Missing client funds from bankrupt FCM, MF Global, now estimated at $1.2 billion, might not be recovered if customer funds were not backed by collateral.
A lawyer briefed on the progress of the investigation into MF Global's dealings being undertaken by various government regulators told CNBC that investigators now believe the bankrupt FCM used customer money to make trades, such as buying sovereign debt securities.
Earlier, there was hope the money would turn out to be held as collateral in an account with one of MF Global's creditors, such as J.P. Morgan, but that does not now seem to be the case.
MF Global used customer funds in a variety of ways, the source told CNBC. In the futures business, MF Global was allowed to use "idle" cash in customer accounts to make investments on its own behalf. It would buy bonds and keep the coupon on them. The firm would also "borrow" from its clients accounts, posting collateral such as US Treasurys.
But as the New York Times has reported, the firm stopped backing the loans from customer accounts sometime in October. Basically, they just took the cash out. If this is right, it is probably impossible to recover the missing funds, writes CNBC.
The hole in MF Global’s customer accounts is now estimated at $1.2 billion by the bankruptcy trustee for the FCM's US brokerage, according to the Financial Times. That is equivalent to almost a quarter of the $5.45 billion in client funds that the company was required to hold separately from its own funds.
The shortfall has blemished futures markets and left thousands of traders with insufficient margin deposits. Failure to separate customer and house funds is a violation under US law.
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