China

Statement from the Provisional Liquidators, MF Global Hong Kong Limited (Provisional Liquidators Appointed) ("MFG HK") 

This is an update following our notice to clients on 18 November 2011.

 

Q&A in relation to MFG HK's clients' segregated funds.

 

 

Q 1.

Where are the MFG HK clients' segregated funds currently held?

A 1.

These funds are currently held in a combination of segregated bank accounts in Hong Kong, with DCASS (the clearing house for the HKFE), with certain third party brokers outside of Hong Kong, and with other MF Global Affiliates.

Q 2.

When will these funds be recovered by the Provisional Liquidators (PLs)?

A 2.

A significant proportion of these segregated funds is already under the PLs' direct control. We expect that the funds held at DCASS can be recovered in the short term, and are liaising with the third party brokers to recover the funds held on behalf of MFG HK's clients.

Q 3.

What about the funds held at other MFG Affiliates overseas?

A 3.

Insofar as the MFG Affiliates in the UK, Australia and Singapore are concerned, we have not been informed of any shortfall in clients' segregated funds. However, neither have the relevant Insolvency Officers (Administrators / PLs) confirmed to us if or when they will be in a position to return MFG HK clients' funds to the PLs in Hong Kong. The PLs will update MFG HK's clients as and when this situation becomes more clear.

 

In relation to MF Global Inc. (MFGI) in New York, it is a matter of public record that there is believed to be a shortfall in clients' segregated funds. The Financial Times is reporting today (22/11/11) that this shortfall may now be in the region of US$1.2 billion. As at the date of our appointment, MFG HK's books indicate that its 'receivable' in respect of clients' funds held by MFGI was approximately US$9 million. At this stage, the PLs are unable to estimate the extent to which the recovery of this sum will be impacted by the reported shortfall in New York. The PLs are seeking legal advice as to MFG HK's rights in relation to the clients' funds held by MFGI.

Q 4.

If the PLs already have a 'significant proportion' of clients' funds under their direct control, can clients expect to receive an interim distribution? If yes, when?

A 4.

The PLs are reviewing the relevant laws and regulations relating to the handling of clients' funds. We are also undertaking an exercise to determine the impact of the liquidation of clients' open positions on clients' balances, which requires pricing information to be provided from a number of sources, some of which have been severely impacted by the collapse of the MFG group. In addition, the PLs are taking legal advice in respect of the possibility of a shortfall in clients' funds, for example, if the funds held by MFGI are not returned.

 

The purpose of the above exercise is to enable the PLs to arrive at a position where some portion of MFG HK's clients' funds can be distributed at the earliest opportunity.

 

The PLs and their legal advisors are treating this issue as our highest priority, and will inform clients as soon as we have a timeline for returning clients' funds.

 

Any proposed interim distribution will require the sanction of the Hong Kong Court.

Q 5.

The Trustee of MFGI is returning US$520 million to clients. If he can do this, why can't the PLs?

A 5.

To answer this question, let us first clarify what the Trustee of MFGI is proposing. Based on a review of publicly available information, the PLs understand that:

 

i. MFGI has identified a population of clients that had no open positions as at 31 October 2011. This means that when the business in New York filed for bankruptcy protection, these clients held only cash in their accounts, and had no exposure to market volatility or operational failures as thousands of clients' positions were liquidated or transferred.

 

ii. Applying the relevant SIPA legislation in relation to the pooling of clients' assets, MFGI appears to have determined that it holds sufficient funds to make an interim distribution to this particular group of clients. This distribution has been approved by the US Bankruptcy Court.

 

iii. The amount to be paid to these 'cash only' clients represents 60% of the balance of cash held in their accounts at 31 October 2011.

 

iv. Furthermore, and critically, MFGI has obtained a 'guarantee' from the CME Group, for up to US$250 million. The effect of this arrangement is to provide the Trustee with cover against circumstances in which the MFGI Trustee gives customers more cash than they are entitled to. Having this 'insurance' has aided the Trustee in reaching the view that he should seek an order from the US Bankruptcy Court to make the interim distribution.

 

This distribution, coming as it does in advance of the actual determination of clients' claims, is an unprecedented step designed to respond to an extraordinary set of circumstances.

 

The PLs understand that MFG HK will not be receiving any distribution from MFGI at this time, as MFG HK's account with MFGI did not meet the criteria established by the Trustee for this purpose – MFG HK was not a 'cash only' account as at 31 October 2011.

 

So, can the PLs do something similar in Hong Kong?

 

In order to make an interim distribution without having the benefit of the sort of guarantee provided to MFGI's Trustee by the CME Group, the PLs need a high degree of certainty that we would not be returning money to clients that are not entitled to those funds, and, if that situation did occur, that the funds could be recovered. This might be achieved by clients providing an undertaking / indemnity to return any funds that it is subsequently determined that they should not have received. To achieve this certainty, we must review each client's position, not only in relation to their dealings with MFG HK, but also the client's net closed out position with overseas MFG Affiliates and/or third party brokers. The PLs have not yet received sufficient information to determine these issues.

 

The PLs will need to satisfy both the SFC and the Hong Kong Court that any proposed distribution complies with the legal and regulatory framework, and that it is in the interests of all clients. The PLs are examining this situation from every angle to try and get to the position where an early distribution of clients' funds can be made.

Q 6.

If I had no open positions as at 31 October 2011, will I be treated the same way as the MFGI 'cash only' clients?

A 6.

This analysis is part of the reconciliation exercise that we are currently undertaking. The legal regime in Hong Kong is fundamentally different from that in which MFGI operates in New York, and the PLs therefore need to be to certain that any distinctions between clients (for example, by the creation of different 'classes' of clients, depending on whether each clients had, or did not have, open positions as at a particular date) is possible within Hong Kong's legal and regulatory framework.

Q 7.

How should clients make claims against MFG HK?

A 7.

The PLs will shortly provide a claim form for clients to complete.

 

Clients of MFG HK are encouraged to contact Ms Jasmine Lai on +852 2913 2539 or email mfglobalhk@kpmg.com should you have any enquires.

 

The Provisional Liquidators will otherwise provide further updates and information in due course.

 

Yours faithfully

For and on behalf of MF Global Hong Kong Limited

 

Patrick Cowley

Joint and Several Provisional Liquidator

(Acting as agents without personal liability)

 

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