The Federal Bankruptcy Code, the Commodity Exchange Act and CFTC regulations all recognize the important status of segregated funds, and grant special treatment to futures/options brokerage accounts held by public customers. When a bankruptcy occurs, all customer accounts of that brokerage firm are to be transferred in their entirety, including all assets specifically identified with a particular customer account. Any assets that remain after these customer accounts have been transferred - including assets in accounts owned or controlled by the brokerage firm, such as "proprietary" and "house" trading accounts - are then to be liquidated and divided among the remaining creditors, along with any other assets owned by the firm.

The normal procedure is that customer accounts - including futures and options positions, cash balances and securities posted for margin, physical commodities used for the purpose of making or taking delivery, warehouse receipts, and all other assets specifically identified with a particular account - are moved to one or more other brokerage firms, in a process referred to as a "bulk transfer." This bulk transfer process is quick and seamless, and is normally completed within a day or two. The only change from the customer standpoint is that his or her account is now located at a different company, much like what happens when a local bank is acquired by another financial institution. In some cases the bulk transfer process has been initiated shortly before the failing brokerage firm files for bankruptcy, which further streamlines the process and minimizes the impact to customers.

In the MF Global situation, a series of bulk transfers of customer positions have been conducted, but because customer funds are missing it has been impossible to transfer these accounts with all the funds they are supposed to hold. The first set of transfers required involved accounts with open futures or options positions and included approximately 60 percent of the collateral (margin) in those accounts. The second set involved accounts containing only collateral but no open positions, and transferred approximately 60 percent of the balance in each account. The third round of bulk transfers brought the balance to approximately 72 percent for both accounts with open positions and accounts without open positions.

Will former MF Global customers ever see the remaining 28 percent of their funds? The answer to this question depends in large part on whether the bankruptcy trustee and others are successful in recovering the missing $1.2 billion in customer funds. It also depends on whether the proceeds from the liquidation of any other MF Global assets (mostly cash and securities, estimated by the trustee at $290 million) are applied to the shortfall in customer funds, or instead used to pay other creditors. In a Jan. 18 filing to the bankruptcy court, the CFTC argued that commodity customers must be made whole, even if this requires others to be sent away empty-handed. This and other issues likely will be resolved in the courts, so it may be many months before the final outcome is known.