Anger mounts as MF Global clients see $3 billion still stuck

While authorities have touted the fact that they are returning 60 percent of the collateral and cash that had been frozen in the wake of the broker's October 31 bankruptcy, a closer look shows that in fact only about 40 percent of customers' total funds have been authorized for release so far.

The remainder, more than $3 billion, ostensibly remains on hand to cover a shortfall originally estimated by MF Global to regulators at just $600 million.

Because the bankruptcy trustee, regulators and exchanges have made no comment on the missing funds in weeks -- and have given no information as to how much cash they are retaining -- customers are left guessing exactly how much might end up in the creditors' process of the bankruptcy.

After weeks of intense lobbying by customers and exchanges, trustee James Giddens last week won court approval to release another $520 million in funds from MF Global accounts that contained only cash as of October 31.

But that has still left thousands of customers in an uproar. Clients who had a mix of cash and trading positions have yet to see a dime of their excess funds, they say. The trustee is planning a third cash transfer to cover these clients, but no timing for that tranche has been announced.

"The whole process is a mess," said Jason Skole, a private investor who had invested $200,000 at the start of this year in a small hedge fund who traded through MF Global.

"Those who had just cash positions will get some of their money. All I've got is 60 percent of the small amount of collateral I had backing trades," he said. He says around $185,000 of his money is still frozen at the bankrupt firm.

Giddens said late last week that they were working on a third bulk transfer to "true up" the value of distributions so that all former customers get the total 60 percent of their net equity, but they weren't yet confident enough in MF Global's bookkeeping and cash on hand to go beyond that.

"We've seen enough (money) to make the 60 percent distributions but we can't distribute money we don't have," Giddens' spokesman Kent Jarrell told Reuters on Sunday.

"As soon as we identify assets under our control, we are trying to distribute them. And we can't get ahead of that because then we can run out of assets.... We have to find the assets and we have to make sure we have to control those assets. It's a time consuming, complex task and we have hundreds of people working on it on our end now."

CME Group referred all questions to the trustee.

The tale of the customer's funds goes like this. On October 31, exchange operator CME Group estimated in a court filing that there was a "requirement" of some $5.5 billion in segregated customer funds -- including, presumably, the missing funds that could not be immediately located.

Over the following weeks, while authorities poured over sloppy and haphazard records, the trustee identified two pools of money that could be partly returned to customers.

The first was $2.5 billion in collateral that was being used as margin to cover existing trades. Those trading positions were transferred to new brokers along with 60 percent of the value of the collateral, or about $1.55 billion.

The second was $869 million that was left in MF Global accounts that contained nothing but cash -- either because customers had liquidated all their trades before October 31, or because they simply had no positions open as it failed. The bankruptcy court ruled last week that those account holders would also get back 60 percent, or about $520 million.

Those two pools of funds only account for about $3.4 billion of the original total $5.5 billion. The customers whose accounts hold that remaining $2-plus billion have never been explicitly identified, or told when they will get their funds.

"We have the $520 million to do distribution of cash accounts. And we knew we had the assets to distribute on the first one around. Now we also feel confident we have enough to true up. What we don't know is what we'll have beyond that," said Jarrell.

It's clear that some cash is being held back in order to cover the missing money that regulators say MF Global may have taken from customer accounts, an unprecedented violation of one of the fundamental tenets of commodity brokers.