purposes and whether current law adequately protect an individual's right to privacy. >> to four years ago, i was a washington outsider. four years later, i am at this dinner. four years ago, i looked like a vest. -- looked like this. today, i look like this. for years from now, i will look like this. [laughter] [applause] that is not even funny. >> mr. president, i do remember when the country rallied around you in hopes of a better tomorrow? that was hilarious. that was your best one yet.

honestly, it is a thrill to be here with the president. he has paid a heavy price for it. there is a term for guys like president obama. probably not two terms -- [laughter] >> you can watch any time on line at the c-span a video library. behind the scenes, the red carpet, and all of the entertainment. >> on tuesday, the senate banking and housing committee held a committee regarding the mf global collapse. this hearing focused on the lessons learned. mf global filed for bankruptcy on october 31. this is an hour and 50 minutes.

it deserves a thoughtful discussion of how to better protect farmers and investors going forth. but before we get to these important issues, i would like to express my deep concern that almost six months after mf global's bankruptcy, thousands of a former customers, including

thousands, still have not recovered the $1.6 billion removed from what should have been protected customer accounts. i know that the trustees, regulators, as well as the fbi and justice department continue to investigate what happened in the final chaotic days of mf global. but in these customer funds must be returned without further delay to the rightful owners. these individuals and executives responsible must be held accountable to the full extant of the law. lastly, it is not acceptable for mf global executives to be given bonuses when customers have not recovered funds improperly taken by mf global. i thank the senator for his leadership on this issue. since the collapse of mf global in october of 2011, my staff has worked closely with the

senator's staff of conducting interviews and a due diligence with regulatory organizations and parties involved in overseeing the mf global in its bankruptcy. we have also coordinated with the senate ag committee which has jurisdiction over america's involvement with commodities for all senate, staff, and representatives before us today to help our constituents impacted. as investigators seek to recover mf global customer funds, and hold accountable those responsible for any wrongdoing,

this committee will focus its attention on preventing future abuses and the other critical policy issues 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? including those firms that hold u.s. customer funds abroad. given the sharp fall from mf global customer accounts, what should congress understand about the idea of extending to commodity accounts similar protections that are currently available to secure the accounts under the investment protector act.

and how we can continue to improve regulatory oversight and coordination for large, complex global institutions. they also provide early lessons since it is the first collapse of a major institution since the law passed. for example, it teaches us that customer protection and oversight demands that we fully fund our regulatory beat. in hindsight, there is little doubt that the people responsible for regulating mf global should have taken additional steps.

it will only force them to delegate even more authority to regulatory institutions and incur a effective market surveillance. the american people and american conference pace of the price. additionally, the key pillar of the wall street reform bill was too big to fail. if mf global demonstrated anything, it it took the risky bets that companies are now afraid to have and will not receive any more taxpayer bailouts. to reserve time for questions, opening statements will be limited to the chair. however, i would like to remind

my colleagues that we will be open for the next seven days with other materials. >> thank you, mr. chairman. thank you for calling this very important hearing. the collapse of mf global is one of the largest bankruptcy in u.s. history and the greatest consumer protection of failure since the enactment of the dodd frank act. it has been six months or more since they filed for bankruptcy. customer assets remain in dispute. hundreds of customers are still waiting to learn how much, if any of their funds will be returned to them. the study of mf global occurred despite the fact that it was regulated not only by the fcc, 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 of these regulators was to ensure that customer assets were protected. those customer assets remains subject to ownership disputes. it reveals a serious regulatory failure, i believe. according to the purpose of today's hearing tough, it should be to help the committee determined which regulators failed to do their job and why. i asked the cfd last november to examine the oversight of mf global. findingsctor general's should assist congress in its efforts to hold regulators accountable for any identified failures.

the also asked the inspector general to determine whether the chairman's refusal was appropriate and whether he should have recused himself much earlier in the process. prior to mf global's bankruptcy, chairman and gensler -- have made multiple contacts with jon corzine concerning the regulation of the firm. if recusal was a proper, it seems it would have been more appropriate at the start of jon corzine's tenure at mf global rather than when the firm had failed. furthermore, the due diligence had revealed that the chairman played an active role leading up to its failure. yet, his recusal nowt shields him from explaining his actions. i believe this is unacceptable. he owes the public an explanation of his job at mf global. it appears we will have to wait a little bit longer.

and of global certainly will not be the last financial firm to fail. failure is an inevitable part of the free-market system. our goal should be not to protect the private market from failure. our goal, i believe, should be to set establish a credible regulatory system that protects consumers while the market is free to innovate and expand. we must hold that regulatory system accountable for its failures. this is an exceedingly difficult when one of the main participants refuses to speak here. i look forward to the testimony today and i thank our witnesses for appearing. perhaps one day we will hear from mr. gensler. today does not appear to be that day, however. >> thank you, senator.

now i will briefly introduce our witnesses. mr. james giddens is a trustee for the securities investment protection act and liquidation of mf global. louis freeh is a trustee from mf global holdings. jill sommers is a commissioner for the commodity futures trading commission. mr. robert cook is the director of the securities and exchange commission's division. mr. richard ketchum is the chairman and ceo of the financial industry regulatory authority. mr. terrence duffy is an executive chairman of the chicago mercantile exchange. i thank all of you for being here today.

i would like to ask witnesses to please keep their remarks to five minutes. your fault written statements will be included into the record. mr. giddens, begin your testimony. >> chairman johnson, ranking member shall be, and members of the committee, off thank you for inviting me to testify. i take seriously my duty as the trustee of mf global inc to treat customers equitably. i would like to provide some proposals that may merit further study and of course input from regulators, experts, and the public. the possible remedy is imposing personal liability on senior officers and directors when there is a regulatory shortfall.

consideration should also be given for requiring not only financial operating principles, but senior officers, including the ceo and cfo. requiring compliance on a much more frequent basis. secondly, i suggest the establishment of the commodities customers fund. we found that more than three- quarters of the customers have a value of less than $100,000 each. that is a fund providing for protection of up to $100,000 would have made a substantial number of the claims held within days of the bankruptcy filing. third, we have learned that 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 securities customers. in my view, they should be. as a suggestion, future merchants might be required to subject an amount in excess of customer funds. that would help ensure there is a significant cushion at all times for commodities customers. let me now turn to funds held for u.s. customers trading on foreign exchanges. under current rules, fcm's are not required to calculate the requirements for foreign trading in the same way they do for domestic trading. reliance on this alternative calculation resulted in a substantial difference in funds segregated.

the alternative calculation had been in place, it would have required a greater segregation. the alternative calculation should be eliminated. finally, i believe there is a great need for international cooperation on insolvency laws. customers would benefit from greater harmonization of the rules regarding the segregation of customer funds for both commodities and securities customers. i have been engaged in active discussions since november with the administrator of mf global u.k. ltd. concerning the return of approximately $700 million of commodities property. this dispute is now being submitted to the u.k. courts for resolution. in concluding, my staff and i continue to work as quickly as possible to return access to all claimants. we have distributed an excess of $4 billion. we have sought for an approval -- $4 million.

we sought from approval of more. thank you members of the committee for this opportunity to testify before you. >> thank you. dr. freeh, please proceed. >> thank you. we have sufficient time for your colleagues on the panel. i was appointed as the chapter 11 trustee, a effective november 28 of last year. there are, in addition to mf global holdings, five other subsidiaries to which i am acting as the chapter 11 trustee. i think everyone understands the function of the chapter 11 trustee is very disdain and very different from my colleague, mr. gidden's.

under the bankruptcy code, my obligation is to study the conduct, among other things. unlike mr. gibbons who is charged with the return of customers property, the responsibility of the chapter 11 trustee is to maximize the value of the estate for the creditors. we have a list of many creditors, including the top 20 which is i believe in the materials. when i was appointed in november, i landed in the middle of a number of issues. first, a very ongoing, active investigation by the agencies represented here this morning, in addition to two federal prosecutors' offices. one of my first challenges was to understand what documents the chapter 11 trustee and the

estates controlled so i could make some arrangements and ensure that the investigators could access the information they needed without compromising any of the privileges that have a judiciary responsibility to protect. we looked at thousands of materials. my team and i, which consists of lawyers, financial experts, and investigators, we determined what the materials were over which we had authority and jurisdiction. we reviewed thousands of pages. we then set in place a process that would quickly produce documents to the investigators. we did a limited waiver of the existing privileges that make appertain to the chapter 11 trustee. i was happy to say that ultimately all of those issues were resolved in the process of producing evidence for the investigators has gone forward expeditiously.

we are very sensitive to the fact that many customers have lost huge amounts of money and collateral that was entrusted to, in this case, the subsidiary but but but of mf global inc. to make sure none of the cash collateral and the estate is in any way related to part of the customer accounts. if we concluded, with no disagreement from mr. giddens and his staff, that the cash collateral does not include any misappropriated or misdirected customer funds. let me also talked, and i am pleased to be able to talk about the subject of bonuses. this was raised, very appropriately, by senator, you, and your colleagues.

the source of this, as you know, was a media report. i do not have control of the media anymore than anybody in this room does. i want to make it very clear that it was never my intention to pay any bonuses. i never had a plan in place to pay any bonuses to senior executives. if i read the story with a lot of surprise. there had been no discussions between myself and my staff about bonuses to senior executives. bonuses are not part of my consideration now and 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 as state. there are 15 employees. these are non-insider employees who worry about tax, a financing, unwinding transactions. they are all working, at this point, on salaries. the senior executives who have been, i believe, before the senate, are also working on salaries.

if i have to negotiate with any of the employees to stay on board because there is a $22 million tax refund that i need to get from the estate, they have the expertise and the experience. you know, i will set fair and competitive salaries with them. if they do not agree with that, then that is not going to work out. i want to remain transparent, as i must, in this bankruptcy process. everything i do will be reviewed not just by the trustee, but by the bankruptcy court. all of our fees and expenses have to be reviewed there. i want to conduct the chapter 11 with full transparency and cooperation.

in closing, i just want to say i worked very cooperatively with mr. giddens. our staff's are in sometimes daily contact. we meet on a regular basis. there'll be times where our interests diverge. just as the interest of other parties in this very complex and, i think, long-running bankruptcy, will occur. but we have some very clear and immediate common goals, which is to get as many assets back to the estates as possible and then alternately courts in england, perhaps the bankruptcy court in new york, or ultimately make decisions about how those assets are distributed. sharing the information, getting the assets, returning them is a very common, critical need. i very much endorse the important considerations that were set forth, particularly on the international cooperation.

we have a lot of assets that we believe are in the u.k., but the u.k. has a separate administrator. a separate court system. we do not have privy as to the holdings company to challenge some of the files and claims that the subsidiary will do. but it is a very difficult task to get facts and receive assets overseas. some restrictions about how segregation should be mandated for u.s. investors overseas, i think, it is a key from the point of view of the chapter 11 trustee. i would just emphasize that. thank you very much. >> thank you. >> thank you. mrs. sommers, please proceed. >> thank you for inviting me today to address the collapse of mf global, lessons learned, and the consequences.

the commission voted to make me the senior commissioner with respect to mf global matters. this need to exercise the executive and administrative functions of the commission with the respect to the bankruptcy proceedings and other actions, to locate and recover customer funds or determine the reasons for the shortfall in the customer accounts. while i am happy to be here today to testify, the scope of my election does not extend to the market-wide policy arising from mf global's failure. chairman gensler remains in charge to develop recommendations for enhancing 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 they are doing everything they can to facilitate the recovery of customer funds and to bring those responsible for any violations to justice. toward those ends, over the past 5.5 months, the commission's staff has conducted a thorough analysis of the books at mf global. it continues to work closely with the trustee. we are also engaging in a comprehensive and ongoing enforcement investigation. it is imperative that the commission, the industry, and the congress identify and assess the causes and collapse and a shortfall of customer funds. and to take corrective action where possible. if 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 commission regulations require that holding customer funds treat such funds as belonging to the customer at all times. fcm's are prohibited from using a customer fund to margin or guarantee the trade or contract of another customer or of the fcm. fcm must maintain sufficient funds at any given point in time. our regulations also require fcm to hold funds in separate accounts. the part of 30 rules provide for an alternative calculation for funds to be required to be segregated that does not afford the same protection as the net

liquidating equity that is used for section for the funds. this is something that i think should be changed. frontline financial regulation is performed by designated self-regulatory organizations. the chicago mercantile exchange and the national futures association are the two primary futures markets. minimale subject to financial and reporting requirements that are enforced in the first instance by the dsro's. many are registered as broker- dealers. duly registered fcm's -- to ensure that all activities of a broker-dealer fcm are properly reviewed, future regulators, including sro's coordinate. mf global was a registered, and

were subject to the regulation. the primary responsibility was reviewing the compliance of capital segregation and financial reporting obligations required by the cftc. prior to the bankruptcy, the features and security regulators shared information and examination results regarding mf global. in august of 2011, mf global filed a revised financial statements and regulatory statement with the cftc as a result of capital charges that it required the broker-dealer to take on. -- with regard to certain

reposed transaction on foreign debt. at approximately the same time, the staff contacted us to inform us of the capital charges. the cftc also consulted regarding the rationale for these additional capital charges. commission staff consulted with foreign regulators during the period of october 24 through october 21 as well as in the critical hours leading up to the bankruptcy filing. at the direction of chairman dancer, commission staff continues to review provision of the commodity exchange act and our commission regular station -- regulation to identify improvement. while the staff has not yet proposed, it is expected to make recommendation in several

areas. at a minnow, i believe changes should be made to our parked 30 -- at a minimum, i believe changes should be made to our part of 30 role. that more information be provided to customers regarding how their funds are held and invested and that more frequent reporting provided to regulators. i understand the severe hardship that mf global's bankruptcy has caused for thousands of customers that have not yet been made whole. they may have correctly understood the risk associated trading futures and options, but they never anticipated that 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 about fcm and dsro's. i will help the commission and congress to implement the rules necessary and to foster open and competitive, a financially sound markets. thank you. >> thank you. mr. cook, please proceed. >> members of the committee, good morning. my name is robert cook. i am the director of the trading markets of the securities and exchange commission. thank you for the opportunity to testify concerning the lessons learned from and policy implications of the collapse of mf global. the bankruptcy of mf global has caused serious hardship for its customers with respect to their ability to access their own

assets. more broadly, for the failure of mf global and a shortfall of customer assets highlight the need for financial firms and regulators to remain vigilant in ensuring that customer assets are appropriately protected. fcc rules are designed to protect customer property by prohibiting broker-dealers from using brokered funds and securities to support proprietary positions and expenses. broker-dealers that hold securities are cash for customers must maintain control over securities that customers have paid for in full and cannot use the security staff to support the firm's own business activities. further, when broker-dealers to extend credit to allow customers to buy securities on margin, there will strictly limit how much of the security is appropriate to pledges to finance the credit extended to customers. the rules also protect cash derived from customers security by requiring the broker-dealer

to maintain a reserve in a bank account with the exclusive benefit of customers in an amount that exceeds the net amounts owed to customers. these cannot be in any instrument that is not paid in full credit by the u.s. government. the capital requirements and protections under the securities and investment protection act, this regime is designed to ensure that if a broker dealer fails, customer securities and funds will be available to be returned to those customers. the preferred method of returning securities customer assets is to transfer those assets to another broker-dealer. on december 9, the bankruptcy court approved the initial sale and transfer to a solvent broker-dealer. this sale transfer apply to approximately 318 accounts held for non-affiliated customers.

the trustee reported that since the transfer, nearly all mf global transfers have received 60% or more of their value. 194 customers have received the entirety of their account balances. we understand that those 194 customers include anyone entitled to advance with an equity claim up to 1.2 $5 million. generally, the rules -- $1.25 million. the fcc has proposed to clarify and strengthen the dealers. including, an examination and effectiveness of broker-dealer controls related to the custody of customer assets. the fcc also continues to work with organizations to strengthen financial responsibility requirements. for example, in june of last

year, the fcc approved a rule requiring the establishment of registration and qualification and examination and continuing education requirements for certain operations, including those who handle customer assets. this role should help ensure that those responsible for these operations are fully versed in their legal obligations, including those related to customer assets. in february of this year, and modern task force formed specifics to the board, including changes. the sec staff is evaluating these recommendations as well, several of which are directed to the scope and dollar limit in a specific liquidation. the fcc is also engaged in international to share more and better data and to do so in a timely way. some of these efforts involve improved coordination with the sro's.

including establishing more meetings with them. thank you for the opportunity to testify on this important subject and i look for to answer any questions you may have. >> thank you. mr. ketchum, please proceed. >> thank you for the opportunity to testify today. my name is richard ketchum, the chairman and ceo of the financial industry regulatory authority. s when a firm like mf global fails, there's always value in reviewing the events and examining where rules might be improved. clearly, the continued impact of mf global's failure and customers who cannot access their funds is a great concern. every possible step to be taken to restore those accounts as quickly as possible. with respect to the mf global's oversight compliance, we shared responsibility fcc, of course.

when finra is not the dea, we work closely and routinely analyzed annual, audited financial statements as part of our ongoing oversight of the firm. while that focuses on a broad range of issues, is particularly valuable to note that we focus on european sovereign debt and during april, may of 2010, we began surveying those instruments. and -- a review of mf global's financial statement filed on may 31 of last year, our staff raise questions about a footnote disclosure regarding the firm's maturity. during discussions with the machine -- with the firm, finra learned that it was collateralized by priceless $7.6 billion in european sovereign debt.

according to the u.s. debt, rtm's are afforded treatment and not recognized on the balance sheet. notwithstanding that position, the firm remains subject to credit risk throughout the life. beginning in mid june, finra had discussions with the firm regarding the proper treatment of the rm portfolio. -- rtm portfolio. as such, we observe the capital needed to be observed. we also had discussions with the fcc about our concerns. they agreed that they should be holding capital against these positions. the firm fought this interpretation throughout the summer. they eventually conceded in late august. mf global infused additional capital on august 31 and september 1.

is it notified regulators of the identified capital and the change in the capital of the rtm portfolio. following this, finra added mf global to a heightened monitoring process where we required weekly information. during the week of october 24, off as mf global's equity price declined and its credit rating was cut, finra increased the level of surveillance over the firm. it became clear that mf global was unlikely to continue to be a viable -- stand alone. we worked closely with potential acquirers with the hope of avoiding liquidation. as has been widely reported, a discrepancy discovered in the futures side of the firm headed those discussions. while finra believes that the rules provide a good structure for protecting customer funds,

from the failures provide an important opportunity for analysis where improvements may be warranted. finra has identified changes that could be made to better protect customers and their funds. also, in terms of our coordination with our counterparts. most recently, finra and the chicago mercantile exchange established call so that our staff can share information between 50 firms that are both broker-dealers and fcf's. we have briefings on firms and futures. our next briefing will be in june. we have also continued our work on rules-making efforts and surveillance. starting in october, firms must file additional reports to capture more detail about a firm's revenue and expenses.

last week, finra's approved a report on a net capital, leverage, and liquidity. finra shares your commitment to reviewing mf global's collapse. we will continue to review our own rules, identify areas where current processes may be enhanced. again, thank you for the opportunity to share our views. i'll be happy to answer any questions you may have. >> thank you. mr. duffy, please proceed. >> thank you for the opportunity. lessons learned from the collapse of mf global. so i have previously testified concerning mf global's miss use of customer funds -- misuse of customer funds. the shortfall was limited to the funds under mf global's control. the customer funds held in segregation by cme's clearing

house were complete. our ability to transfer a position and the collateral of our customers was undone by a provision in the bankruptcy code. we believe that congress can help protect customers whose collateral is safeguarded at a clearing house. it can do that by changing the bankruptcy code to permit houses to transfer to customers, despite a failure of their clearing member. the industry is united in a search for a solution that will restore confidence. obviously, changes in the bankruptcy code are not easy or quick. it is constructed to look at a wide range of actions that could be implemented without action. cme group, along with others, has imposed forms for -- to intensified reporting to prevent funds. they also proposed enhanced reporting and transparency. cme group is already in

tormenting proposals by all fcm's. a requirement that the fcm's a cfo assign all payouts exceeding 25% of aggregated amounts. a bimonthly report and where they are held. cme has also challenged the industry and commission to consider whether other solutions will better-serve the interests of customers and the industry. in addition to the proposed amendment industry code, cme is working to find a structure that will protect collateral against fellow customer and a fraud risk. we're committed to finding a solution of provide strong, segregated funds from a legal,

operational, and cost-benefit perspective. in addition to these regulatory initiatives, we also recently lost to the cme group family farmer and rancher protection fund. it is designed to protect them and the cooperatives in the event of shortfalls of funds. if we hope the steps will give additional confidence after the actions and failure of mf global. the misconduct of mf global, however, should not serve as a reason to undermine the current system by clearing houses and exchanges. some critics suggest that the current system is compromised by conflicts of interest. there is no conflict of interest in cme's due to its customers, and shareholders. it is required to keep its markets fair and open by vigorously marketing all

participants. a federal law structure that eliminates conflict of interest. the current regulatory model f has served this industry, its customers, and the public very well. off and we look forward to working with the congress and a regular tourist -- and regulators in our markets. thank you. >> thank you. i would like thank you -- thank all of our witnesses. as we begin our questions, i would ask the clerk to put five minutes on the clock for each member. just to be clear, given that $1.6 billion of customer funds and has yet to be recovered due to mismanagement or possible illegal transfers by mf global, can you commit to us today that your office will not be seeking bonuses for any former or current mf global employee? >> mr. giddens, some have a specific insurance coverage had been in place, how would that

have impacted the transfer of client positions through other fcm's for former customers of mf global? do you believe that congress should visit the idea of commodities accounts and insurance coverage similar to that provided under the securities investor protection act? >> yes. the proceedings which govern broker-dealers contain procedures for contemplating and facilitating trenchers of

accounts to other broker-dealers and provide mechanisms for the prompt payment of customer claims. this is greatly facilitated because there is the financial support of the sipa fund. it has several billion dollars of assets in the ability to assess the industry for additional funds. those funds would assist, if it were necessary to cover shortfalls, to enable a trustee to transfer accounts to other solvents fcm's. i think, as mr. duffy was

alluding to, there are problems here because you have to distribute equally. i believe that if you had a fund that would give you more flexibility as a trustee, you could more rapidly transfer accounts and have those available in your arsenal of things to move things along. >> commissioner sommers, could you describe any legal actions or efforts the cftc is taking to recover the u.s. customer funds being held in the u.k.? how is the work of the cftc being coordinated with mr. giddens efforts to protect u.s. customer efforts subject to regulation 30.7?

>> thank you, senator. the cftc does not have the authority to bring an action to a u.k. court proceeding. we are, as we are in the united states, working very closely with mr. giddens and his staff. the law firm he has hired to represent bankruptcy in the u.k., in front of the english courts. we will continue to monitor all of the different actions that happen in that proceeding. >> mr. giddens, do you have anything to add? >> just to confirm that we do confer frequently with the cftc about the strategy in the u.k. and the nature of the legal issues. equally, to the extent we can of shared information with judge freeh regarding that

proceeding, our review is that all of those funds are segregated assets that belong to the 30.7 customers of the broker-dealer. >> mr. duffy, do you have any views of the fie recommendations to better protect customer accounts? also, would it be a valuable for sro's in the cftc to receive daily, electronic backup documentation on these accounts directly from exchanges, clearing houses, and custodial banks in order to confirm that a self-reporting by fcm's is a separate? >> let me take the latter first, as far as the daily reporting from the sro and cftc to the exchanges. i am a big believer in

transparency and real time reporting. since it is kind of hard to argue with that. if the reality is, what is the practicality of getting that done? even if we had it on a real-time basis, if people were having multiple books or doing nefarious activity, it to be very difficult to detect what happened in the mf global situation. as much as i support real-time, i think there's a lot of information that needs to go into that. as far as the fia's recommendation and some of the things they propose, cme is supportive of their recommendations. >> i note that senator shelby has temporarily left the committee to attend an appropriations committee and he will be back.

senator? >> thank you, mr. chairman. i thank all of you for your testimony. i sit through most of these hearings. it always gives you a headache to think about all the regulators involved in one entity and we created that. you didn't. i am not criticizing that come off but it does seem like there are a lot of silos and various areas that each of you look at that to not overlap property -- properly. i would like to ask mr. giddens and judge freeh, what happened? what happened to the customer accounts? how did the money end up in places that it was not supposed to end up? we have talked about everything but that here today. >> our analysis of what happened

and where the money went, i think has substantially concluded. that is the first phase of the process. because of the liquidity crisis in the last week, something like $105 billion in cash went out of the firm to banks, depositories, some to commodities customers, some to securities customers. what on the surface appeared to be normal transactions. a great deal of this was caused by customers leaving the firm and asking if their assets could be transferred out of the firm. also, the firm had to scurry around to find additional collateral. additional collateral was required with respect to the repo to market transactions which went from $200 million to $900 billion additional collateral required. in these firms, cash is moved around from various accounts on

a daily basis. and it is possible that if mistakes are made, and you say we have excess in one category and we could use that to move it to another, and with some much happening in the last week and some of the bodies of transactions, that is where we think -- what we think accounts for the mistakes. we can trace where the cash and securities and the firm went. that we have done. the second, more complex phase, which we are aggressively pursuing, is to get as much of that back off if we have an appropriate legal theory to do that. if we have done that. we have had some success to date. we will continue to pursue that

with the goal of getting back as much of the property as weekend. >> f let me ask you this question. we of the picture of what happened. a lot of money was moving around quickly. with all of that occurring, regardless of the regulators who look at this, how you keep, at the end, money going out of a customer account inappropriately some other place? and how can even a regulator at an instant keep that from happening? >> a given the fact that so- called operational personnel can move a funds and have authority to do it, it is almost not possible to build a full-proof system. the checks that you have, or the reporting requirements and the totaling up on a daily basis of what the requirements should be, so if there are substantial

mistakes in that, it permits someone to say, theoretically, i have an excess in the commodities funds, therefore i can transfer that to the securities accounts, or vice versa. we had an example shortly after rose appointed. i got a call -- after i was appointed. i got a call from mf global saying they broglie transferred -- wrongly transferred from the securities accounts to the commodities accounts and would like to reverse it. -- they are wrongfully transferred from the securities accounts to the commodities accounts and would like to reverse it. how that was done, we cannot say. there were mistakes being made. a part of this, the process that most people do not

realize, relatively low operational people, at any given time, have the authority to transfer hundreds of millions of dollars. >> , was there an investment committee? is their personal recourse to the executives when these kinds of things happen? is there a way to deal with them on a personal basis against their personal assets? secondly, was there any kind of investment committee or in turn controlled that existed there to keep this kind of thing from happening within the firm? if not, are there other firms to your knowledge that have the same problems? >> on the personal liability, i think there are -- my personal view and the people working with me -- is there are discrepancies. there are higher ups who do not influence the vice president to

move money, are probably very difficult to suggest that they are personally liable. that is one of the reasons i suggested that we look at that and begin to consider, saying it is not enough when you're managing the firm, determining the investments and the overall strategy. if you create the liquidity crisis, you will bear some responsibility. i think -- >> was there any discipline that kept one person within the firm from making a big event? >> my understanding was that there was an investment committee, a risk officer at the

firm. there were examples of where recommendations were not taken via the risk officer and under per record legitimate corporate structure, senior officers could choose to ignore that. our view of mf global from our analysis of its operations was that the firm was poorly capitalized and had liquidity crises highly leveraged before mr. corzine came, and those problems continued. they certainly went through the motions of having operational supervision, risk supervision and the like. how effective that was, i think, is demonstrated by the imminent

failure of the firm. >> thank you for the time. >> a senator menendez. >> thank you for your testimony. let me ask you. i just heard that your response to senator corker's question that mf global is poorly capitalized. was that the harbinger of its doom? >> that was certainly a large can shooting factor. so if they had a crisis, there's not much of what occurred -- a cushion. that was a large contributing factor. also, the nature of their investments in risky european sovereign debt of countries such s kohen italitaly, spain and i, with the results since those were purchased on margin, a collateral put up had to be continually increased.

so toward the end date, as i recall, something in the neighborhood of $300 million in margin became closer to $900 million. >> senator, also, in addition to that, a critical factor was the inability of its i.t. and the technology system to keep pace with the trades and to even record them. in the last few days, there are many non recorded trades. even now to reconstruct what happened, there is difficulty. the technology was not equipped for the frenetic pace of trading in the last several days. that, combined with a miscalculation, using the most generous terms subject to investigation of what was

segregated and not segregated, and the inability to control and track the trades and the accounts was just a perfect storm for the disaster that occurred. >> so you clearly have between poor capitalization, highly leveraged, and an inferior technology ability a structural problem at mf global. let me ask you this -- has it been part of your effort and reviewed to determine what individuals at what level -- i am trying to think of structure -- what individuals created the set of her decisions that created the challenge we have? >> that is the subject to both of my investigation and mr. gidden's. we are looking to determine the available cause of action, including fraud, lack of fiduciary responsibility. >> where are you in that

investigation? >> we are just beginning. >> so you cannot identify the responsible prarties? >> no. >> you suggested in response in earlier testimony that director liability may be a preventative measure. is there director liability here now? >> there well may be. we are looking at that. >> ms. sommers, in december 11, the cftc finalized a rule prohibiting the investor in foreign sovereign debt securities. if the rule had been finalized before the collapse of mf global or not overturned in 2005, does the cftc believe that mf global

would have avoided collapse? >> no, sir. the investment under 1.25 are the permissible investments that can be used to invest customer funds and segregation but they cannot be used by the fcm company themselves to invest for their own gain. >> what is the likelihood -- my understanding is you have identified where the money is. what is the likelihood of recovering it on behalf of all those individuals whose money is abroad? >> with respect to the $100 million that was represented as being segregated for them, our position is that under u.k. law, that money should be treated as a segregated customer funds.

and i think we are reasonably confident of a positive outcome from the u.k. courts but there is no guarantee of that. >> one final question. clearly, what a company does in the first instance is the challenge, we expect them to do the right thing legally and some simply and ethically. but in the absence of that, is there anything in this experience that says to you that there is something structurally been used to be changed to mitigate the extent? my understanding is that there was $700 million instance in which report indicated that funds werecall in quote that could not be stopped because it was done. might it have mitigated going to a $1.6 billion? >> the number of 1.60 billion dollars, you will have to ask -- our number is low or.

$700 million is missing. anything we could have gained. i think we have done everything as a dsro. we have looked to the francis analysis of mf global -- the forensic analysis. mr. gideon said the company had a liquidity crisis and their increased went from $200 to $900 million on their margin calls. that money has to come from somewhere. that is one of the things i have learned carried as far as going forward, i think the cme, and that is the biggest part of what we do is to protect the integrity of our markets and clients. >> so there is nothing structurally? >> we do not believe there is anything strictly wrong with the process. >> thank you. >> let me just say thank you for being here.

mr. giddens or judge freeh, i am trying to get a perspective in terms of time. you said when i think mer. giddens when former senator corzine came on board there were problems with this firm. they have liquidity problems. and i understand it, that would have been in the scope of $200 million at that point in time? is that what you found? >> no, senator. just alluding to the fact the evidence we see is from 2008 o n. mf global was losing money in an operating cents or more as a highly leveraged -- was over highly leveraged.

so it was a firm which had financial difficulties when mr. corzine came in. and that is simply to say the liquidity crisis was not as severe as it was in the final weeks of october, 2011. >> that is what i was trying to get at here is that everything i've heard through hearings like this and reading testimony etc. was that in the final weeks of mf global, the sky fell in. now, my understanding -- to me it seems basci. ic. even have and then a lawyer. somebody gives you money, you quoted in a trust account. you are not authorized to say, gosh, a rough month. i will borrow money out of the trust to come. that is in effect what they did here, right? >> the -- the analogy is a good

but what they can do perfectly legally through fancy footwork and accounting each day is look at funds theoretically in a so- called trust and say we now have access. the money is moving in and out daily, as we had a chart, between the broker-dealer, the segregated accounts, the european subsidiaries, the banks, depositories. so it is all very fluid. the concept that there is a frozen trust account cannot touch is not the way it operates in the real world. and it operates in such a sense if you do a calculation and somebody in chicago says we have calculated we have $200 million excess. we can use that as collateral

and transfer that to the broker- killer account. equally as in the example i gave, a transfer was made from the broker-dealer fund on the last day open $200 million may be on the assumption they had access. but the rules of the regulators and the way it works and maybe the way it has to work is that the money is really not frozen and can easily be moved around. there could be much stricter safeguards, some of the things mr. duffy was talking about in terms of making people responsible at the top, which i was talking about, so it is not so easy for $85,000 a year vice- president to say i would seem that the regulations and i will most $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 or regulating this? >> i really have no personal opinion about that. >> let me ask a question about that. you are going into this time of a personal investigation is what he said, judge freeh, and you are going to start to uncover who did what and when. so what are your options? if you see evidence that bad practice was done and a deceptive way, describe for the committee that three or four things that could happen to the principles here? >> yes. in addition to the regulators

and criminal investigators conducting simultaneous and in some ways similar investigations, and that is why we are cooperating with them to the extent possible, making available records, witnesses, waiting privileges. but in our own investigation and our own mandate, myself as the chapter 11 trustee, is to look for causes os action. at this point, nothing is off the table. so another look at employees and directors of the holding company as well as the subsidiary that mr. giddens is trustee for, but third parties, including financial institutions. at this point, literally if

everything is on the table both asividually -- persons well as institutions. what we will do separately but simultaneously is made legal determinations with our lawyers about whether a viable cause of action occurs and -- exists or whether it is efficient to pursue the cause of action. in my own case, representing the debtors, we may have a cause of action that will cost $10 million but the individual has no assets. so i would have to weigh that in terms of wasting assets in the estate. >> thank you. >> senator? >> thank you. i appreciate your holding this hearing. it is not a surprise -- we saw montanans funds used to hedge -- wiped away due to mf global's

inability to segregate funds. this is the a largest bankruptcy in u.s. history. the first time segregated funds have been violated. i will probably get back around because its question, is a good one. mr. freeh. i want to thank all of you for testifying. you have an incredible résume a, one that i'm sure you're proud of. going back to the question the chairman asked, the first question where he did talk about bonuses, i want to clarify because in your statement today 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.

the question has been asked -- you said there are about 15 employees you have hired, plus three the senior executives carrot >> yes, sir. the 15 employees remain. they were pre petitioned operators. they run tax activities. they are the worker bees. >> not folks that would be part of the problem? >> we do not know. we are not considering them insiders. we are considering them employees. >> how about the three senior executives? would they be considered insiders? >> yes. >> so in the previous question, you are looking about who did what when and a potential cause of action. when you negotiate their salaries, how are you going do it, when you're looking at them as being part of the problem,

part of the crooks? >> we have not made any determinations. the salaries are set. >> who sets them? >> they were set at the time of the petition reverting back to their base salary. so each employee, including the three insiders, had base salaries which have been continued. >> ok. all right. the point i'm trying to get at, i do not really want to give any benefits whatsoever to anybody who caused this debacle. debacle is not a tough enough word. are you confident that is the case? >> i am called to them. what i said to the chairman with respect to the 15 non-insiders, the group working out to get the very important and valuable tax refund back to the state -- the estate, i need to maintain them out or else the alternative would be to go out and hire an

accounting firm at three or four times the cost. that is the balance i am conducting. it is on that non-insider level. and there is only 15 critical people that i have to balance a fair and competitive salary for. >> mr. duffy, in your testimony you described the futures market as most professional. clements,f mf global's i suspect some farmers and ranchers, would be seeking a return of less than $100,000. this really is the question. why should farmers and ranchers trust cme to regulate and be able to protect their money? >> there are several reasons. first and foremost, are the $5.50 2/6 million dollars cme group held $2.5 billion.

when mf global filed for bankruptcy, our customers were made whole of the clearing house level. there's monies that was transferred out. with respect to what mr gidden said, there are many clients that had higher balances than that. one of the reasons why we came up with the rancher and former protection program is that there are 36,000 accounts of which 25,000 have $50,000. a lot of those are bonafide ranchers. if mf global happen today, every rancher would have been made 100% hold. >> what about those folks that are not made home now, the little guys? >> we cannot do --looking bad, there are $158 billion of segregated funds.

that would be a detriment to guarantee that the above number. >> mr. giddens. questionsen a lot of here today about a half a dozen regulators may be more about what happened, what transpired, things that have been talked about poorly capitalized, liquidity problems when mr. corzine came onboard. and we see something happen in the eighth largest bankruptcy that ever happened there were it -- were segregated funds were compromised. is this kind of stuff just happening? as a policymaker you 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 do not want to throwing anybody under the bus. just be honest. can you say this is where the system failed? this was a regular kid did not

do their job or did do their job? -- this is a regulator that did not do their job? if you can juggled books good enough, you can get away with just about anything? unless there is something else out there, tell me what it is. >> i think that the evidence indicates that in most cases and the individuals complied with, speaking of fcm's generally, complied with the root regulations. regulators looked at materials. materials were filed. but all the failures of broker- and dealers or fcm's are caused by fraud or financial mismanagement. 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 cfo, to say if there is a shortfall in customer funds, you may be laudable. personally liable. therefore, that should incentivize you to have internal systems which assure you that you have enough funds. perhaps one of the ways to do that, as is done with any kind of normal repo, is 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 do not think it was happenstance circumstances. i think there is often a case in many bankruptcies, from enron on

out, where our firm is in financial trouble and the normal controls are ignored and people act in desperation to try to avoid these kinds 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, all, for your testimony. >> senator moran. >> thank you. commissioner sommers, i want to focus on cftc. , what was the conflict of interest the cause of the chairmen to recuse himself five days before filing a bankruptcy? >> i am not familiar with the specifics of what he was thinking when he decided to recuse himself. >> it was not a discussion among

commissioners? >> there was not a discussion. >> there was a vote that selected due to be the lead on mf global? >> the other three commissioners voted. >> but no discussion about why the chairman was no longer going to act in that capacity? >> no. >> prior to the bankruptcy of mf global, looking back, it seems clear that mf global was under financial stress. you can look at stock prices, the new york fed reaction. did the cftc take any action to enhance its surveillance prior to the filing of a bankruptcy? >> in the week leading up to the bankruptcy filing, we had people on the ground atm, out mf globa. the numbers and what we look at are whether or not the firm is capitalized