taken by them by mf global. i thank senator for his leadership on this issue. since the collapse of mf global, in october 2011, my staff has worked closely with senator shelby's staff in conducting extensive interviews and due diligence with regulators, self-regulatory organizations, and other parties involved in overseeing mf global and its bankruptcy. we have also coordinated with the senate ag committee which has primary jurisdiction over matters involving commodities and holding a series of bipartisan briefings where all senate staff with representatives of many of the organizations before us today to

help our constituents impacted by the fund's downfall. as investigators seek to recover mf global customer funds, and hold accountable those responsible for any wrongdoing this committee will focus our attention on preventing future abuses and the other critical public policy abuses raised by the collapse of mf global. today's hearing provides a unique opportunity to ask an important set of questions. how can we strengthen protections for customer accounts at fcms or broker dealers, including those firms that hold u.s. customer funds abroad, given the size of the shortfall in mf global's customer accounts. what should congress understand about the idea of extending to commodity accounts similar insurance protections that are

currently available to securities accounts under the securities investor protection act. and how we can continue to improve regulatory oversight and coordination where large, complex, global financial institutions. mf global may also provide some early lessons about the wall street reform act, since it is the first collapse of a major financial institution since the law's passage. for example, the story of mf global teaches us that effective customer protection and market oversight demands that we fully fund our regulatory cops on the beat. in hindsight there is little

doubt that regulators responsible for monitoring mf global should have taken additional steps. by shortchanging the cfdc or fcc of much-needed funding will only force them to delegate even more authority to self regulatory organizations in a way that could impart effective market surveillance. when funding cuts prevent regulators from inspecting firms or sending necessary staff to monitor a crisis, the american people and market confidence pay the price. additionally, a key pillar of the wall street reform bill was in the end too big to fail. and if mf global demonstrated anything, it is that those who take the risky bets that been down their companies are now afraid to fail and will not receive any more taxpayer

bailouts. to preserve time for questions, opening statements will be limited to the chair and ranking member. however, i would like to remind my colleagues that the record will be open for the next seven days for additional statements and other materials. i now turn to ranking member shelby. >> thank you, mr. chairman. thank you for calling this very important hearing. the collapse -- the collapse of mf global is one of the largest bankruptcies in u.s. history. and the greatest consumer protection failure since the enactment of the dodd-frank act. it's been six months or more since mf global filed for bankruptcy. the ownership of $1.6 billion in customer assets remains in dispute. hundreds of mf global customers are still waiting to learn how much, if any, of their funds will be returned to them. the disorderly failure of mf global occurred despite the fact

that it was regulated by not only the cfdc and sec, but also the financial industry regulatory association, the chicago board options exchange, the national futures association and the chicago mercantile exchange. the job of each regulator was to ensure customer assets were protected. that $1.6 billion in customer assets remains subject to ownership dispute that remains subject to ownership dispute reveals a serious regulatory failure i believe. accordingly the purpose of today's hearing should be to help the committee determine which regulators failed to do their job and why. to assist the effort, i asked the inspector general last november to examine the commission's oversight and regulation of mf global. the inspector general's findings along with other ongoing

investigations should assist congress in its efforts to hold regulators accountable for any identified failures. i also asked the cftc's inspector general to determine whether chairman gensler's recusal was appropriate and whether he should have recused himself much earlier in the process. prior to mf global bankruptcy, chairman gensler had contacts with mf global and ceo jon corzine, concerning, the cftc's regulation of the firm. if a recusal was appropriate it seems it would have, would have been more appropriate to start with mr. corzine's tenure rather than after the firm failed. furthermore, this committee's due diligence has revealed that chairman gensler played an

active role in the oversight of mf global during the week leading up to its failure. yet, the chairman's recusal now shields him from explaining his actions. i believe this is unacceptable. the chairman owes the public a full accounting of his role in the fall of mf global. it appears, by his absence today, however, that we will have to wait a little bit longer for such an accounting. mf global will not be the last financial firm to fail. failure is an inevitable part of the free-market system. but our goal should be not to protect the private market from failure, our goal, i believe, should be to establish a credible regulatory system that protects consumers while leaving the market free to innovate and to expand. we must then hold that regulatory system accountable for its failures. this is exceedingly difficult when one main participant refuses to speak here. i look forward to the testimony today, and i thank our witnesses

for appearing. perhaps one day, mr. chairman, we will hear from mr. gensler. today does not appear to be that day, however. >> thank you. thank you, senator shelby. now i will briefly introduce our witnesses. mr. james w. giddens is a trustee for the securities investor protection act of mf global incorporated. lewis j. freeh is a trustee from mf global holdings, honorable gerald summers is commissioner for the commodity futures trading commission. mr. robert cooke is director of the division of trading and markets for the u.s. securities and exchange commission. mr. richard ketchum is chairman he is chairman and ceo of the

financial industry regulatory authority. he is an executive chairman of the chicago mercantile exchange. i would like to ask witnesses to keep remarks to five minutes. your full written statements will be included in the areaing record. you may begin your testimony. chairman johnson, ranking member shelby and members of the committee. i take seriously a trustee of mf global links. i would like to provide a copy and of course input from regulators a lack of supervision and inattention to maintaining segregation of customer accounts caused the shortfall of customer funds.

this is imposing personal liability on senior officers and directors when there is a regulatory shortfall. consideration should also be given to requiring not only financial operating principles, but senior officers, including the ceo and cfo to certify compliance with commodity segregation requirements on a much more frequent basis. secondly i suggest the establishment of a commodities customer protection fund. this is a fund providing for protection of up to a maximum of $100,000 would have made a

substantial number of the claimants hold within days of the bankruptcy filing. third, we have learned many commodities customers have not fully understood the nature and risk of certain financial products in which their funds were invested. currently commodities customers are not subject to suitability requirements as are security customers. in my view they should be. as a fourth suggestion, the merchants may be required to segregate an amount in excess of 100% of customer funds. that would help insure there's sufficient at all times for commodities customers. let me know turn to now turn to funds health for u.s. customers trading on customer exchanges. under current rules, scms are not required to calculate the

seg grags requirement foreign trading in the same way as they do for domestic trading. reliance on this alternative calculation resulted in a substantial difference in funds segregated. the alternative calculation would have required a greater segregation. the calculation should be eliminated. finally i believe there's a great need for international cooperation on insolvency laws. customers would benefit from rules with funds for both commodities and securities customers. i've been engaged in active discussions since november with administrators of mfk global limited concerning a return of approximately 700 million of commodities customer properties. thises is being submitted to the uk courts for resolution. we have distributed in excess of

$4 billion. thank you for this opportunity to testify before you. >> thank you. >> thank you very much. good morning. thank you for the opportunity to appear here. you have my opening statement. i want to leave time for you. i want pointed as the chapter 11 trustee effective november 28th of last year. can you addictions to mf global holdings.

five other subsidiaries to which i am acting as the chapter 11 trustee. i think everyone understands the functions of the chapter 11 trustee. very distinct and different from my colleague. under the bankruptcy code my obligation is to investigate the acts, conduct, look at assets, liabilities and the financial condition of the debtor among other things. the responsibility of the chapter 11 trustee is to maximize the value of the estate to creditors. including the top 20, which is included in the materials. when i was appointed in november i landed in the middle of a number of issues. first very active ongoing investigations by the agencies represented here this morning in

addition to two federal prosecutors office. as well as the trustee. one of my first challenges was to understand what documents the chapter 11 trustees and estates controlled to make arrangements and ensure the investigators could access the information they needed without compromising any of the privileges that i have a fiduciary responsibility to protect. we looked at thousands of materials, my team and i, we determined what the materials were over which we had authority and jurisdiction. we reviewed thousands of pages and then set in place a process that would quickly produce documents. we did a waiver of the existing

privileges that may attain to the chapter 11 trustee. and ultimately all the issues were resolved in the process of producing evidence to the investigators has gone forward expeditiously. we're very sensitive to the fact that many customers have lost huge amounts of money and collateral that was entrusted to the subsidiary mf global inc. we scrubbed our own cash collateral upon direction by the bankruptcy judge to make sure that none of the collateral in the estate is in any way related to or would be part of the customer accounts. and we concluded with no disagreement from the staff that the cash collateral that the estates now possess does not include any misappropriated or misdirected customer funds. let me also talk, and i'm

pleased to be able to talk about the subject, the bonuses. this was raised very appropriately, senator tester, by you and your colleagues. the source of this was, as you know, a media report. and i don't have control over what's in the media no more than than anyone in the media does. it was never my intention to pay any bonuses. i never had a plan to pay any bonuses. i read the story with a lot of surprise. there were no discussions about myself and my staff about bonuses to senior executives. and bonuses are not part of my consideration now. they have not been in the past. i want to be as clear as i can about that. my responsibilities as trustee is to maintain the people that i need right now to help

administer a cost-efficient and well-administered estate. there are 15 employees. these are noninsider employees who work worry about tax. who worry about financing, unwinding transactions. they're all working at this point on salaries. three senior executives are working on salaries. if i negotiate with the 15 employees to stay on board because of the $22 million tax refund that i need to get to the estate. they have the expertise and experience. i will set fair and competitive salaries with them. if they don't agree with that, then that's not going to work out. i want to remain transparent, as i must in the bankruptcy process. everything i do is subject to review. not by the trustee.

but the bankruptcy court. so i want to conduct the chapter 11 debtor estates with full transparency and cooperation. we need on a regular basis. there will times when our interests diverge and long running bankruptcy will occur. but we have some clear and immediate common goals, which is to get as many assets back to the states as possible and ultimately courts in england, a perhaps the bankruptcy court in new york will ultimately make decisions about how those assets are distributed.

but returning them is a very common, critical need. from the perspective of the trustee, i very much endorse the six important considerations that he sets forth. particularly on the international cooperation. we have a lot of assets in the uk. they have a separate administrator and court system. we don't have privity to challenge and file some of the claims as the subsidiary ink will do. but it's a very difficult task to get back and retrieve assets overseas. some restrictions about how segregation should be mandated key from the point of view chapter 11 trustee. i would emphasize that.

thank you very much. >> please proceed. >> good morning, everyone. thank you for inviting me to discuss the collapse of mf global, lessons learned and policy implications. on november 9th of 2011, the commission voted to make me the senior commissioner with respect to mf global matters. this authorizes me to have soul solely, with respect to the pending enforcement investigation, the bankruptcy proceedings and other actions to locate or recover customer funds or determine the reasons for the shortfall in the customer accounts. while i'm happy to be here. the scope of my election as senior commissioner for mf global matters does not extend to the market wide policy implications arising from mf global's failure. chairman gensler remains in charge of directing commission

staff to develop recommendations for enhancing commission and designated self-regulatory organization programs that are related to the protection of customer funds and has instructed staff to do so. my focus has been on making sure that the commission is doing everything it can to facilitate the recovery of customer funds and to bring those responsible for any violations of the commodity exchange act or commission regulations to justice. towards those ends, over the past 5 1/2 months. commission staff has conduct aid thorough analysis of the books and records of mf global. and continues to work closely with the trustee in the bankruptcy. we are also engaging in a comprehensive, ongoing enforcement investigation. it is imperative that the commission, the industry, and the congress, identify and assess the causes for the collapse and shortfall in customer funds. and to take corrective action where possible.

we must do everything in our power to restore confidence in the futures markets so that producers, processors, and other end users of commodities can once again hedge their price risk without fear of their funds being lost or frozen. section 4d of the cea commission and regulations requires that an fcm holding customer funds treat such funds as belonging to the customer at all times. fcms are prohibited from using a customer fund to margin or guarantee trades or contracts of another customer or of the fcm. and the fcm must maintain sufficient funds in segregated accounts to cover the net liquidating equity of each of its customers at any given point in time. our regulations also require an fcm to hold customer funds, deposited for trading futures and options, listed on foreign

boards of trade, in separate accounts known as part 30 secured accounts. the part 30 rules provide for an alternative calculation of the amount of funds required to be segregated, that does not afford the same protections. as the net liquidating equity calculation used for section 4 d funds. this is something that i think should be changed. the act and the commission regulations establish a regulatory structure or front line financial regulation is performed by designated self regulatory organizations. the chicago exchange and national futures association are the two primary futures market. fcms are subject to cftc approved minimum financial and reporting requirements that are enforced in the first instance. many fcms are also registered with the fcc as broker/dealers.

these duly registered broker dealer fcms are subject to the jurisdiction of both cftc and the fcc. to ensure that all activities of a dealer are properly reviewed, sros coordinate their regulatory oversight. this coordination includes periodic meetings of the inner market surveillance group. mf global was a dly registered fcm and was subject to the cftc and sec, it was the dsro for mf globals futures markets activities and had primary responsibility for overseeing the fcms compliance with capital, segregation, and financial reporting obligations required by the cftc. prior to the bankruptcy the

futures and securities regulators shared information and examination results regarding mf global. in august 2011, mf global filed statements and regulatory notices with the cftc as a result of additional capital charges that the sec required the broker dealer to take on with regard to certain repoed maturity transactions on foreign sovereign debt. at approximately the same time. sec staff, contacted cftc staff to inform us of capital charges. the cftc staff also consulted with cme, finera, and cbo, regarding the rationale for additional capital charges. commission staff consulted with domestic and foreign regulators during the period of october 24th, through october 31st, as well as in the critical hours leading up to the bankruptcy filing. at the direction of chairman gensler, commission staff continues to review customer fund protection provisions of

the commodity exchange act and our commission regulation to identify possible improvements. while the staff has not yet proposed the amendments to the commission, it is expected they'll make recommendations in several areas. at a minimum, i believe that changes should be made to our part 30 rules so customer funds held for trading on foreign markets are subject to the liquidity regulations. that more information be provided to customers regarding how their funds are held and invested. and that more frequent reporting be provided to regulators and that fcms internal controls for the handling of customer funds be strengthened. i understand the severe hardship that mf globals bankruptcy caused for thousands of customers who have not yet been made hole. made whole. customers may have correctly understood risks associated with

trading futures and options. they never anticipated their segregated accounts were at risk of suffering losses that were not associated with their trading. the shortfall in customer funds was a shock to the market from which we have not yet recovered. i believe the commission can make improvements to our regulatory oversight, of fcms and dsros to help restore confidence in the futures market and i will help the commission and congress to implement the rules necessary to enhance our ability to protect market users and to foster open competitive and financially sound markets. thank you. thank you. >> mr. cook, please proceed. good morning. my name is robert cook. i am the director of the division of trading and markets of the securities and exchange commission. thank you for the opportunity to testify on behalf of the commission, concerning the

lessons learned and policy implications of the collapse of mf global. the bankruptcy of mf global has resulted in serious hardship for many of its customers who have experienced significant delays and uncertainty with respect to ability to access their own assets. more broadly, the failure of mf global and the shortfall in customer assets. highlight the need for financial firms and for regulators to remain vigilant in ensuring customer assets are appropriately protected. sec rules are designed to protect customer property by prohibiting broker dealers from using customer funds and securities to support proprietary positions and expenses. broker dealers that hold securities or cash for customers must maintain physical possession or control over securities that customers have paid for in full and cannot use the securities to support the firm's business activities. further, when broker dealers extend credit to allow customers to buy securities on margin, the