Scott said the “core of this entire investigation and the resolution of the investigation rests with the application of CFTC Rule 1.25. In that rule it clearly states you can’t comingle customers’ with business’ accounts.”

Sommers agreed but pointed out Rule 1.25 “only governs customer segregated money on the FCM side.” The rule doesn’t prohibit “a BD (broker dealer) from making investments out of their house account in foreign sovereign debt.” The rule removes “foreign sovereign as a permissible investment but allows FCMs to petition us for exemptions.”

Following a heap of questions from seemingly bewildered committee members, Peterson tried to make the regulatory set-up less confusing. “As I understand it, MF Global was an FCM for years. They charged commissions to do these trades. They had segregated money and made (more) on that.  

“This business has become increasingly competitive to the point where (none of the firms) can make money on the commissions they charge to do these trades. The way they’re making money is by investing customers (funds).

“As I understand it, one of the reasons they wanted to liberalize that is to make more money. But when they invest this money – when they put it in sovereign debt – they have to be treasury bonds into that fund to cover it so that the customer isn’t at risk.

“What happened with the FCM is they were losing money so Corzine came in and made them a broker dealer (BD). Well, the broker dealers aren’t regulated by CFTC but the SEC (Securities and Exchange Commission).

“So, that’s where the confusion is coming in. They got into the broker dealer business, began investing in sovereign debt, doing the repos and adding to their risk, leveraged themselves up somewhere between 30 and 37.5 times.

“Then, this thing moved against them and they had to come up with margins. When they couldn’t come up with the margins, the firm collapsed.

“So, there are two different things. Commissioner Sommers is trying to tell you that the CFTC doesn’t regulate the broker dealer side of this. … You need to split this between what the CFTC can do and what they can’t.”