>> mr. chairman, im, i think the timeframe you're referring to, there may have been some ongoing review by our division of corporation finance filings are being made in the ordinary course. i'm not directly familiar with what the questions they were raising. i think they were regular review of the filing. i'm not aware of any communications of any other regulators at that time. >> mr. berkovitz? >> i would add that typically there is consultation and coordination between the two agencies on these types of matters, if they are not something that would rate -- raise red flags though it would not be any indication. >> was any communications into secretary geithner or the fsoc? >> i couldn't answer that full but i'm not aware of any. throughout this period that you

are referring to, in the review of the reports that we had and the information we obtained from our review of mf global, as was looking at the report from the self regulatory organization, we have not received any red flags that would be a major issue at that time the mac the dodd-frank statute, one of the objectives of the fsoc is to facilitate information sharing and coordination among member agencies. there were obvious problems at mf global. was fsoc doing its job here, do you know, mr. berkovitz? >> from -- i would say as again during this time period, based on the information which entrance of the money and the segregation accounts, that with respect to the issue that we look at and sent to mf global,

protection of customer funds, how they work protecting customer funds, daily reported that we're getting, the monthly reports that we had, and that we had been obtaining from the self regulatory organization, from cme, had not raise any red flags regarding the treatment of customer funds. so in the normal course of business, absent red flags, wouldn't necessarily rise to something that the fsoc would have been notified of. >> if i could add, serve. to your earlier comment, i was thinking of the earlier time period i think it started your question with. when it became clear that were serious concerns with mf global, there was a lot of discussion among various regulators. we were talking with the cftc, treasury department during that week about, and leading into the weekend about what was going on. fsoc has been talking about, and i don't want to speak for fsoc,

-- >> are you a board member? >> our chairman is, yes or. >> you're a member, right? >> chairman of the cftc is a member, yes. >> fsoc had included exposures to european sovereign debt. and after, after the bankruptcy filing there was a call to fsoc on that day to discuss what the implications might be of the bankruptcy. >> mr. ketchum, do you have any comment on that question are also a member pashtun your organization is a member of fsoc? >> no, we're not. to the best of my knowledge no self-regulatory agency is a member of fsoc. >> there were obvious problems with mf global. do any of you have an opinion whether not fsoc was doing its job here?

>> my view is that, my understanding fsoc was really great primer as a way to help monitor systemic risk, to identify where there may be systemic risk and to deal with it. while the bankruptcy of mf global is a significant event and has caused enormous hardship for many individuals, it's not clear to me that it fell within the framework of a systemic risk your that being said, i think one of, the discussions on that call after the bankruptcy, you know, it was recognized this was an opportune to learn lessons about how the regulatory structure works and whether there is opportunity for any improvement. >> let me ask you something. the purpose of the fsoc is also to facilitate information sharing and coordination among the member agencies and other federal and state agencies

regarding domestic financial service policy development will making, examination from reporting from requirements, and enforcement actions. these are the duties of the fsoc you're so both of your organizations were duty-bound to exchange information. was that not happening with regards -- what you were hearing from mf global at the time? >> we had exchange information. we were in communication with the sec and our staff is in communication with finra as well. through this period, up until the last several days, the daily segregation reports, the monthly reports, the reports that we were getting from our dsr row had that indicated there were issues with the customer's segregated funds. in the absence of information

coming to us from the reports from mf global, from the dsro, from her own review, we had information that this would be something that we would necessarily pass on to the fsoc as mr. cook stated. >> thank you very much gentlemen. i now yield five minutes to mr. capuano, ranking member. >> mr. chairman, i'm going to try to stick to the issues at hand. if you want to talk to fsoc let's get them in. i think it's a fair question asked what the going to do from this point forward but they will put together for systemic risk. this may or may not get to the point that if anyone is suggesting it that it is. so in the meantime, mr. kobak, i'd like to stroke you understand totally 100% agree that your first primary responsibility to customers. but for the sake of discussion i also brazil as a bankruptcy trustee you were collecting information on all creditors, not just customers.

is that if you're a suction? >> that's correct. our primary emphasis at this point is customers, both on security and commodity side but we certainly have fiduciary duty to speak for the sake of discussion all customers, and i'm not suggesting -- for the sake of this discussion let's assume you can get to 100% of the but after the customers were paid, who is the largest creditor to your knowledge at the most? >> i believe the large crater is probably jpmorgan. they were creditor of the holding company but also -- >> again, not to be -- >> i know there was a very large revolving loan. i know they would including thing. i'm not exactly sure [talking over each other] >> hundreds of millions. >> so it's a regulated bank at the other end of this. the reason i ask is as i understand when everything is said and done, where the collateral might have come from, that's fine. we will get to that in a minute the cftc. the final analysis would have a lot of money to get to, it appears on a very cursory review that money had to come from the outside.

in this case a significant amount of it came from a regulated entity, is that a fair statement? >> i really don't know. we haven't been there. we have really done an analysis. >> i'm not trying to jump ahead. i guess i'm jumping ahead because that's what i have to do today. i personally think that's what it's going to end up to mr. kobak come have a look at the auditors or look at the credit rating agencies? heavily to any of the other entities with a presumption in at some point you're going to have to go at everybody to try to get money from any place you can that is due to this company. have you started looking at them? >> step one has been to look at the accounts to see the content like what the transactions were. i think as mr. corzine was suggesting today, another part of that is probably looking at money that should've been coming in to see whether it all got there. that's what we've been concentrating on today. we certainly will do the others. >> mr. baxter, to know if the fed has been looking at any

entities on the other side of these agreements? >> you know, ranking member, that i can't talk about specific regulated institutions. but the answer to your question generically as we were looking at certain institutions, banking institutions before the before e bankruptcy and will continue to look at them after the bankruptcy. >> i will take eventually i myself will want to go to to ask question. i'm not expecting millions today. to make this mess there had to be two parties. one party might have been mf global, maybe or maybe not doing something well but had to be another party. if there's another regulated entity after getting loans, getting risky situations, this unfortunately sounds all too familiar. which i know it's too early yet but i just want to make sure that the fed is aware that i for one want to go down that road when the time is appropriate. mr. berkovitz, for the ctc, you just last week, i think it was, change regulation 125.

but that change has been pending since may 2009. that's two years, officially put out their october 2010. we have been dealing with this for two years. do you think that maybe you kind of waited too long? >> congressman, the commission, as you noted, publish and advance notice rulemaking in may 2009. we took the comment, public comments we received on whether we should speak how many public comments did you get? >> i think there were -- >> twelve? >> fifteen or something like that. >> twelve. so not hundreds of thousands of comments? >> that's right. we issued a notice of proposed rulemaking in october 2010, at that time. subsequently -- >> i understand. you think that you should have acted quicker?

the only reason i ask, click this i is the way to mf global what do. whether they did right or not it's clear the incredible doors that were opened by the ctc through 1252 allow them to hype oh everything. what i see, again, still catching up and it looks like to find close the door. the fact you close the door a week after the bankruptcy raises even more red flags that you knew that there was an open door and you knew should have closed it earlier. so i guess the question is, if you had closed earlier would we be sitting here today? >> i would like to clarify in terms of what regulation 1.25 type of transaction it would allow and transactions it does not cover. regulation 1.25 speed are using mf global has violated 1.25? >> know, congressman. i'm saying 1.25 covers what investments of customer finds -- >> i know what it covers.

i understand. that's why we're trying to get back customers. 1.25 is the regular for all intents and purposes enforcing the so-called segregation of customer funds. but they were not segregated otherwise we wouldn't be looking for them. and as i understand everything i have read so far has indicated mf global went through 1.25 possibly legally, maybe not, not sure yet, to get that those funds in a way that was allowed by the cftc. whether they did illegal is fine, but at least some of it, that door was open. now that it is close, the fact you close so quickly after the bankruptcy certainly indicates to me that was the problem. you now close the barn door after the horse is gone, which is fine. so to me, what changed? why all of a sudden did somebody on the border change their their vote? >> congressman, as i was describing, a process of -- >> i understand processes.

why wasn't it passed before the bankruptcy? didn't have the votes? >> considering it through the summer. >> all of a sudden they woke up on december 4 and said oh, my god, we've got to pass this today? >> there were a number of outstanding issues -- >> do you realize how much this smells? this is like a dead fish sitting on the table to me. because the way you're implying is that if this had never happened, somehow miraculously on december 4 it would have passed anyway. which, of course, is virtually impossible for me to believe since it'd been hanging out there for two years. >> there's nothing in change aren't 1.25 prior to the change which would have permitted a person to take customer out of -- >> no, no, no. i understand what 1.25 does but i also understand what doors it opens up it allowed them to be in sovereign debt. it allowed in houseboats and have no close those doors. which i think of an estimated that as i understand, mr. koh, you never opened those doors.

is that a fair statement? in house repose? >> the reserve account in the security side needs to be invested in cash or treasury. >> you didn't have this door open? >> i don't exactly everything. >> if i could clarify what 1.25 allowed for -- >> i know what it did but i also know how it's used and that's why the door was closed. you clearly saw it as an open door. and i think that's fine because it was and i'm glad you closed it. but i've got to tell you it seems as though you're sitting on your hands for a year and have when you, you should've shut the door. you knew there was a problem. as you acted precipitously we wouldn't be here today because mf global would have been able to do. that's the way i read it i wouldn't mind hearing a follow-up later but i have a limited time. i think i'm already over my limited time. i will be backed. >> thank the gentleman.

mr. berkovitz, commissioner sommers told the senate ag committee on we have a very good idea at this point what happened to the money. what happened? >> congressman, i think what commissioner sommers was referring to was we have a very good idea of the initial transfer out of the segregation accounts. we have a lot of information about a nation where that money went within the company. what we are continuing to look at come we are continuing to examine is what was finish of the transaction from what was the underlying purpose of those transactions, to what extent with a legitimate transaction, to what extent would it not legitimate transactions. and then from there what happened to those funds. several other steps that we are looking at very, very closely to try to trace exactly where all that money went. >> was there one particular entity they got a line share of those transfers in the last

days, our? >> i can't speak to that. that's where we are continuing to try to trace these funds, and that's not going -- that's an ongoing process. but we are, that is one of the questions we're trying to track right now. >> thank you. mr. duffy, you heard mr. corzine testified today when asked about a $70 million transfer, $175 million transfer that was made, classified as a loan to a u.k. subsidiary. and he denied actually knowing about those transaction. do you agree with that test we? >> i can only tell the committee, which i told in the senate, what i've been told. this committee asked for an explicit timeline of everything that cme group new, and we documented that and submit it for the record. i think you submitted it earlier. in there and had references of our employees that were on calls

where the other employees of mf global said mr. corzine was aware of the loans to the 175 million to european subsidiaries. so that is what i know about it. >> assume he all have been some postmortem of what, you're trying to help of recovering those funds. >> we are not. were not allowed to do an investigation. >> so your hands are off at this particular point? >> our focus, as i say i'm a testament, cme group put up $550 million to help the trusty put money back into the small farmers and ranchers and that's what we have done. >> thank you. i think my friend from texas -- [inaudible] >> i want to follow up on the testimony, the line of

questioning about interagency coordination. i know the sec initiated some actions back in the summer i believe to require this entity to put up additional, is that correct, mr. kirk? >> yes. just amplify that was initiated by the front-line supervisor of thinner and they cboe who identified asia and consulted with us. that resulted -- >> when did you first get concerned about this issue with this into the? >> this particular issue was raised by finra, and the cboe i think into june, july time frame after a number of conversations during that timeframe. >> and mr. berkovitz, when was kind of the first indication to the ctc there was a problem over

at mf global? >> it was the weekend -- obviously, well, let me backup. the week of the 24th of october after the downgrade, the ratings downgrade, the earnings statements, we became concerned about the protection of customer accounts and customer funds. so we sent people on site. i believe it was the 27th of october. >> about 90 days later and was in the last week of the game. >> if i might just amplify, you were talking about the bankruptcy and the week beforehand. the capital charge issue that came up in august was one that was discussed to clarify one of the facts, what are the issues and to ultimately reach a final determination where the firm was

told they need to take the charge at that time. i understand the sec staff to inform the ctc staff about the issue and that a capital charge was going to be taken. under the normal rule when someone has to take a capital charge of this nature, in a way that suggests their capital charges earlier were inadequate they have they have to file a notice to their regulators, which i believe they did which would be to us and to thinner and ctc, and then they were forced to restate their report of the financial part which would then be filed with us and ctc all in august, early september time emac go back to what you just said, mr. berkovitz but you didn't acknowledge that pic you said we became aware of the problem -- >> i think i answered a different question than one you asked. and i apologize for that. mr. cook is correct. we were told about the capital issue in early august and we were informed of the issue and

the resolution of the issue at the time so we were aware of that in the early august time frame. >> thank the gentleman. mr. perlmutter? >> thanks mr. guerre. it will be interesting as the weeks and months go by and all these facts really to unfold because there is several sort of major things that i'm concerned about. and i'd like to first sort of understand the process. mr. keshen. you said we need to get our hands on this quicker. but if i'm not mistaken, specific steps in and they can freeze everything by filing a bankruptcy. that's how we protect customers of broker-dealers? >> congressman, the old for protection for customers and broker-dealers when it is a bankruptcy and liquidation is

specific with the trusty and should be. in many circumstances where a firm is in financial trouble, the raiders working with the firm are able to identify either transfer accounts or sale of the from which avoids having customer accounts frozen and avoids the variety of impacts that come from liquidation. so we tried to avoid that whenever we can. >> that sort of the last straw. but in defense of that using you would like to be able to have some authority to force a sale or to protect -- because it sounds to me like you're getting weekly sort of updates and you guys get nervous a week or two in advance of the trusty stepping in and closing the company? >> well, we, of course as you recall from my testimony and from mr. cook's article we became concerned over the positions of the quarterly statement at the end of may and demanded, and maybe initial

request for the cboe for additional capital to meet the capital requirements we thought applied. that finally occurred in august. we continue to monitor the firm as time went on. the position didn't change. what changed over time was the gradual public recognition of the size of the position in foreign sovereign debt that the firm had. and with that the ratings impact and the eventual withdrawals, liquidity support that put the firm into its span in the last week. so we were very concerned about that. it was entirely working together with the other self-regulatory organizations and with the sec. no, i don't think it's a matter of additional authority. it simply is the concerns we have a firm that -- >> in hindsight summit should put them into bankruptcy a week before this, made would've say that $900 million. and really, i'm just trying to

understand, because i'm very concerned, this feels like déjà vu all over again to me, okay? and mr. duffy, you and i have had conversations about see any and about, you know, this would be the first time that money was lost from segregated accounts. i was counting on you guys sort of in this, and i appreciate that the cme has put up $550 million, which is, you know, towards the insistence to the customers. how does this happen? you clear twice a day. you see who is got money and who doesn't. >> it is very disturbing. you and i have had many conversations, and i think one of the reasons you saw my testimony the way it was, it was the timeline to show that we are getting falsified segregation reports, and as we tie this education report out from wednesday going into thursday and friday, the money was there as of wednesday for the most part, 80 to 90%. so something happened on

thursday, friday. we're doing everything possible. we spent $11 million doing this. we audit every for each and every year. we do spot audits, surprise audits. we've done things to make sure our system never fails to our system has never failed in 75 years. in our opinion someone has violated a law here. and it's hard to -- >> if there is an embezzlement and fraud or whatever, we've got to just deal with it. the fbi is in this. but i was hoping that the system that was in place, especially through -- >> the system didn't fail. >> as this unfolds i want to see that. >> i'm trying to show that in my testimony. >> i would like to turn my question to mr. baxter, because he had this primary dealer, mf global picking a, i don't and if lehman brothers was a primary dealer. i think it was. in monitoring these guys were doing deals with in monitoring these guys were doing deals with you, you start getting nervous.

you cut them off. in earlier october. mr. ketchum is nervous about things over the course of the summer, through august, maybe the books are getting cooked. i mean, we're to regulators over there. and, finally, the bankruptcy trustee comes in, boom, blocks of downtown is able to return $4 billion which is 72% as of today. i'm curious going to support mr. capuano was going. you know, databanks come in, and if they did they were doing their job, and sweep all the cash that then left the customers holding the bag? >> let me review some of -- >> i said a lot there, i apologize. >> and i hope i don't replicate that. let me review some of the activities of the new york fed during the week of october 24, which was the week preceding the bankruptcy. and it started with a downgrade on monday the 24th, the next

day there was a large loss declared by mf global. and already in the market there were rumors, and not only rumors, they were confirmed, about the large position taken in sovereign debt by mf global. and what those three things did, congressman, is they acted together to generate a loss of confidence that started a run on mf global. and the run that went on mf global really went on the funding side, and mf global funded it's up in the repo market. the same way that bear stearns funded itself in march 2008, and you'll recall that the run began on march 11, and by march 14 bear stearns had no liquidity. similarly with lehman, which you mentioned, the run began on september 9, thousand 8, and

again it began on the repo side of the book, and by september 12, that friday, the lehman brothers brokerage unit was out of liquidity. so a part of what you see happening here relates to the funding, and relates to funding assets that are not liquid. so what you see happening is the run starts abruptly, and it is a vicious in its downward spiral on these firms. so consequently, when we saw what was happening early in the week on october 24, on octobe october 26, i called my counterparts at the commission and one of my colleagues called counterparts at the ctc and said, given what we've seen in other recent experience, we think that we ought to be, we ought to be picking up the pace with respect to our crisis

management, with respect to mf global. so with respect to the earlier questions about communication among the governmental entities, including the fed, there was i think good communication that we have a crisis on our hands. now, turning for just a minute to the other piece of this question which relates to the secured parties and and secured parties. i want to make three points, congressman, because we were one of those secured parties that protected themselves and protect the american taxpayer. [inaudible] yes, and i want to make three points of what we did. and by making this point i don't want to in any way come across as insensitive to those who lost money by reason of this bankruptcy. but for the purpose of this hearing today, i think there are three important points as to why we avoided a loss. first, our margin account was on our books and we controlled