The CME Group said Wednesday that MF Global apparently transferred customer segregated

funds following the completion of CME audit procedures, a violation of CME rules and

Commodity Futures Trading Commission regulations.

Several media reports said that the day MF Global filed for Chapter 11 bankruptcy protection, the firm reportedly said there was a shortfall in customer accounts of about $700 million. The media reports said that this

disclosure scuttled a last-minute purchase of the firm by Interactive Brokers.

CFTC and CME rules mandate that customer funds be kept separate, or segregated,

from the firm’s own money at all times. The CME Group said the funds related to the

reported shortfall were held by MF Group and not on deposit with CME Clearing.

“CME completed its on-site review last week. At that time, the results of our review

indicated that MF Global was in compliance with its segregation requirements. It now

appears that the firm made subsequent transfers of customer segregated funds in a

manner that may have been designed to avoid detection insofar as MF Global did not

disclose or report such transfers to the CFTC or CME until early morning on Monday,

October 31, 2011. CME fully discharged its auditing procedures in accordance with

applicable procedures and standards and is working with regulators and authorities

to investigate these transfers,” the exchange said in a press statement.

A Bloomberg story said that MF Global has now accounted for all of its client funds,

according the to the firm’s lawyer at a bankruptcy court hearing.

The CME Group said that it conducts regulatory reviews to check a company’s financial

records to ensure the firm’s full segregation compliance and to monitor necessary

corrective action. According to exchange and CFTC rules, clearing firms are required to

calculate their customer segregated positions daily and notify both entities when it knows

or should have known these customer accounts are under-segregated.

“None of MF Global's reports reflected any under-segregated positions. The reports actually

reflected excess segregated funds,” the exchange said.

The exchange said it is working with the CFTC and the Securities Investor Protection

Corporation trustee to transfer customer positions to other qualified clearing member

firms with as much held collateral as legally permitted. CME Group said it has no control

over customer segregated funds that were held with Mf Global and not CME Clearing.

Those funds are now controlled by the SIPC trustee, the exchange said.

The CME Group said it is holding “substantial” excess margin collateral from MF Global,

which keeps it “in a strong financial position, both with respect to MF Global and more

generally.”

By Debbie Carlson of Kitco News dcarlson@kitco.com