KUALA LUMPUR: Malaysian brokerages may have stumbled into a legal grey area when it comes to returning client funds in relation to MF Global Singapore Pte Ltd (MFGS), the Singapore arm of failed global derivatives broker MF Global.

At issue is whether segregated client funds should be returned in whole to the clients, or to MFGS and its liquidators, which could result in a haircut.   

Liquidators of MFGS have managed to recover up to 86% of their clients’ accounts and have made an application to the High Court of Singapore for a proposed interim distribution of customer segregated and proprietary funds.

However, due to some legal issues, some of these clients may not recover the full value of their accounts even though the accounts were properly managed, segregated and are untouched.

MFGS, acting in trust of its clients, had opened accounts with brokerages in Malaysia for its clients to trade.

When its parent company MF Global Holdings Ltd filed for bankruptcy in November, the Malaysian brokerages froze the funds.

To date, most of those accounts, which are untouched, are still held by the local brokerages.

An industry source with knowledge of the situation told The Edge Financial Daily, “The Securities Commission (SC) has been looking into the issue. There is no precedent, but the SC has consulted with its internal legal advisors. Discussions are still under way but at this time, the SC is of the opinion that the local brokers do not owe any obligation to MFGS’ clients, the ultimate account holders. The brokers’ client should be MFGS and therefore the obligation is to the liquidators.”

AmFutures Sdn Bhd’s director of eBooking for Equities and Futures, Stephen Noel Kwong told The Edge Financial Daily, “As far as we’re concerned, the money belongs to MF Global. We do not have a relationship or legal agreement with their clients.”

It is learnt that AmFutures has roughly RM1 million in MFGS’ client accounts while some of its subsidiaries have roughly the same amount owed to them by MFGS.

Kwong also noted that if some of the clients’ money remained unaccounted for, the liquidator would likely distribute the recovered funds pro-rata.

Industry observers expressed concern over the decision which seemed unfair to the customers.

“Client accounts are legally required to be kept separate from the brokerage. It protects clients from being exposed to the brokerage’s business. When bankruptcy occurs, the clients accounts are supposed to be returned directly to them,” said an observer.

He explained, “In the MF Global case, well-managed accounts that have been properly segregated and can be attributed to the ultimate account holder may not be returned directly to them. When the money is returned to liquidators, it will be lumped together with other clients’ money. Then there is the concern that liquidators might issue a haircut to compensate for any missing funds and return the money pro-rated.”

An analyst noted that while funds are usually returned to liquidators first instead of the clients directly in the event of a bankruptcy, there are also differences in how client accounts should be treated.

“In a bank, it is quite different as customers are protected by deposit insurance to a certain degree, and after that they are subject to haircut risks in the event a bank folds. However, these bank deposits are also used to fund loans, so the depositor assumes some risks as it partakes in the bank’s business”, he explained.

“However, in the case of a client account at a broker, it is used purely to facilitate transactions by the client. The funds are not mixed up with that of the brokers, and the client does not assume the brokers’ business risks”, he added.      

“As such, it should be treated differently from other bankruptcies, and should be returned to the clients”, the analyst opined.

Since this has not happened in the past, this case could set the precedent for future handling of client accounts held in trust.

Another brokerage that is holding MFGS’ client accounts agreed that the arrangement seemed unfair to the client but pointed out that there was no alternative, and that the liquidators would ultimately exercise discretion in distributing the funds.

Liquidator KPMG Services Pte Ltd (Singapore) plans to return US$350 million (RM1.06 billion) of the US$405 million in clients’ funds recovered thus far but have not made it clear how the funds will be distributed to MFGS’ clients if some portion of the clients’ funds cannot be accounted for.

It was recently reported that the trustee of MF Global Inc (MFGI) had indicated there is an apparent shortfall in their segregated US-based customer accounts which may exceed US$1.2 billion.

MFGS did not comment on how its clients would be affected by the shortfall but noted that the reconciling of MFGI’s books were still underway and any impact on MFGS, if any, was not yet known.

KPMG Services and MFGS could not be reached for comment.


This article appeared in The Edge Financial Daily, February 3, 2012.