the u.s. customers as being segregated for them, our position is that under uk law, that money should be treated as segregated customer funds. and i think we are reasonably confident of a positive outcome from the uk courts but there is no guarantee of that. >> one final question, mr. duffy. clearly what a company does in the first instance is the challenge. we would expect them to do the right thing both legally and substantively and ethically. but in the absence of that, is there anything in this experience that says to you heading cme that there's something structurally that needs to be changed to at least mitigate the extent? my understanding is there was a $700 million odd instance in which they would have --

reporting would have indicated that funds were commingled. that couldn't be stopped because it already was done but might it have mitigated going to $1.6 billion? >> you'd have to ask mr. giddens where that number came from, our number is significantly lower. anything we could have gained by the experience, i think we have done everything, as dsro,hive reviewed all our practices going back, looking through the whole forensic analysis of mf global, and we feel very strongly we did all the things that were appropriate. i think mr. gideon said something important just a moment ago, he said the company had a liquiddy crisis, and increases from $200 million to $900 million on margin calls. that money had to come from somewhere. i think that's a very important point in this hearing today. that's one of the things i've learned. as far as going forward i think the cmo is, without a doubt, that is the biggest part of what we do as dsro is protect the

integrity of our markets and our clients. >> so there's nothing structurally -- >> i don't believe there's anything structurally wrong with the process, sir. >> thank you, mr. chairman. >> senator johanns. >> let me just say, thank you for being here. mr. giddens or judge free, either one of you may be equipped to answer this. i'm trying to get a perspective here just in terms of time. you said when i think mr. giddens, that when former senator corzine came on board, there were problems with this firm. they had liquidity problems and that sort of thing. and as i understand it, that would have been in the scope of $200 million at that point in time? is that what you found? >> no. no, senator. just alluding to the fact that the evidence we see is from 2008

on. mf global was either losing money in an operating sense or was highly leveraged. it was a firm which had financial difficulties when mr. corzine came in. that's simply to say the liquidity crisis was not as severe as it was in the final weeks of october 2011. >> that's what i was trying to get at here. that everything i've heard through hearings like this and reading testimony, et cetera, was that in the final weeks of mf global, the sky fell in. now, my understanding -- to me it seems to basic -- even having been a lawyer where you maintain a trust account, somebody gives you money, you put it in a trust

account, you're not authorized to say, gosh, kind of a rough month this month, clients aren't paying their bills or whatever, i'll just borrow money out of the trust account. but that's in effect what they did here, right? >> the analogy is good. but what they can do through accounting and fancy footwork each day is look at funds that are theoretically in a so-called trust account and say, we now have excess. because money is moving in and out daily among, as we have a chart to indicate, between the broker/dealer, the fcm accounts, the segregated accounts, to european subsidiaries, to banks, depositories. so it's all very fluid. so the concept that there's a frozen trust account that you can't touch is not the way it

operates in the real world. if you do a calculation and somebody in chicago says, we've calculated, we have $200 million excess, we can now use that as collateral and transfer that to the broker/dealer account equally, as in the example i gave, a transfer was made from the broker/dealer segregated fund on the last day of $220 million, maybe on the assumption that they had excess. but the rules of the regulators and the way this works, and maybe the way it has to work, is that the money is really not frozen and can be moved around. there could be much stricter safeguards, things mr. duffy was talking about, in terms of making people responsible at the top which i was talking about and others, so it's not so easy for some $85,000 a year vice

president to say, i've seen the calculations and therefore i'll move $200 million one way or the other. >> did you come across any indication that the firm was actually using that approach in a way that you personally would regard or you would offer an opinion that that was deceptive, it was done in a way to deceive people who were supposed to be paying attention to this, regulating this? >> i really have no personal opinion about that. >> let me ask a question then about that. you're going into this time of a personal investigation i think is what you said, judge free. and you're going to start trying to uncover who did what and when and that sort of thing. so what are your options? if you see evidence that that

practice was done in a deceptive way, just describe for the committee the three or four things that could happen to the principals here. >> in addition to the regulators conducting simultaneous and in some ways similar investigations, and that's why we are cooperating with them to the ultimate extent possible, making available records, witnesses, waiving privileges where we can do so. but in our own investigation and our own mandate, myself as a chapter 11 trustee and mr. giddens as a cipa trustee, is to look for causes of action. at this point nothing is off the table. we not only look at employees and directors of the holding company as well as the subsidiary that mr. giddens is the trustee for, but third

parties, including financial institutions who had different collateral requirements, which changed, particularly in the last several days. so at this point, literally everything is on the table, both individual persons as well as institutions. and what we will do maybe separately but maybe simultaneously is make legal determinations with our lawyers about whether a viable cause of action exists and whether it's efficient to pursue that cause of action. and my own case, representing the debtors, we may have a cause of action that would cost $10 million, but the institution or the individual has no assets. so we'd have to -- i'd have to weigh that in terms of what'sing assets in the estate. >> thank you, mr. chairman.

>> senator tesser. >> thank you, mr. chairman. i appreciate you holding this hearing. it's not a surprise to especially mr. giddens, i mean, we saw funds hedge wiped away because of lack of mf global to segregate funds and keep them segregated. i think this is the eighth-largest bankruptcy in u.s. history. correct me if i'm wrong, the first time segregated funds have been so violated, so to speak. i'm probably get back around to corker's question because i think it's a good one and i'm not sure there's an answer to it but we'll probably do it anyway. thank you all for testifying, i very much appreciate your time today. mr. free, you've got an incredible resume, one i'm sure you're proud of, one that is very, very good. going back to the question the chairman asked, the very first question, where he did talk about bonuses. i just want to clarify. because in your statement today, you said bonuses are not part of

consideration now or in the past. i thought you told the chairman, nor in the future. is that correct? >> i did, sir. >> thank you. and the questions asked kind of add some credence to this. you said there's about 15 employees you have hired, plus correct me if i'm wrong, plus three senior execs, is that correct? >> yes, the 15 employees remain. they were prepetitioned operators. they run as i mentioned tax activities. they were the worker bees so to speak. >> yeah. not folks so to speak that would be part of the problem. >> well, we don't know at this point, but of course we're not considering them insiders, we're considering them employees. >> how about the three senior execs? would they be considered insiders? >> yes, they are insiders. >> okay. so in the previous question that senator johanns asked, that you're looking about who did

what, when, and a potential cause of action. when you negotiate their salaries, how are you going to do it, when in fact you're look at them being part of the problem, part of the so-called crooks? >> well, we haven't made any determinations, of course, in that regard. the salaries are set, senator, we're not negotiating salaries. >> who sets them? >> well, they were set at the time of the petition reverting back to their base salaries. so each employee, including the three insiders, had base salaries which have been continued. >> okay. all right. so i mean, so the point i'm trying to get at here, and i think i heard the answer, i mean, i don't really want to give any benefits whatsoever to anybody who caused this debacle, and debacle is not a tough enough word. are you confident that's the case? >> i'm confident that's the case. what i did say to the chairman, with respect to the 15

noninsiders, for instance the group that is working now to get a very important and valuable tax refund back to the estate, you know, i need to maintain them or else the alternative would be to go out and hire an accounting firm at three or four times the cost. so that's the balance that i'm conducting. but it's on that noninsider level, and there's only, as i said, 15 critical people that i have to balance a fair and competitive salary for. >> okay. mr. duffy, in your testimony you describe the futures market as mostly professional, yet mr. giddens suggests 78% of mf global climb antaimants would b seeking a return of less than $100,000. and this really is the question. why should farmers and ranchers trust cme in the future to

regulate and be able to protect their money? >> i think there's several reasons, sir. but first and foremost and important is the $5.5 billion to $6 billion roughly of segregated funds cme is holding. when mf global collapsed and fell from bankruptcy, cme held $2.5 billion of those customers' funds. our customers were made whole at the clearinghouse level. there were monies transferred out at the farm level, not the clearinghouse level. with respect to what mr. giddens said about the $100,000 clients, there are many clients who have significant higher balances than that. one of the reasons we came up with the rancher and farmer protection program is there is roughly 36,000 accounts of mf global of which 20,000 odd have $25,000 or $50,000 or so. a lot of those are farmers and ranchers. if it happened today every farmer or rancher would be made

100% whole. but it wasn't so what about those who were not made whole, the little guys? >> we can in the do things looking back, it would be considered a moral hazard. there's $158 billion of segregated in the futures industry and that would be a detriment to cme or anybody else to try to guarantee that number. >> there's been a lot of questions here today about the half a dozen regulatorregulator more, about what happened, what transpired, things been talked about, poorly capitalized, liquidity problems, when mr. corzine came on board. and we see something happen in the eighth largest bankruptcy that's ever happened where segregated funds were compromised. does this kind of stuff just happen? as a policymaker, you always look to say, what went wrong, what could we have done better, who screwed up?

are you to a point where you can say that? i don't want you throwing anybody under the bus, just be honest. are you at a point where you can say, this is where the system failed? this was a regulator that either didn't do their job or did do their job, or if you've got a cagey enough accountant, you can juggle the books good enough, you can get away with just about everything? it appears to me that unless there's something else out there, and tell me what it is. >> i think that the evidence indicates that in most of the cases, the individuals complied with -- speaking of fcms generally, complied with the regulations. regulators looked at the materials. materials were filed. but all of the failures of either broker/dealers or fcms

are for the most part caused either by fraud or by financial mismanagement. and in those percentages where this occurs, as i think was the case here, you can by hindsight look at it and say, there are some things that could have been done. more frequent reporting. also i think the imposition on seniors in the firm, such as the ceo and the cfo, to say, if there is a shortfall in customer funds, you may be liable. personally liable. and therefore, that should incentivize you to have internal systems which ensure you have enough funds and perhaps one of the ways to do that, as is done with any kind of normal repo, you have excess collateral. why not have a requirement that there be excess segregation? so i think there are specific things that can be done to

ameliorate the situation. i don't think it was just a happenstance circumstance. i think there is often a case in many bankruptcies, from enron on out, where a firm is in financial trouble and the normal controls are ignored and people act in desperation to try to avoid these kind of problems. i think the regulators and the reports and things required do serve a valuable purpose. but i think they can be improved. >> thank you. thank you all for your testimony. >> senator moran. >> chairman, thank you. commissioner somers, i want to focus on cftc. what was the conflict of

interest that chairman ginsler caused to recuse himself five days after the filing of the bankruptcy? >> i'm not familiar with the specifics or what he was thinking when he decided to recuse himself. >> it was not a discussion among the commissioners? >> there was not a discussion. >> then there was a vote i assume that selected you to be the lead on mf global? >> the other three commissioners voted. >> no discussion why chairman ginsler was no longer going to act in that capacity? >> no, sir. >> prior to the bankruptcy of mf global, looking back it seems clear mf global was under financial distress. you can look at stock prices, the new york fed reaction. did the cftc take any action to enhance its surveillance or to encourage others to enhance its surveillance prior to the filing of bankruptcy? >> in the week leading up to the bankruptcy filing, we had people

on the ground at mf global, our staff in chicago was there on the ground. but the numbers and what we look at are whether or not the firm is capitalized and whether they have the money to meet their segregated obligations to their customers. and the data that was provided to us from mf global showed that they were in compliance up until the very last few days. >> when you say you had cftc personnel on the ground, was that an increase in personnel on the ground? did you detect there might be something wrong and reacted or not? >> we actually had people at mf global's offices in chicago and new york and that's not typical. >> and when did that occur? the increase -- >> the week prior. >> the week prior? >> uh-huh. >> when over 99% of mf global's accounts were commodity

accounts, did cftc have an opportunity to prevent cipa from taking over the bankruptcy? and why was mf global's holding, the holding company, why was it allowed to file chapter 11? both of those instances seem to me to have preferred the general creditors over the segregated account holders. did cftc have a role in altering the decisions that were made that allowed those two things to happen? cipa's involvement, in my view to the detriment of the segregated account holders, and the holding company wide bankruptcy filing. both those words to the detriment, it seems to me, to the segregated account holders. did the cftc have a role to play in those decisions? >> although i was not privy to

the conversations that led up to mf global being placed into insip penitentiary bankruptcy proceeding, it is my understanding that when that is done and the s.e.c. has the ability to place an entity that they believe is either in financial distress or is approaching financial distress, they have the ability to refer them to cipac. we do not have that same authority if an entity is a standalone versus a broker/dealer. it is my understanding even though the entity was a joint broker/dealer fcm placed into a cipa proceeding, all the commission's regulations, part 190, bankruptcy, rules and regulations, those all apply. just as they would if it were just a standalone fcm and those,

you know, were not -- >> commissioner, is what you're telling me then is that my understanding or my suggestion that those segregated account holders were harmed by that decision is not true? >> my understanding is that it is not true. >> did that discussion occur prior to the filing of bankruptcy? was cftc engaged in the conversation about how this bankruptcy was going to occur? >> the commission was informed that mf global was going to be placed into a cipa liquidation. we were not involved in whether or not that decision should be made. >> who at cftc was handling the decisions related to enhanced supervision and the kind of bankruptcy or the bankruptcy proceedings? who at cftc was handling those decisions prior to the bankruptcy? >> up until november 3rd, chairman ginsler was directing those decisions.

>> and since you've told me you don't know what his conflict of interest was that caused him to recuse himself five days after the bankruptcy, you don't have an opinion as to whether that same conflict of interest would have accrued prior to the filing of bankruptcy? do you know if something happened between the filing of bankruptcy and the five days later when he recused himself that created a conflict of interest? or is it the same conflict of interest that was there prior to bankruptcy and subsequent to bankruptcy? >> i do not know. >> thank you. mr. chairman, thank you. >> senator shelby. >> thank you. i apologize for missing part of your testimony. but i have a conflict, as others do. we had a markup in the appropriations committee. and you shouldn't be absent from that. as you can recall. i hope some of these questions have not been asked, and if they have, i was not here to do it.

in the area -- i'll first go to you, commissioner somers. during the week leading up to the bankruptcy, picking up on some of senator rand's questions, during the week leading up to bankruptcy of mf global, did chairman ginsler ever, ever indicate to you that he was concerned about customer assets at mf global? >> my recollection, senator, is that chairman ginsler had concerns regarding the financial condition of the company, and that's why staff were sent. >> how many times do you recall or do you have a record of it you could furnish to the committee if you don't recall yourself at the moment, did chairman ginsler brief you and other commissioners at the cftc's meetings on the management of the prices? because that had to be a concern

for the cftc. because this was not business as usual. >> right. over the weekend prior to the filing of the bankruptcy, i recall receiving two e-mails from the chairman. and then we health a closed meeting -- >> what was the substance of those e-mails? >> just informing us that he was -- >> there was a problem? >> no. informing us that he had been on conference calls with domestic and foreign regulators regarding the potential sale of mf global to another financial institution. >> did he indicate great concern at that time? >> not at that time, no. >> okay. mr. duffy, i'll direct this question to you and also to commissioner somers. what authorities does the chicago mercantile exchange,

cme, have to protect customer segregated accounts at a futures commission in emergency -- during emergency situation? and commissioner somers, following up on that question, mr. duffy, what authorities does the cftc have to protect customer segregated accounts at a futures commission merchant during an emergency situation? mr. duffy, you first. >> first and foremost, we make sure they're in segregated compliance. and these are reports we were getting -- >> what did you say? they should be segregated? >> we get segregated reports from mf global, as we were getting them all along on a daily basis since they were acquired. they were on a daily seg report voluntarily anyway. we were getting these reports on a daily basis through a day lag

and you've got to time them over several day periods. these are things we do to have authorities to make sure they're in compliance. if they go out of compliance of segregation it's a violation of -- >> were some of those reports you were getting, as you look back, were they misleading or were they a little more than that? or what? >> the latter, sir. they were a little more than that. we were told on one report given to us on a thursday that they had $200 million in excess seg, after they had announced that the money was missing on sunday evening. >> was that true? >> it was then true, that they gave us the report saying there was 200 deficit. they gave it to us the following monday. from the prior thursday. so the reports were definitely inaccurate. >> so that's misleading you, right? >> it was very misleading to us, yes. >> commissioner somers, a question to you. same thing. >> we have never had this type of situation in the past, but if

we were ever in a situation where we believed that a company was in a situation where they could not meet their obligations, the commission could seek legal action to have a receiver appointed in an emergency situation. >> i'll direct the same question to both of you. in the area of protection of customer segregated accounts, commissioner somers and mr. duffy, both of your organizations as i understand it had staff on-site at mf global chicago offices the weekend before the firm's bankruptcy filing. what steps did your agency, i'll start with you, commissioner somers, take to protect customer assets prior to learning that customer assets were missing? and what date and time did staff in your agencies first learn that there was a possible or

probable shortfall in the customer segregated accounts? and after you learned of the missing customer assets, what specific steps did each of your agencies take to ensure that customer funds were not improperly transferred over the weekend? that seems when there was more than a little mischief done. commissioner somers, you first. >> so the first question with regard to what our staff was doing, although the commission and the dsro receives daily segregation reports, those reports only list the amount of money that the fcm owes to customers. what their obligation would be there. our staff was in the process of trying to get supporting documentation from mf global to be able to make sure they actually had that money in the bank. >> you had that conversation you testified