KPMG defends efforts on MF Global claims

Winding-up collapsed US brokerage MF Global has thrust the UK’s Financial Services Authority’s new rules under the spotlight but critics argue the new regime is not working, damaging London’s reputation.

However, Richard Heis, joint special administrator of MF Global UK, has defended KPMG’s efforts saying: “The wider point is that London is an international trading centre dealing with 60 exchanges all over the world. It’s going to be a lot more complex to try to resolve it.”

He also pointed to a $550m guarantee from CME, the world’s largest futures exchange, to US customers as a critical difference which allowed US trustees to pay out earlier.

The biggest issue for KPMG, he says, is determining which clients have money in MF Global UK’s segregated funds. Those with non-segregated funds have been put into the unsecured creditors’ pool and, he says, the issue was complicated by many customers looking to switch the status of their accounts in the final few days.

“It’s one thing for the company to have sent an email confirming it ... but the cash needs to be segregated. Segregation only works if the banks acknowledge that those funds are held as segregated,” he says. “That is the conventional wisdom, although the point is currently awaiting the verdict of the Supreme Court in Lehman.” The categorisation of claims is the main issue, he adds.

A pressure group established on Tuesday called MFGlobalUKClients, representing hundreds of customers of the UK arm, says the distinction is critical. “Under the new rules client monies are being used to pay for secured creditors,” it says.

Clive Roberts, a fund manager at Alecto Financial, says he has millions of pounds of both his own and clients’ money tied up in accounts at MF Global – much of it in non-segregated accounts. “They are classifying non-segregated clients as creditors to the company, which is totally unacceptable,” he says. “If I put money into an account, I shouldn’t be a creditor in the same way as the landlord or the coffee supplier.”

The main call on funds has come from James Giddens, the trustee of the US business and also MF Global UK’s largest creditor. It is claiming $744m in client balances. In a messy situation, KPMG wants $250m from the US estate. “The question is whether they’re claiming into the client money pool, the segregated funds, and it is our view that it is not a claim against the segregated pool, it is a claim against the unsecured estate,” says Mr Heis.

Others have charged that KPMG has lacked experience in dealing with derivative products. Some positions were kept open and liquidated by exchanges and clearing houses, meaning the positions could not be marked-to-market at the point of MF Global’s collapse. Mr Heis acknowledges valuation issues may have to be settled legally.

Additional reporting by Simon Mundy