from 
MF Global's folks------
    Mr. Duffy. MF Global told CME and CFTC at the same time at 
2:00 in the morning that they transferred customer segregated 
funds into MF Global's broker-dealer account.
    Mr. Conaway. All right. Thank you, sir.
    Mr. Luparello, did your team sense anything out of the--I 
mean it is obviously chaotic but anything------
    Mr. Luparello. That is exactly right. I would say not 
necessarily panic but it was a chaotic scene that week and over 
that weekend. And the reports I was getting back from my team 
onsite as the firm was trying to deal with customers that 
seemed to be uncertain about what was next as well as potential 
counterparties and acquirers. There was an awful lot going on. 
I think the panic------
    Mr. Conaway. Yes.
    Mr. Luparello.--did not set in until there was a 
realization that there was a shortfall in the customer 
segregation funds.
    Mr. Conaway. And that is on Saturday/Sunday when------
    Mr. Luparello. Correct.
    Mr. Conaway.--customers don't--they are not answering the 
phone for customers at that point in time.
    Given what your team observed and both of you have been in 
the business a long time, does that create an excuse of some 
sort to transfer segregated funds out of the segregated 
accounts into the proprietary accounts? Is that any kind of 
excuse whatsoever for that to happen?
    Mr. Luparello. No.
    Mr. Conaway. Either one of you think that could happen by 
accident, the folks who actually triggered those trades, 
triggered that movement didn't know in fact that they were 
doing something they weren't supposed to?
    Mr. Luparello. You know, I think given the chaos of the 
situation and without knowing the facts as they have progressed 
from that point on, as we have been in more of a support role 
with the SIPC Trustee, there are certainly possibilities that 
funds could have not been received that should have been 
received, or could have been wired out that shouldn't have been 
wired out. But from an intent standpoint, I would say the 
answer to that is clearly no.
    Mr. Conaway. All right. Mr. Duffy, do you get a sense that 
that is business as usual in those circumstances?
    Mr. Duffy. I don't believe business as usual is to transfer 
customer segregated funds out of their accounts into broker-
dealer accounts, sir.
    Mr. Conaway. Okay. Mr. Corcoran, thank you for coming 
today. Given that the market I think self-heals far better than 
regulatory fixes that come in after the fact, would an FCM-only 
agency--wouldn't you be able to pitch that as being safer and 
more competitive? And wouldn't that give you in fact a 
competitive advantage that would work for your customers to 
make their own choices as to how they wanted to take risks 
versus going with an MF Global which had a mixed arrangement 
that you could play off and say hey, you are not going to have 
that risk? Would the market fix itself in this instance?
    Mr. Corcoran. It is very possible that the market itself 
will fix itself in a sense and that customers will look very 
closely at FCMs, how they conduct their business. And hopefully 
from the outcome of these hearings and other factors related to 
this event, there will be further transparency to FCMs' 
investment of customer assets and customers should have more 
transparency and be able to make a wiser selection of which FCM 
is safer for them.
    Mr. Conaway. Sure. Mr. Roth, Mr. Fletcher, in the time left 
what we hear is this: that the market is spooked, that the 
market is not working, but the truth of the matter is we have 
had a month of activity. Do you sense the folks trying to put 
in perspective the MF Global reg versus the broader history of 
how safe these transactions have been in the past and are 
beginning to move back toward their normal functioning?
    Mr. Fletcher. It will move back towards the normal 
function, but it won't be the same. My company, for example, 
had accounts with MF Global and with Newedge. When we are done 
settling down from this, we will probably have our business 
divided amongst five or six companies rather than just one or 
two just to minimize that risk.
    Mr. Conaway. Okay. Mr. Roth, what about your folks real 
quick?
    Mr. Roth. Yes, I would agree with Mr. Fletcher that trading 
activity may return to normal but there are going to be 
residual effects of an erosion in confidence that are going to 
affect the markets. I think we need to look for solutions that 
can be market-driven, they can be regulatory solutions, but we 
need to find solutions to try to restore that public 
confidence.
    Mr. Conaway. Thank you, gentlemen. I yield back.
    The Ranking Member for 5 minutes.
    Mr. Peterson. Thank you. I am going to yield briefly to Mr. 
Boswell.
    Mr. Boswell. Well, thank you very much. Because of a 
conflict I am going to have to go, but I have talked with some 
of you previously and I concur with some of the things that 
have already been said. I am concerned very much about the 
futures hedging, the whole planning process that our ranchers 
and farmers and others must depend on. This is a big setback, a 
big loss, but I guess until the bankruptcy part is settled, it 
is going to be kind of hard to determine what can be recovered 
as we go into that. But I think we are going to have a lot of 
contact with you as the days lay ahead to get this sorted out. 
And I appreciate the sincerity. But it must be done. We have no 
disagreement on that.
    So with that, Mr. Ranking Member, I will yield back and 
also give you my 4 minutes or whatever I had left.
    Mr. Peterson. Thank you, Mr. Boswell.
    And yes, I have been thinking about some of these changes 
and was actually thinking about putting a bill in this 
afternoon, but I held back because I think we need to find out 
a little bit more about this. I think we need to seriously 
examine whether we should put these segregated accounts with a 
third party. And I know that is going to apparently cause some 
people to go ballistic, but we need to look at that.
     I think this double capital issue needs to be looked at. 
You know, that doesn't seem to make any sense to have people 
use the same capital. So hopefully, the Committee can spend 
some time looking at this and working with people and try to 
get the understanding of what the best solution would be. What 
I do not want to do personally is any kind of a thing where we 
are going to set up any kind of an insurance fund or anything 
like that. I am against that. I think that is a bad idea.
    But the other thing I am concerned about, and it relates to 
Dodd-Frank. You know, we exempted the end-users from some of 
these requirements and there are bills in to try to fix what 
some people are afraid of is happening there, but as near as I 
can tell it is not us that is causing the problem. It is the 
prudential regulators which we don't have any control over in 
terms of whether there is going to be margin and capital 
requirements on the end-users.
    But my concern is that you could potentially--if we exempt 
end-users completely from the swap dealer and major swap 
participant regulations, then you are going to also exempt them 
from segregating those funds. And if you had a situation where 
one of those organizations went bankrupt, you would have the 
people involved in that in the same situation that these folks 
are in here today. And I am not sure we want to create a 
situation like that. So, Mr. Fletcher, you are an end-user I 
guess. You know, do you have concerns about that, now all of a 
sudden you are going to be doing business with somebody that is 
not regulated, the money is not segregated?
    Mr. Fletcher. Well------
    Mr. Peterson. If they do something and go down and------
    Mr. Fletcher. My firm is a grain elevator and most--nearly 
all of the business that we do is actually futures contracts to 
hedge purchases that we------
    Mr. Peterson. So you don't do swaps?
    Mr. Fletcher. No.
    Mr. Peterson. Well. I guess it wouldn't affect you 
directly, but you understand what I am getting at?
    Mr. Fletcher. Sure.
    Mr. Peterson. So I think we need to take a look at that as 
well because people say this is never going to happen. Part of 
how we got into a lot of these different issues is because back 
in the CFMA in 2000, the argument was, well, these are all a 
bunch of rich people and they are all gambling with each 
other's money and it is nobody's business what they are up to. 
And you know, they almost took the country down and now they 
have put a bunch of people in jeopardy here. So obviously they 
can't control themselves so we need to make sure that we don't 
leave any loopholes here. So with that, Mr. Chairman, I will 
yield back.
    The Chairman [presiding.] The gentleman yields back his 
time. The chair recognizes the gentleman from Georgia who has 
been very patient. Proceed, Mr. Scott.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman.
    Gentlemen, thank you for being here today and I am somebody 
who has a Series 7 and less than 12 months ago was in that 
highly regulated industry and still maintain my license to this 
day. And so I guess when I see what has happened here, it is 
pretty clear to me that rules were broken, laws were broken. 
And again, I want to make sure we do whatever has to be done to 
protect the consumer, but we also don't want to do so much that 
it creates a burden on the ethical people that are out there 
conducting business.
    So with that said, if I could just ask a couple of quick 
questions. Mr. Duffy, do you think that what happened at MF 
Global, was it standard operating procedure or did they get to 
the end of their rope and say, we are going to make one big bet 
here and if the bet goes right we will be okay and if it goes 
wrong, we won't?
    Mr. Duffy. I can't even comment on this, sir. I have no 
idea what was going through their heads in the final moments. I 
have only gotten the reports back from my legal folks of what 
happened and that is what I factually reported out to the 
Congress.
    Mr. Austin Scott of Georgia. Do you believe that if we had 
more audits of the reports, the segregated fund reports, would 
doing more audits of those reports, whether we did every firm 
on a monthly basis, would that have prevented this?
    Mr. Duffy. Well, it is important to note that we do audit 
each and every firm every year. So we have 50 auditors on staff 
at CME Group that we use to audit them. On the segregation 
reports, which I think is what you are referring to, I did say 
in my oral testimony where I demonstrated where people 
falsified reports so------
    Mr. Austin Scott of Georgia. Yes.
    Mr. Duffy.--even though we tied out these reports, but if 
they give you the real report afterwards, it is a bit of a 
problem. So that is--I don't know if you could ever stop--I 
think to what Mr. Roth said--if there is corruption and people 
are convinced that is the way they are going to do it, that is 
what they are going to do. So we have done everything that we 
feel that we can to prevent this type of activity, but again, 
it happened.
    Mr. Austin Scott of Georgia. But if they know that they are 
more likely to be audited in the future, that would be a 
deterrent.
    Mr. Duffy. I think the penalties need to be stiffer. I 
truly believe that. I think the penalties are too loose and 
they need to be implied--applied and they just need to be 
stricter penalties.
    Mr. Austin Scott of Georgia. Okay. All right. And I will 
leave it at that. Thank you for coming today. I know it has 
been a long day. And Mr. Chairman, I yield back the remainder 
of my time.
    The Chairman. The gentleman yields back. The chair now 
recognizes the gentleman from Texas for 5 minutes, Mr. 
Neugebauer, sir.
    Mr. Neugebauer. Well, thank you, Mr. Chairman.
    Mr. Duffy, I had to step out of the room but I wanted to 
make sure that you got an opportunity if you haven't already to 
explain the efforts that CME Group has taken to increase the 
speed for many of those customers to get their money back 
because that is something you didn't have to do but your firm 
has stepped up. Did you have a chance to------
    Mr. Duffy. I didn't walk them through all the steps, 
Congressman. I am happy to do it. The original--when this first 
happened we were trying to desperately get the accounts 
transferred to Mr. Corcoran's firm. Obviously, it took a 
significant amount of--but the most important thing was to get 
the monies that the Trustee had into the participants' hands. 
And our board made a decision not based off of large hedge 
funds or institutional dealers. Our board really made a 
decision off of the farmers and ranchers who needed those 
monies back into their accounts. So we put up originally a $200 
million guarantee to encourage the Trustee to give as much 
money back as possible. That was slowing the process so we 
upped it to $550 million to encourage the Trustee to pay up to 
75 cents of every dollar and if he fell short, CME would eat 
the $550 million loss.
    Mr. Neugebauer. Yes, and I commend you for that because it 
has been I think pointed out in this testimony today that a lot 
of small farmers and ranchers got quite a bit of their 
operating capital tied up in--it puts a hardship on them.
    Mr. Brodsky, you mentioned that along the way over the last 
I guess year or so you have had concerns about MF Global. And I 
know that FINRA has had some similar concerns and so did you 
all have discussions together about that?
    Mr. Brodsky. Yes, there were a variety of meetings and 
conversations, particularly between FINRA, CBOE, and the SEC on 
the broker-dealer side. And in fact when MF Global was pushing 
not to allow--or to cause the--us to not charge their capital 
for the concentration they had in the sovereign debt 
securities, the three of us got together and said we are not 
agreeing with you; you must do it. And that was something that 
we came to, and again, they pushed and we pushed back. And 
ultimately, the SEC has the final word and it was their 
decision that obviously we concurred in that they had to take 
a--recognize that even though it might not have been the way 
they would have wanted it to happen.
    Mr. Neugebauer. And so was the CFTC, did you all ever bring 
them into that conversation?
    Mr. Brodsky. I am not aware that they were at that point. 
This is the--I would call the issue of the bifurcated 
regulation that you have. And on the SEC side, you tend to see 
the securities regulators working together though I do know 
that in the recent past the SEC and the CFTC have worked 
together. But I think when the earlier conversations were 
taking place, I think it was just among the securities 
regulators.
    Mr. Neugebauer. Yes, because under Dodd-Frank, we have set 
up FSOC and one of the charges to FSOC was there was going to 
be more cooperation and collaboration. This way when regulators 
are talking, everybody that could be impacted--so from the 
testimony that was issued today, I am beginning to think that 
evidently Secretary Geithner in his role as facilitator has 
some work to do in that area because we didn't seem to have the 
same levels of conversation going on at the CFTC as it seems 
that was going on at the Chicago--with the three entities------
    Mr. Brodsky. One of the suggestions we made in our 
testimony is that once we get through all the heavy work that 
we have to do to understand what happened that we as regulators 
should all sit together and determine whether there should be a 
more formalized kind of coordination in matters like this. So I 
think there was some--I am sure there was room for improvement.
    And in addition, under Dodd-Frank there are certain 
mandates in the bill that require that the SEC and CFTC 
identify areas where they should harmonize regulations. There 
is no deadline to that but I certainly support that as a very 
positive objective of Dodd-Frank.
    Mr. Neugebauer. And that harmonization is an important part 
of that as well so that we don't put a bigger strain on the 
industry.
    But I will say this--and I think Mr. Duffy pointed this 
out--since 1936 I think this is the first time that accounts 
have been commingled and there has been a loss. So I think one 
of the things we want to do here is we want to go on a fact-
finding mission, make sure we understand all of the things that 
were going on so that--there will be some people that want to 
jump out there and create some more regulation. I am not sure 
that anything that was passed under Dodd-Frank would have 
prevented what happened here from happening. As alleged here, 
maybe some people broke the rules. And so when people break the 
rules, it doesn't matter how many rules you have.
    So I think it is good and we look forward--I think some of 
you will be at our hearing next week. We want to make sure we 
have a thorough understanding of all of the pieces here before 
we jump to any conclusions.
    And Mr. Chairman, I want to commend you for holding this 
hearing today. I think it was a very productive hearing, but 
what it did point out is there are still a lot of things we 
don't know and we need to know.
    The Chairman. The gentleman is exactly right and I expect 
with good efforts we will know more of those things shortly, 
won't we?
    With that, the gentleman yields his time back and I yield 
myself 5 minutes.
    Mr. Brodsky, you testified that the CBOE had taken 
disciplinary action against MF Global five times as a result of 
examinations and investigations. What kind of activity did you 
find that was worthy of a discipline? And what kind of 
disciplinary actions did you take since we are discussing 
consistencies of management?
    Mr. Brodsky. In the course of our regulation of MF Global 
going back to 2003, there were a variety of actions, several of 
which resulted in financial penalties and censures. And there 
were I would say more technical things that happened but there 
were several times, as I said--I would say one, two--at least 
five and several of them resulted in fines and censures.
    The Chairman. Okay. Mr. Fletcher, you commented as I was 
coming in the room I think to Mr. Conaway's question something 
about how you would address dealing with these issues in the 
future, and your response was I believe spread your business 
out?
    Mr. Fletcher. Yes. And I have thought about that 
afterwards. I would spread mine out but in the case of my 
customers, that is not an acceptable answer to them. I have 
probably 30 to 35 customers of mine who have individual 
brokerage accounts with--and as it happened, every one of them 
was with MF Global that I am aware of. They are--they have an 
IB that has a significant presence in our area and that is 
really not an option for them, because, they may be trading two 
to five to ten contracts, you know. My company is going 
hundreds of them; I can spread my stuff out. They can hardly do 
that.
    The Chairman. So going from there, what would you say would 
be the single-most important action regulators could take to 
try and restore confidence in the futures markets?
    Mr. Fletcher. I am here testifying for National Grain and 
Feed Association and we, as an association, haven't come to a 
conclusion on what the best action would be. If you asked me 
that personally, the first thing that comes to my mind is 
having third party fiduciary holding the segregated funds that 
had an arrangement with CME to pay margins as necessary rather 
than a brokerage firm doing it.
    The Chairman. Fair enough.
    Mr. Duffy, when CME conducted the audit of MF Global the 
week of October 24, did the CME check the balances of the 
accounts with the depositories holding those funds or rely 
solely on the statements from MF Global's daily segregation 
reports?
    Mr. Duffy. What is important to note is that we did not do 
a full audit on the week prior to the bankruptcy. What we did 
was send in auditors to check the segregation reports to make 
sure that they tied out against third parties and ledgers and 
the third parties being the banks. When we did the initial 
report Wednesday--it takes a couple days to go through it when 
we are tying these out--we had most of it tied out between 85 
and 95 percent of the tie-outs were done against the banks and 
the monies were there from Wednesday. So again if these 
transfers occurred from after Wednesday, we would not have 
known it. We were still tying out Wednesday on Thursday and 
Friday.
    The Chairman. When was the first time you were contacted 
regarding any doubts about whether customer segregated funds 
were intact at MF Global by anyone?
    Mr. Duffy. The only time I was contacted was I will say 
Chairman Gensler called me on Friday prior to the Sunday or 
Monday bankruptcy and he asked me if I had any concerns about 
MF Global's capital. I said I have no knowledge; you will have 
to call our clearinghouse because I have no knowledge of that. 
So then I learned of a problem with their capital on Sunday 
evening early that it was an accounting error of roughly $900 
million, and then I was not informed until Monday morning of 
the 31st that it was no longer an accounting error and it had 
been transferred to the broker-dealer.
    The Chairman. So Chairman Gensler contacted you on Friday 
before.
    Mr. Duffy. He contacted me along with their head of 
clearing and asked me if we had any concerns with MF Global's 
capital and I said I would have no reason to be. You would have 
to contact their folks in clearing and risk.
    The Chairman. Did he offer anymore comments that------
    Mr. Duffy. That was the end of my conversation.
    The Chairman. Fascinating. Mr. Luparello, based on press 
reports, it appears that FINRA raised red flags back in June 
regarding the risk-building within MF Global. Can you describe 
those risks and how you came to identify them?
    Mr. Luparello. Yes. The analysis we did of their audited 
financials filed in June had a footnote disclosure about the 
large repo to maturity on the European sovereign debt. That 
started the analysis that we shared with CBOE and eventually 
the SEC that the firm was not taking the proper haircuts on 
those positions. That conversation, as we have discussed, 
culminated in August with the firm taking those additional 
haircuts and disclosing them both in their periodic filings as 
a listed company and also in their FOCUS filings.
    The Chairman. Thank you. My time has expired.
    For the final period of questioning I turn to the gentleman 
from Virginia, Mr. Goodlatte.
    Mr. Goodlatte. Thank you, Mr. Chairman. This has been a 
long day and I appreciate you and the Ranking Member holding 
this hearing. And we certainly had a comprehensive exposition 
of the issues. I don't know if we have gotten all the answers 
that we need but certainly this has been worthwhile to assure 
folks that we and the industry are paying attention to the 
concerns that have been raised by the debacle at MF Global.
    Mr. Roth, in your testimony you mention that FCMs are 
required to report on a daily basis the amount of funds 
required to be held in segregation and the amount actually 
held. Was MF Global fulfilling this requirement?
    Mr. Roth. Congressman, I think my testimony says that for 
the FCMs for which NFA is the DSRO, we require those firms to 
file the daily seg statements with us. We were not the DSRO for 
MF Global so not--MF Global was not making any filings with 
NFA.
    Mr. Goodlatte. Do they have a similar obligation to any 
other entity?
    Mr. Roth. Well, the CME was the DSRO and I am sure the CME 
has its own means of monitoring compliance with segregation 
requirements, but they would not have been filing their reports 
with NFA.
    Mr. Goodlatte. So you say the CME------
    Mr. Roth. CME was the DSRO.
    Mr. Goodlatte. Okay.
    Mr. Roth. And I am saying I am sure the CME monitors in its 
own way compliance with segregation requirements, but MF Global 
would not have been filing reports with NFA because we were not 
their DSRO.
    Mr. Goodlatte. Got you. So I should direct that question to 
Mr. Duffy?
    Mr. Duffy. We were--I am sorry.
    Mr. Roth. Go ahead.
    Mr. Duffy. We were receiving regular updates from MF Global 
on their segregation report, and as I said in my testimony, 
they showed excess funds of $200 million all the way through 
Friday afternoon and then until the report came back to us on 
Monday when they gave us the real report and said it was a $200 
million deficit with the same date from the prior Thursday's 
report. So I know it is a little confusing, sir, but they were 
giving us updates. We were--I was just telling the Chairman 
before you walked in we were doing tie-outs of those 
segregation reports to the bank ledgers and other means to make 
sure that the money was matching up.
    Mr. Goodlatte. So is what you are telling me that they were 
providing you with false information up until they corrected 
all that with their------
    Mr. Duffy. I can only tell you what I have been shown by 
our attorneys, sir. We had two reports, one dated I believe 
October 27--and you can--they can correct me if I am wrong on 
the date--that we received I believe on Friday that showed a 
$200 million excess of segregated funds. Once they decided to 
tell us not to look for the accounting error of $900 million 
anymore, that it has been transferred into their broker-dealer 
account, they submitted another segs daily with the same 
October 27 date that showed a $200 million deficit and not a 
$200 million gain------
    Mr. Goodlatte. So------
    Mr. Duffy.--excess funds.
    Mr. Goodlatte. But it doesn't stand to reason that that all 
occurred over that weekend.
    Mr. Duffy. It doesn't stand to reason. All I can tell you 
is that we received one report on Friday that said they had 
$200 million in excess funds and the same report we got on the 
following Monday dated from that Friday now showed a $200 
million deficit in segregated funds.
    Mr. Goodlatte. So that is when you first became aware that 
the amount required to be held in segregation was not the 
amount actually held?
    Mr. Duffy. I became aware of the amount that was a deficit 
on Sunday evening that there was a $900 million shortfall. They 
called it an accounting error. They informed us at 2:00 in the 
morning that it was not an accounting error; they transferred 
the money to their broker-dealer. So that is when I found out 
that there was a problem.
    Mr. Goodlatte. Some news reports state that MF Global had 
been commingling funds for several days if not weeks. If this 
proves to be true, could MF Global have ensured in their daily 
report that there were enough funds in the segregated accounts?
    Mr. Duffy. Could they have--I am sorry, sir?
    Mr. Goodlatte. Could they have ensured that that was the 
case without giving you false information?
    Mr. Duffy. Again, we were tied out 85 to 90 percent of the 
third party tie-outs from the Wednesday daily report on 
Thursday and Friday and it did show that they were in excess 
segregation of $200 million.
    Mr. Goodlatte. Great. Thank you.
    Mr. Duffy. Thank you.
    Mr. Goodlatte. Mr. Roth, I will go back to you. You state 
in your written testimony that self-regulation has served our 
markets and our nation well for a very long time. Would you 
elaborate on why market participants should remain confident in 
the current system?
    Mr. Roth. Well, I would point out a number of different 
things. One thing is that the self-regulators are subject to 
pervasive oversight by the CFTC. The CFTC comes in and does 
rule enforcement reviews of NFA all the time. They have 
reviewed every one of our regulatory programs. And as part of 
that review, the CFTC conducts audits of firms we have just 
audited to make sure that our audits were comprehensive and 
complete. And to my knowledge, they had never had any sort of 
material finding or any sort of problem with the audits that we 
have done. So I don't think the problem is who is doing the 
audits. I think the audits that have been done by the SROs have 
been comprehensive and complete, but there is no system that is 
foolproof. And as I mentioned earlier in my testimony, if 
someone is intent upon committing a violation of the Act, it--
there is no regulatory system that can prevent them from doing 
that.
    Mr. Goodlatte. Okay. And then I will go back with your 
permission, Mr. Chairman, one last question for Mr. Duffy on 
that very point.
    CME finished an audit of MF Global on August 4 and then 
another audit a week before MF Global filed for bankruptcy. Did 
these audits ever turn up anything of concern?
    Mr. Duffy. Congressman Goodlatte, the audit you are 
referring to that was complete on August 4 started in January. 
These audits take several months to do. There were some minor 
discrepancies but nothing out of the ordinary that they 
immediately fixed when we reported the audit to them of which 
we sent the letter to Mr. Corzine and he was sent the letter of 
our--copy of our audit. Then, we did not do a full audit the 
week prior to bankruptcy. As I said, we sent auditors in to do 
tie-outs of segregation reports. Full audits take 4 to 5 
months.
    Mr. Goodlatte. So going back to the audit that was 
completed on August 4, does that lead you to conclude that 
these problems occurred over a short period of time toward the 
end of October or do you think the audit was insufficient that 
was completed------
    Mr. Duffy. Again, I am not an auditor. I can only go by 
what the reports say. It was started in January, it was 
completed in August, there were some minor discrepancies, they 
were fixed immediately by the firm. That is the last I had 
heard of it.
    Mr. Goodlatte. Okay. Thank you.
    Thank you, Mr. Chairman.
    The Chairman. Thank you. The gentleman's time has expired.
    All time for questions has expired. Does the Ranking Member 
have any closing remarks?
    Seeing none from the Ranking Member, I would simply note 
that this is not the last hearing nor certainly the last time 
this issue or the laws related to it will be addressed. We have 
discovered fascinating information that unfortunately still 
leaves many, many questions unanswered.
    With that, the chair would like to dismiss the panel. And 
under the rules of the Committee, the record of today's hearing 
will remain open for 10 calendar days to receive additional 
material and supplemental written responses from witnesses and 
to any question posed by a Member.
    This hearing of the Committee on Agriculture is adjourned.
    [Whereupon, at 5:57 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
 Supplementary material Submitted by Hon. Jill Sommers, Commissioner, 
                  Commodity Futures Trading Commission
    During the December 8, 2012 hearing entitled, Hearing To Examine 
the MF Global Bankruptcy, requests for information were made to Hon. 
Jill Sommers. The following are the information submissions for the 
record.
Insert 1
          Mr. Huelskamp. Thank you. And I wish you would share with the 
        other Commissioners that obviously, if you were unaware, that 
        looks rather suspect and reflects poorly on him as a Chairman 
        of the Commission to invent something such as a statement of 
        nonparticipation, which no one seems to know what it is other 
        than he has already participated.
          And another question I have, on July 20, which was the 1 year 
        anniversary and then-deadline for the Dodd-Frank requirements, 
        there were four conference calls and I believe you participated 
        in one with MF Global. And could you describe what occurred in 
        those conference calls?
          Ms. Sommers. I don't believe I participated in a conference 
        call with MF Global in July.
          Mr. Huelskamp. You are correct. I am sorry. That was in 
        December. I know there were four conference calls. I apologize. 
        I had the wrong date on that.
          Ms. Sommers. In December of 2010 I had a meeting in my office 
        with MF Global.
          Mr. Huelskamp. Yes. Was Jon Corzine in on that meeting?
          Ms. Sommers. He was.
          Mr. Huelskamp. And were there notes kept of this particular 
        meeting?
          Ms. Sommers. Perhaps. I don't recall whether I took notes. It 
        was approximately a 15 minute meeting.
          Mr. Huelskamp. Yes. I might ask if you would provide those to 
        the Committee.

    Attached is a record of the meeting with MF Global on December 21, 
2010, which lists possible agenda items for the meeting and reflects 
that Jon Corzine and Laurie Ferber, General Counsel of MF Global, 
attended. The only note taken at the meeting was an addition to the 
agenda to reflect that the subject of disruptive trading practices was 
discussed.
                               attachment



Insert 2
          Mr. Huelskamp. Well, it indicated to discuss segregation and 
        bankruptcy with MF Global on 12/21 of 2010, I would think that 
        would be a particularly important subject as we continue here.
          But one other item as far as Mr. Gensler's meetings with Mr. 
        Corzine, which one did occur on July 20. Do we have notes of 
        what they discussed? And I think this is very strange. I was 
        unaware until today that Mr. Gensler actually used to work for 
        Mr. Corzine at Goldman Sachs and that seems very suspect, 
        certainly, to my constituents. So if I might have an answer to 
        that question.
          Ms. Sommers. I can pass that on. I don't know if there are--
        ----
          Mr. Huelskamp. We do not know if there are any notes of this 
        closed-door meeting?
          Ms. Sommers. To Mr. Gensler's meeting I do not know if there 
        are notes.

    I have referred Representative Huelskamp's request for notes to 
Chairman Gensler's office.
                                 ______
                                 
         Submitted Statement by National Pork Producers Council
Introduction
    The National Pork Producers Council (NPPC) is an association of 43 
state pork producer organizations and serves as the voice in 
Washington, D.C., for the nation's pork producers. The U.S. pork 
industry represents a significant value-added activity in the 
agriculture economy and the overall U.S. economy. Nationwide, more than 
67,000 pork producers marketed more than 110 million hogs in 2010, and 
those animals provided total gross receipts of $15 billion. Overall, an 
estimated $21 billion of personal income and $34.5 billion of gross 
national product are supported by the U.S. hog industry. Economists Dan 
Otto and John Lawrence at Iowa State University estimate that the U.S. 
pork industry is directly responsible for the creation of 34,720 full-
time equivalent pork producing jobs and generates 127,492 jobs in the 
rest of agriculture. It is responsible for 110,665 jobs in the 
manufacturing sector, mostly in the packing industry, and 65,224 jobs 
in professional services such as veterinarians, real estate agents and 
bankers. All told, the U.S. pork industry is responsible for more than 
550,000 mostly rural jobs in the U.S.
    Exports of pork continue to grow. New technologies have been 
adopted and productivity has been increased to maintain the U.S. pork 
industry's international competitiveness. As a result, pork exports 
have hit new records for 18 of the past 20 years. In 2011, so far, the 
U.S. pork industry has exported nearly $5 billion of pork, which added 
$57 to the price producers received for each hog marketed. Net exports 
this year represent about 20 percent of pork production. The U.S. pork 
industry today provides 21 billion pounds of safe, wholesome and 
nutritious meat protein to consumers worldwide.
Profile of Today's Pork Industry
    Pork production has changed dramatically in this country since the 
early 1980s. Technology advances and new business models changed 
operation sizes, production systems, geographic distribution and 
marketing practices.
    U.S. pork farms have evolved from single-site, farrow-to-finish 
(i.e., birth-to-market) production systems that were generally family-
owned and small by today's standards to multi-site, specialized farms 
that generally are still family-owned. (There are still many single-
site operations.) The changes were driven by the biology of the pig, 
the business challenges of the modern marketplace and the regulatory 
environment. Separate sites helped in controlling troublesome and 
costly diseases and enhanced the effect of specialization. Larger 
operations can spread overhead costs, such as environmental protection 
investments and expertise, over more farms and buy in large lots to 
garner lower input costs. The change in sizes has been the natural 
result of economies of scale.
    Marketing methods have changed as well. As recently as the early 
1980s, a significant number of hogs were traded through terminal 
auction markets. Many producers, though, began to bypass terminal 
markets and even country buying stations to deliver hogs directly to 
packing plants to minimize transportation and other transaction costs. 
Today, hardly any hogs are sold through terminal markets and auctions, 
and the vast majority of hogs are delivered directly to plants.
    Pricing systems have changed dramatically, too, from live-weight 
auction prices to today's carcass-weight, negotiated or contracted 
prices, with lean premiums and discounts paid according to the 
predicted value of individual carcasses.
    Today, the prices of a small percentage of all hogs purchased are 
negotiated on the day of the agreement. All of the other hogs are sold/
priced through marketing contracts or are packer produced in which 
prices were not negotiated one lot or load at a time but determined by 
the price of other hogs sold on a given day, the price of feed 
ingredients that week or the price of lean hog futures on the Chicago 
Mercantile Exchange (CME). These risk-management mechanisms are entered 
into freely and often aggressively by producers and packers alike to 
ensure a market for and a supply of hogs, respectively, and to reduce 
the risks faced by one or both parties.
    All of this means the days of rising at dawn to simply feed and 
care for ones pigs are over. In addition to that daily task, today's 
pork producers--many of whom have at least a bachelor's degree in 
animal science, business, economics or similar discipline--must be very 
proficient at managing the prices they pay for their inputs, i.e., corn 
and soybean meal, and at calculating the prices they'd like to receive 
for their hogs when they sell them.
    There are a number of ways that pork producers manage their risk, 
but the most common is use of the futures market--at least for a 
percentage of the pigs they sell each year.
How Futures Market Works
    The futures market, which has been used for nearly 150 years, 
provides an efficient and effective way to manage, or transfer, price 
risk. It also provides price information that is used as a benchmark in 
determining the value of a particular commodity or financial instrument 
at a specific time.
    The market's benefits, risk transfer and price discovery, reach 
every sector of the world economy, where changing market conditions 
create economic risk in the diverse fields of agricultural products, 
foreign exchange, imports, exports, financing and investments.
    In the agricultural industry, futures contracts are bought and sold 
to protect producers from the volatility in the commodities market. 
Hundreds of different strategies are used, but all establish a price 
level now for items such as feed grains to be delivered later, 
providing what amounts to insurance against adverse price changes. This 
is called hedging.
    A relatively small amount of money, known as initial margin, is 
required to buy or sell a futures contract. So, for example, on a 
particular day, a margin deposit of just $1,000 might allow for the 
purchase or sale of a futures contract covering $25,000 worth of 
soybean meal. (These transactions, however, must be backed by the 
financial resources of the purchaser; the buyer must be able to execute 
the contract.)
    The margin deposit simply locks in the price--based on that 
particular day's market for, say, soybean meal--that will be paid at a 
future date. Using the example above, suppose on Dec. 20, 2011, soybean 
meal is selling for delivery in March at $100 a ton. A pork producer 
buys a futures contract for 250 tons--$25,000--with a $1,000 margin 
deposit.
    If at delivery time the price in the market has risen to $110 a 
ton, the producer will need to pay the soybean meal supplier $27,500 
(250 tons times $110 per ton), or $2,500 more than the price at the 
time the futures contract was bought. But that higher cost is offset by 
the profit the producer makes selling the $100-a-ton futures contract; 
the contract is worth $10 a ton more, or $2,500.
    The margin required to buy or sell a futures contract is solely a 
deposit of good faith that can be drawn on by a brokerage firm to cover 
losses that a customer may incur. If the funds in a margin account are 
reduced by losses to below a certain level--known as the maintenance 
margin requirement--a broker will require an additional deposit of 
funds to bring the account back to the level of the initial margin. 
(Additional funds also may be required if an exchange or brokerage firm 
raises its margin requirements.) Requests for additional funds are 
known as margin calls.
    Had the price of soybean meal in the example above dropped by $10 a 
ton, selling for $22,500, the producer would have a margin call of 
$2,500 (250 tons times $10 per ton).
    Because accounts must maintain the initial margin deposit, margin 
calls may occur numerous times throughout a futures contract's time 
span, even, theoretically, every day.
    Minimum margin requirements for a particular futures contract at a 
particular time are set by the commodities exchange, such as the CME, 
on which the contract is traded. Exchanges continuously monitor market 
conditions and risks and, as necessary, raise or reduce their margin 
requirements. Individual brokerage firms may require higher margin 
amounts from their customers than the exchange-set minimums.
Pork Producers Use Futures To Manage Risk
    U.S. pork producers use futures contracts to manage risk--that is, 
the price volatility of commodities--and to bring a semblance of 
stability to their business. Indeed, in today's financially uncertain 
times, most agricultural lenders, who provide pork operations with 
working capital--and even lines of credit to purchase futures 
contracts--require producers to employ risk management tools such as 
futures contracts.
    It is important to point out that pork producers (and other farmers 
and ranchers) use the futures market to ensure the viability of their 
business and, thus, to produce pork; they are not speculators who 
``play'' the market simply for the profits they can make--using futures 
contracts as financial--and who never take delivery of product for 
which they purchase or sell a futures contract.
    Without futures contracts or other risk-management tools, producers 
would lose flexibility and revenue, and consumer prices would increase, 
testified one witness at the Dec. 13 hearing of the Senate Agriculture, 
Nutrition, and Forestry Committee.
    Livestock producers must hedge against increases in the prices they 
pay for feed grains and against decreases in the prices they receive 
for their animals. And most of them use hedging to plan for the next 
year or more. Some producers, for example, already have purchased 
futures contracts for feed grains on which they will take delivery in 
early 2013.
    Here's how one pork producer hedges his risk:
    The producer pays a broker $1,400 for each futures contract, 
locking in the price of corn and soybean meal--contracts are for 5,000 
bushels of corn and for 100 tons of soybean meal--and setting the sales 
price of his hogs--a contract covers 40,000 pounds of carcasses, which 
is about 200 pigs. (The prices are locked in on the date the contracts 
are bought.)
    This producer hedges his risk on about \1/3\ of the 350,000-400,000 
hogs he markets each year, or about 150,000 pigs. (The other hogs are 
priced through contracts with a meat packer; the feed grain prices are 
set through contracts with feed mills, which, in turn, manage their 
risk, using the futures market.) That means hundreds of futures 
contracts, with between $1.3 million and $1.5 million--the initial 
margin--to cover them deposited with a broker. The producer also has 
with a lender a line of credit that can be tapped should he need to 
deposit additional funds to meet margin calls. Every day, the producer 
must be aware of--and sometimes act on--the market fluctuations in 
prices.
    If corn and soybean meal prices in the market go up and hog prices 
go down, the producer will have excess funds in his account. If the 
feed grain prices go down and hog prices go up, the producer will have 
a shortfall in funds, and the broker will issue a margin call for 
additional funds to be deposited.
    Producers of all sizes achieve risk management through the futures 
market without directly using a broker. Some producers, for example, 
sell pigs to be delivered at a future date to a packer or buy feed 
grain to be delivered in a month or two from a supplier. The risk 
associated with those transactions are borne by the packer and the feed 
grain supplier, which manage their risk in the futures market.
    It must be noted that having commodities exchanges in the United 
States is vitally important not only to livestock and poultry producers 
and other farmers but to consumers. If producers had to use an exchange 
in, say, Brazil, the price of commodities would be set by that 
exchange--certainly still determined by supply and demand--but the 
total cost would be higher because of transportation fees. This would 
raise producers' costs of getting a hog to market, and some part of 
that, no doubt, would be passed along to consumers in the form of 
higher retail pork prices. (NOT SURE ABOUT THIS.)
Implications for Pork Producers of MF Global's Bankruptcy
    Many agricultural producers, including U.S. pork producers who 
produce at least 20 percent of U.S. hogs, had funds with MF Global. 
Most, if not all, of them, however, did not deposit their funds 
directly with the clearing broker. They opened futures trading accounts 
with an ``introducing'' broker, which put the funds into MF Global, 
which had the financial wherewithal to make large transactions in the 
commodities exchanges.
    Most producers were unaware of their connection to MF Global, so 
they were stunned to learn in early November, when the clearing broker 
filed for bankruptcy, that their futures accounts were frozen and funds 
were ``missing.''
    The seriousness of the MF Global debacle cannot be understated. Had 
such a loss of customer funds happened during a worse economic 
climate--2008-2009, for example, when pork producers were losing $24 
per hog and 50 percent of their equity and more than several went out 
of business--there likely would have been widespread bankruptcies in 
the agricultural industry and severe food supply issues.
    It has been reported that financial market participants were not so 
shocked by the size of MF Global's loss but by the fact that retail 
investors lost money in ``customer accounts,'' which were supposed to 
be segregated, or at least there were supposed to be restrictions on 
how funds in the accounts could be used by the clearing broker. (It was 
far from comforting for producers to hear former MF Global CEO Jon 
Corzine testify Dec. 8 before the House Agriculture Committee, ``I 
simply do not know where the money is.'')
    It remains unclear exactly how customer funds were lost, but for 
pork producers, the ``how'' is almost irrelevant. The loss and use of 
funds they expected to be used for their transactions--and the apparent 
lack of adequate oversight of MF Global's activities by governmental 
and non-governmental entities--has shaken producers' confidence in the 
futures market and in regulators' ability to police traders.
    And that loss of confidence will cost producers and consumers.
NPPC Asks
    U.S. pork producers need assurance that the markets will work and 
that the funds in their futures accounts are safe. And while NPPC is 
pleased that the Commodities Futures Trading Commission (CFTC) has 
approved a rule to enhance protections for where customer funds can be 
invested, it does not support more regulations for regulations' sake.
    The entire futures trading system must be assessed, from exchanges 
to brokers to clearinghouses, and oversight of the system must be 
exercised by the public- and private-sector entities that have 
responsibility. Put simply: There must be trust in the exchanges 
between the buyers and sellers; commodities trading customers must have 
faith in the system.
    Possible ``fixes'' to prevent another MF Global situation include:

   Impose stiffer criminal and/or civil penalties for misuse of 
        customer accounts.

   Require brokers to obtain permission before using customers' 
        funds for purposes other than customer transactions.

   Extend to commodities exchange customers insurance similar 
        to that provided to securities investors through the Securities 
        Investors Protection Corporation.

   Require other financial tests and additional audits of 
        brokers and dealers by governmental and non-governmental 
        entities.
Questions
    The collapse of MF Global and the missing customer funds raise a 
number of questions to which NPPC hopes Congress will get answers. 
Among pork producers' questions:

   Are there mechanisms that can be put in place to prevent 
        another MF Global?

   Will customers be given priority in the bankruptcy 
        proceedings to recover funds?

   Will producers whose funds were with MF Global be made 
        whole?

   How will the transfer of funds from MF Global to new 
        accounts with other clearing brokers be treated by the Internal 
        Revenue Service? Will such transfers be treated as taxable 
        events?

   Will actions be taken to simplify and expedite claims to 
        recoup funds, which producers must file with MF Global's 
        bankruptcy trustee?
Conclusion
    U.S. pork producers depend on, and in many cases are required by 
their lenders--through the covenants of operating capital loans--to 
have, risk management tools, including futures contracts. So, producers 
must have confidence in the futures market; the credibility of entire 
system, therefore, must be restored.
    NPPC is ready to work with lawmakers and, if necessary, regulators 
to re-establish integrity and faith in the system.
                                 ______
                                 
                          Submitted Questions
Response from Hon. Jill Sommers, Commissioner, Commodity Futures 
        Trading Commission
Question submitted by Hon. Chellie Pingree, a Representative in 
        Congress from Maine
    Question. Ms. Sommers, on Tuesday the CFTC adopted the so-called 
``MF Global Rule'' which bans the use of customer funds for in-house 
repo-to-maturity transactions and re-defines the permitted investments 
that FCMs can purchase with customer funds in repo-to-maturity 
transactions with third parties. The original list of acceptable 
investments for customer segregated funds is spelled out in the 
Commodity Exchange Act, and hews to conservative choices such as 
Treasuries, municipal bonds, and other products fully backed by the 
United States or a U.S. locality.
    Beginning in 2000, however, the CFTC used its discretionary 
authority under the statute to expand the list of allowable 
investments, first allowing the purchase of certificates of deposit, 
commercial paper, and interests in government sponsored entities. In 
2005, it permitted investments in foreign sovereign debt and in-house 
transactions.
    Now that the CFTC has rolled back those de-regulatory measures, how 
can we as lawmakers ensure that a similar de-regulatory slide does not 
happen again?
    Answer. First, I would like to address some misconceptions 
regarding the relationship between Commission Regulation 1.25 and the 
investments MF Global made in foreign sovereign debt through the off-
balance sheet ``repo-to-maturity'' transactions that have been widely 
reported. MF Global was a dually-registered Broker Dealer/Futures 
Commission Merchant (BD/FCM). The BD arm of MF Global was regulated by 
the Securities and Exchange Commission (SEC) and the Financial Industry 
Regulatory Authority (FINRA). The FCM arm of MF Global was regulated by 
the CFTC. The ``repo-to-maturity'' investments in foreign sovereign 
debt made by MF Global were conducted through the BD arm of the company 
under the oversight of the SEC and FINRA.
    Commission Regulation 1.25 lists the investments that a CFTC-
regulated FCM is permitted to make with customer segregated funds. 
Prior to the recent changes made to Regulation 1.25, FCMs were allowed 
to invest customer funds in highly-rated foreign sovereign debt, but 
only to hedge foreign currency risk posed by fluctuations in a 
particular foreign currency posted by the customer to the FCM. Such 
investments were strictly limited to the amount of a foreign nation's 
currency that the customer posted. Investment in foreign sovereign debt 
for purposes of speculation was never allowed by Regulation 1.25, and 
Regulation 1.25 does not, and never has, governed investments made by 
the BD arm of a dually-registered BD/FCM.
    ``Repo-to-maturity'' investments have never been allowed under 
Regulation 1.25. Section 4d of the Commodity Exchange Act and 
Regulation 1.25 require that the value of customer segregated accounts 
remain intact at all times. When an FCM invests customer funds, that 
actual investment, or collateral equal in value to the investment, must 
remain in the customer segregated account. If customer funds are 
transferred out of the segregated account to be invested by the FCM, 
the FCM must make a simultaneous transfer of assets into the segregated 
account. An FCM cannot take money out of a segregated account, invest 
it, or use it for its own purposes, and then return the money to the 
segregated account at some later time. If an FCM does so, it has 
violated the law. If an FCM were to invest customer segregated funds in 
foreign sovereign debt in order to speculate and hopefully make a 
profit, the FCM would violate the law under either the current or 
former versions of Regulation 1.25.
    It is critical that customer funds be invested in a manner that 
minimizes their exposure to credit, liquidity and market risks, both to 
preserve their availability to customers and clearinghouses and to 
enable investments to be quickly converted to cash at a predictable 
value. Accordingly, Regulation 1.25 establishes a general prudential 
standard by requiring that all investments be ``consistent with the 
objectives of preserving principal and maintaining liquidity.'' In 
order to ensure that all investments of customer funds continue to meet 
this prudential standard, I believe the CFTC should receive information 
from FCMs and clearinghouses on a regular basis detailing how customer 
funds are invested. The Commission should also regularly review the 
list of permitted investments under Regulation 1.25 and revise the list 
as necessary to reflect current market conditions.
Response from Hon. Jon S. Corzine, former Chief Executive Officer, MF 
        Global Inc.
Questions submitted by Hon. Chellie Pingree, a Representative in 
        Congress from Maine
    Question 1. You have described the profit MF Global obtained from 
RTM transactions as the difference between the interest earned on the 
security and the interest charged to MF Global for the purchase of that 
security. As you described it, the interest on the security would be 
greater than the interest charged for that purchase, producing income 
for you.
    Since these transactions involved the use of customer funds, how 
much of that interest income was provided to the customers?
    Answer. It is my understanding that no FCM customer funds were 
invested in the RTM transactions. It is further my understanding that 
the RTM transactions were entered into for the benefit of MF Global, 
and that all interest income earned from the transactions was for the 
benefit of MF Global.

    Question 2. Do you know if customers were even aware of these 
transactions?
    Answer. MF Global made numerous disclosures regarding the RTM 
transactions, including in its audited financial report that was issued 
at the close of the 2011 Fiscal Year, and in certain quarterly 
financial filings both before and after that year-end filing. MF Global 
also discussed the RTM transactions during various investors calls. MF 
Global also issued regulatory filings in connection with FINRA's 
decision that MF Global needed to maintain additional net capital.
Response from Hon. Terrence A. Duffy, Executive Chairman, CME Group 
        Inc.
Question submitted by Hon. Chellie Pingree, a Representative in 
        Congress from Maine
    Question. Part of the oversight of FCMs like MF Global involves 
disclosures to one of the self-regulatory organization for the 
derivatives industry. In the case of MF Global, it appears the front-
line SRP was the Chicago Mercantile Exchange (CME). But the CME is also 
a publicly-traded entity that generates revenue through trades made 
through its exchange. MF Global accounted for a significant volume of 
those trades.
    Is there a conflict of interest for a public company that is tasked 
with regulating an entity that is a critical part of its own business 
plan?
    Answer.
Industry Regulation
    Futures markets are commonly referred to as being ``self-
regulated,'' but ``self-regulation'' in that context is a misnomer 
because the regulatory structure of the modern U.S. futures industry is 
in fact a comprehensive network of regulatory organizations that work 
together to ensure the effective regulation of all industry 
participants. The Commodity Exchange Act (``CEA'') establishes the 
Federal statutory framework that regulates the trading and clearing of 
futures and futures options in the United States, and following the 
recent passage of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, its scope has been expanded to include the over-the-
counter swaps market as well. The CEA is administered by the U.S. 
Commodity Futures Trading Commission (``CFTC'' or ``Commission''), 
which establishes regulations governing the conduct and 
responsibilities of market participants, exchanges and clearing houses. 
The CFTC conducts its own surveillance of the markets and market 
participants and actively enforces compliance with the CEA and 
Commission regulations. In addition to the CFTC's Federal oversight of 
the markets, exchanges separately establish and enforce rules governing 
the activity of all market participants in their markets. Further, the 
National Futures Association (``NFA''), the registered futures 
association for the industry, establishes rules and has regulatory 
authority with respect to every firm and individual who conducts 
futures trading business with public customers. The CFTC, in turn, 
oversees the effectiveness of the exchanges, clearing houses and the 
NFA in fulfilling their respective regulatory responsibilities.
    It should be clear from the foregoing that the futures industry is 
a very highly-regulated industry with several layers of oversight. The 
industry's current regulatory structure is not that of a single entity 
governed by its members regulating its members, but rather a structure 
in which exchanges, most of which are public companies, regulate the 
activity of all participants in their markets--members as well as non-
members--complemented with corollary oversight by the NFA and CFTC.
CME Group Regulation
    As the world's leading and most diverse derivatives marketplace, 
CME Group is deeply cognizant of its important role in the context of 
the global market infrastructure. We serve the risk management needs of 
a wide variety of customers across a broad array of asset classes, and 
economic decisions around the globe are informed by the price discovery 
provided through our transparent and competitive markets. CME Group 
fully appreciates the responsibilities that come with the leadership 
position we occupy, and we are unequivocally and demonstrably committed 
to preserving the integrity of our markets and protecting the financial 
safety and soundness of our clearing house. We understand better than 
anyone that our company's reputation and our customers' confidence are 
on the line with every transaction executed on our markets and with the 
completion of every clearing cycle.
    As discussed further below, there is no per se conflict of interest 
that arises simply because CME Group is a public company that is also 
tasked with keeping its markets fair and open by regulating the users 
of our markets. To the contrary, there is substantial evidence that 
such private regulation has served the markets and market participants 
very well. Although we recognize that exchange sponsored regulation 
creates a theoretical possibility of conflicts, such possibilities 
exist in every organization, and the operative issues are whether 
organizational structures are effectively designed to mitigate the 
potential for conflicts and whether appropriate controls are in place 
to properly remediate any potential conflict that does in fact arise. 
At CME Group, we have very compelling incentives to ensure that our 
regulatory programs operate effectively and we have established a 
robust set of safeguards designed to ensure these functions operate 
free from conflicts of interest or inappropriate influence.
Incentives for Rigorous Regulation
    In our view, no entity operating independent from CME Group could 
possibly have stronger intrinsic motivations to ensure the operation of 
a fair and financially sound marketplace.

   Our ability to attract and retain business fundamentally 
        depends on our customers' confidence in the integrity of our 
        markets, and exceeding our customers' expectations in that 
        regard is one of the cornerstones of our business model. 
        Ensuring that our markets are defined by effective and 
        appropriately balanced regulation is a competitive advantage 
        that draws institutional, commercial and individual customers 
        to CME Group.

   As a public company, it is only by performing our regulatory 
        functions well that we avoid the severe reputational 
        repercussions and associated impacts to shareholder value that 
        would arise if lax regulation or improper conflicts were to 
        compromise our commitment to fair, transparent and financially 
        sound markets.

   CME Group's own capital is first at risk if a failed 
        clearing firm's capital and collateral posted to CME is 
        insufficient to cover a default at the clearing house, giving 
        us the strongest possible economic incentive to ensure robust 
        oversight of our clearing firms' compliance with our rules and 
        CFTC regulations.

   In addition to strong economic and reputational self-
        interest, CME Group is subject to robust regulatory oversight, 
        as further detailed in the next section, creating powerful 
        regulatory incentives for CME Group to effectively regulate its 
        markets.

    No other entity that might conceivably conduct the regulation that 
CME Group performs of its markets and of the financial practices of its 
clearing members would have such compelling interests to perform as 
well. Given this context, there can be little question that the 
interests of CME Group, its customers and its shareholders are fully 
aligned in promoting a rigorously effective regulatory environment.
Government Oversight
    As introduced at the outset of this letter, it is important to 
recognize as well that regulation at CME Group does not operate in a 
vacuum, but is subject to active government oversight, primarily by the 
CFTC.

   CME Group's exchanges are registered as designated contract 
        markets (DCMs) with the CFTC, and our clearing house is 
        likewise registered as a derivatives clearing organization 
        (DCO).

   In order to achieve registered status, we are required to 
        fulfill substantial regulatory obligations codified in the 
        Commodity Exchange Act's 23 core principles for DCMs and 18 
        core principles for DCOs. These include core principles 
        requiring that we establish structures and enforce rules to 
        minimize conflicts of interest in our decision making processes 
        and that we have appropriate procedures for resolving potential 
        conflicts.

   The CFTC's Division of Market Oversight actively oversees 
        DCM compliance with core principles and its Division of 
        Clearing and Risk oversees DCO compliance. Exchanges and 
        clearing houses are continually subject to both formal and 
        informal reviews of how effectively we fulfill our regulatory 
        mandates. In the event CME Group's exchanges or clearing house 
        were to fail to comply with the core principles, the company 
        could face significant sanctions, reputational exposure and 
        even compromise the registration status which allows us to 
        operate our markets.
Proven Track Record as Industry Leader
    CME Group has a proven track record of taking industry leading 
measures to ensure that our regulatory responsibilities are executed 
without conflicts or undue influence.

   CME Group was the first futures exchange to create a Market 
        Regulation Oversight Committee (MROC) to augment the 
        independence of our regulatory functions. The MROC is a board-
        level committee composed solely of independent (i.e., public) 
        members of CME Group's Board of Directors, and we created this 
        committee well before the CFTC determined to require that all 
        DCMs establish such committees. Pursuant to its publicly 
        available charter,\1\ the MROC provides independent oversight 
        of the policies and programs of CME Group's Market Regulation 
        and Audit Departments in order to help ensure the effective 
        administration of our SRO responsibilities and that those 
        responsibilities are executed independent of any improper 
        interference or conflict of interest.
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    \1\ http://files.shareholder.com/downloads/CME/1670414224x0x119341/
d801a2be-bc2f-40fa-94b1-1dadd0d59171/market-regulation-committee.pdf.

   CME Group was also the first futures exchange to include 
        independent, public individuals on our disciplinary committees. 
        Again, the CFTC subsequently adopted this model for all DCMs, 
        establishing minimum requirements for public representation on 
        disciplinary panels, requirements which CME Group independently 
---------------------------------------------------------------------------
        chooses to exceed.

   We also have a substantial ethics and compliance program and 
        related certification processes for all employees, as well as 
        an additional Confidentiality Policy for the Market Regulation 
        and Audit Departments \2\ which sets forth a rigid framework 
        that precludes the use or disclosure of information obtained in 
        the context of fulfilling our regulatory obligations other than 
        for regulatory or risk management purposes.
---------------------------------------------------------------------------
    \2\ http://www.cmegroup.com/market-regulation/overview/files/
confidentialitypolicy.pdf.
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Investment in Integrity of our Markets
    CME Group invests substantial resources in our efforts to protect 
the integrity of our markets and the financial stability of our 
clearing house. These include:

   150-person Market Regulation Department.

   61-person Audit Department.

   Functions such as Clearing Risk Management, Regulatory 
        Information Technology, the Globex Control Center and the Legal 
        Department, among others, additionally support various facets 
        of our regulatory functions.

   Our investment of tens of millions of dollars each year in 
        our regulatory efforts reflect the importance we place on this 
        commitment to our market participants, and also substantially 
        reduces the financial and operational burdens on Federal 
        regulatory agencies. The exchanges' regulatory programs operate 
        at no cost to the taxpayer and, in fact, the exchanges pay the 
        CFTC for the CFTC's program of oversight of exchange regulatory 
        programs.

   Significant investments in our regulatory technology, 
        including staff dedicated solely to the support and continuous 
        development of our regulatory technology infrastructure, ensure 
        that our regulatory and market protection capabilities 
        anticipate and evolve with the changing dynamics of the 
        marketplace. CME Group owns or has applied for numerous patents 
        related to its regulatory technology and other tools designed 
        to help protect against disruptions in our markets. We have 
        developed an exceptionally granular audit trail of market 
        activity and powerful and flexible data query and analytical 
        tools that allow our regulatory staff to examine real-time and 
        historical order, transaction and position data, maintain 
        profiles of markets and market participants, and to detect 
        trading patterns potentially indicative of market abuses.

     Following the ``Flash Crash'' on May 6, 2010, for 
            example, CME Group was able, later that same night, to 
            provide the CFTC with a detailed account, sequenced to the 
            millisecond, of every order, trade, cancellation and 
            modification that took place in its relevant markets on 
            that day. Moreover, it was our ingenuity and investment in 
            developing and implementing market controls that 
            effectively halted the market break that day by 
            automatically pausing the market long enough to source 
            liquidity and that helped to ensure, unlike other venues, 
            that no trades had to be canceled.

   With respect to our open outcry markets, we independently 
        elect to invest in high-end, comprehensive camera surveillance 
        of our trading floors to detect and deter abuses--not because 
        any rule mandates that we do so, but because of our commitment 
        to effectively fulfill our mission to protect the integrity of 
        our markets.

   Our clearing house's financial safeguards system is 
        continually evaluated and updated to reflect the most advanced 
        risk management and financial surveillance techniques and 
        capabilities.
Enforcement
    CME Group's effectiveness and assertiveness in regulating its 
markets are also reflected in the results of our surveillance and 
enforcement programs.

   In 2011, CME Group's exchanges opened approximately 700 
        regulatory inquiries, in addition to conducting proactive 
        regular surveillance, and took 138 formal disciplinary actions 
        against market participants.

   Two of those recent actions, resulting in $850,000 in fines 
        and remedial actions, were taken against one of our most active 
        proprietary trading firms for failing to properly supervise and 
        test its deployment of automated trading systems. In another 
        recently resolved matter, eighteen brokers and locals in a 
        particular market on the trading floor were fined more than 
        $600,000 and subject to trading suspensions for engaging in 
        non-competitive trades that disadvantaged other market 
        participants.

    Direct regulation by the exchange offers our regulators unique 
proximity to the markets, market participants and the broader resources 
of the exchange in ways that foster the development of expertise that 
not only helps to make our regulatory staff more effective, but also 
assists Federal regulators in our common objective of preserving the 
integrity of the markets.

   Most of our interaction with Federal agencies occurs with 
        the CFTC, and its Division of Enforcement publishes a report of 
        its activity for each fiscal year. Its most recent full report, 
        for FY 2010, noted that it took 57 enforcement actions.\3\ In 
        30% of those actions, CME Group either referred the matter to 
        the CFTC or provided assistance to the CFTC.
---------------------------------------------------------------------------
    \3\ The CFTC recently released statistics for FY 2011, which noted 
the filing of 99 enforcement actions and the opening of more than 450 
investigations, but the full report is not yet available.

   Excluding enforcement actions outside of CME Group's 
        regulatory purview, such as forex fraud, the percentage of CFTC 
        actions in which CME Group referred the matter to the CFTC and/
---------------------------------------------------------------------------
        or provided assistance to the CFTC was 68%.

   An example of how exchange sponsored regulation and Federal 
        regulation work together is evident in another 2011 matter 
        whereby CME Group regulators initially took summary and 
        emergency actions to bar a party engaged in violative practices 
        from our markets and referred the matter to the CFTC and 
        Department of Justice. The CFTC subsequently filed a civil 
        action against the individual, and in December 2011, he was 
        sentenced to 44 months in prison and ordered to pay restitution 
        of approximately $369,000 after having pled guilty to wire 
        fraud.

    Exchange sponsored regulation also often allows for more expedient 
identification of potential issues given our knowledge of and proximity 
to the markets, as well as the ability to react more quickly and 
flexibly to potential market and regulatory issues; in certain matters, 
that speed can make all the difference between having the ability to 
freeze or recoup misappropriated money and losing it forever to 
wrongdoers.

   For example, in a series of three separate recent cases 
        resolved in 2011, the CME Group exchanges were able to quickly 
        identify suspicious activity in our markets involving off-shore 
        parties seeking to misappropriate money from other unwitting 
        market participants. We promptly referred those matters to the 
        CFTC which subsequently filed suit against the parties in 
        Federal court. Our ability to quickly detect this activity and 
        assist the CFTC in its subsequent investigatory efforts 
        resulted in fines and restitution of more than $3.5 million 
        and, by quickly freezing funds, prevented $7.2 million more 
        from being stolen.
MF Global Bankruptcy
    The MF Global bankruptcy was not a failure of exchange sponsored 
regulation. CME Group's clearing house fully met its obligations to all 
other clearing member firms and their customers, and our Audit team 
performed its responsibilities in regard to MF Global consistent with 
the highest professional standards.

   As CME Group has noted in its testimony before several 
        Congressional committees, 100% of the customer segregated 
        collateral posted to CME and held at the clearing level, 
        amounting to $2.5 billion, was fully accounted for. The well-
        publicized shortfall in customer collateral came from the 
        customer segregated funds held at the FCM level, not funds held 
        at the clearing level.

   MF Global's improper transfer of customer segregated funds 
        held at the FCM level was a very serious violation of the 
        Commodity Exchange Act and exchange rules, and the resulting 
        shortfall in customer segregated funds was an unfortunate first 
        in our industry's long history. However, no regulator, whether 
        an exchange sponsored regulator or otherwise, can guarantee 
        that individuals will not break rules--regulators can seek to 
        establish appropriate rules, monitor compliance with the rules 
        and ensure that market participants are appropriately 
        accountable for breaches of the rules.

   CME Group is fully cooperating with Federal authorities in 
        the MF Global matter to assist them in their investigatory 
        efforts and is working with the industry to review how current 
        safeguards for customer segregated funds held at the firm level 
        can be strengthened.

    To put it plainly, there was no conflict of interest with respect 
to CME Group's regulation of MF Global, and any suggestion that 
conflicted regulation contributed to the MF Global fiasco is misplaced. 
Indeed, in 2008 and 2009, CME Group fined MF Global $400,000 and 
$495,000, respectively, for supervision failures and other violations 
of trading practices rules, clearly indicating that CME Group's 
regulators actively monitored and enforced compliance with the rules by 
MF Global, just as we do with every other market participant.
    Notwithstanding the fact that MF Global's misconduct was the cause 
of the shortfall in customer segregated funds, CME Group's efforts in 
the wake of these events speak to the level of our commitment to 
ensuring our customers' confidence in our markets.

   We made an unprecedented guarantee of $550 million to the 
        SIPC Trustee in order to accelerate the distribution of funds 
        to customers.

   CME Trust pledged virtually all of its capital--$50 
        million--to cover CME Group customer losses due to MF Global's 
        misuse of customer funds.

   CME Group has also recently announced that it will establish 
        a $100 million fund designed to provide additional future 
        protections of customer segregated funds for U.S. family 
        farmers and ranchers who hedge their business in our markets.

    No other exchange or clearing house has taken such actions.
Conclusion
    CME Group's record belies any suggestion that conflicts of interest 
arising from exchange sponsored regulation have precluded us from 
assertively regulating our markets. The current regulatory model has 
served the futures industry, its customers and the public very well, 
and MF Global's misconduct should not undermine that record.
    The utility of SROs has been consistently recognized by Congress. 
For example, the Commodity Futures Modernization Act of 2000 embraced 
the SRO regulatory structure by further defining the SROs' 
complementary role vis-a-vis the CFTC and law enforcement agencies. In 
2008, in ``The Department of the Treasury Blueprint for a Modernized 
Financial Regulatory Structure'', Treasury recommended that the SRO 
model be preserved for the futures and securities industries ``[g]iven 
its significance and effectiveness.'' Similarly, in 2009, Treasury's 
``Financial Regulatory Reform--A New Foundation: Rebuilding Financial 
Supervision and Regulation'' further endorsed the SRO structure. Most 
recently, the Dodd-Frank Wall Street Reform and Consumer Protection Act 
recognized the substantial public good that effective exchange 
sponsored regulation delivers and extended the core principles based 
SRO regulatory regime to the previously unregulated swaps market.
    In conclusion, CME Group's regulatory efforts have had a 
significant impact on enhancing market integrity. We have a robust and 
proven model for managing against potential conflicts of interest, and 
the public's and market participants' interest in well and efficiently 
regulated CME Group markets continues to be best served by our strong 
and innovative self-regulatory programs buttressed by effective CFTC 
oversight.

                                  
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