MF Global casts spotlight on client fund rules

Thu Jan 26, 2012 5:08am EST
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By Luke Jeffs

LONDON (Reuters) - Three years after the demise of Lehman Brothers exposed problems in how brokers handle client funds, trading firms are still using lax rules to withhold cash owed to clients of failed brokerages, fuelling calls for reforms.

Clients of MF Global UK, which filed for bankruptcy after revealing it had made a $6.3 billion bet on European sovereign debt, are struggling to get their money back from accounts where their investments have been pooled.

Administrator KPMG has recovered about $1 billion of the $1.2 billion of client assets in the three months since MF Global collapsed, but the remaining $200 million of client cash is proving elusive.

The impasse is linked to legal agreements that determine whether client assets are held separately from those of other clients, in a segregated account, or mixed with other client collateral in what is known as a non-segregated account.

Brokerages like MF Global hold investments on behalf of pension funds or hedge funds. Problems arise when the broker goes bust because those assets are frozen and they are most likely invested elsewhere, which means they are sitting on someone else's books such as a bank or exchange.

KPMG has successfully reclaimed the assets and cash held by clients in segregated accounts, where there is demonstrable link between the asset and its owner.

But cash held in non-segregated accounts is proving harder to recall because the firms holding the funds are often also owed money and are wary of giving up what they have for fear they may not get what they are owed in the long run.

"By their nature segregated funds are quicker and easier to collect in," KPMG said in an emailed statement.   Continued...

<p>The sign marking the MF Global Holdings Ltd. offices at 52nd Street in midtown Manhattan is seen in New York November 2, 2011. REUTERS/Shannon Stapleton</p>