MF Global UK Limited in Special Administration

Transcription

1 MF Global UK Limited in Special Administration Special Administrators Progress Report for the six month period 31 October 2011 to 30 April May 2012

2 Notice: About this Report This Report has been prepared by Richard Heis, Michael Robert Pink and Richard Dixon Fleming, the Special Administrators of MF Global UK Limited (in special administration) solely to comply with their statutory duty under Rule 122 of the Investment Bank Special Administration (England and Wales) Rules 2011 to provide creditors and clients with an update on progress in the special administration and for no other purpose. This report is not suitable to be relied upon by any person, or for any other purpose, or in any other context. This Report has not been prepared in contemplation of it being used, and is not suitable to be used, to inform any investment decision in relation to the debt of or any financial interest in MF Global UK Limited (in special administration). Rule 122 requires this Report to cover the six month period to 30 April However, where possible we have provided updated data beyond 30 April; where this is the case we state the date the updated information relates to. Any estimated outcomes for creditors included in this Report are illustrative only and cannot be relied upon as guidance as to the actual outcomes for clients, creditors or other stakeholders. Any person that chooses to rely on this Report for any purpose, or in any context, other than under Rule 122 of the Investment Bank Special Administration (England and Wales) Rules 2011 does so at their own risk. To the fullest extent permitted by law, the Special Administrators do not assume any responsibility and will not accept any liability in respect of this Report. Richard Heis and Michael Robert Pink are authorised to act as insolvency practitioners by the Institute of Chartered Accountants of England and Wales. Richard Dixon Fleming is authorised to act as an insolvency practitioner by the Insolvency Practitioners Association. The Special Administrators act as agents for the Company and contract without personal liability. The appointments of the Special Administrators are personal to them and, to the fullest extent permitted by law, KPMG LLP does not assume any responsibility and will not accept any liability to any person in respect of this report or the conduct of the special administration of the Company. 1

3 Glossary of terms Act The Insolvency Act 1986 (as amended) ISDA International Swaps and Derivatives Association Affiliate(s) Authorities Brokers CFD Company/ MFG UK A company or companies within the MFG Holdings Group The Bank of England; HM Treasury; and the FSA Third party brokers (including affiliates) Contract for Difference MF Global UK Limited of 5 Churchill Place, Canary Wharf, London E14 5HU with company registration LBIE LCH. Clearnet LME MFG Holdings MFG Holdings Group MFG Inc Lehman Brothers International Europe LCH. Clearnet Group London Metals Exchange MF Global Holdings Limited MF Global Holdings Limited and its subsidiaries MF Global Inc Directors DTC Directors of the Company (as at 31 October 2011): Bradley Ira Abelow; Francis Kemper Cagney; David Moses Gelber; Richard Warren Moore; and Charles Graham Pendred Depository Trust Company MFG Services OTC Proposals MF Global UK Services Limited Over the Counter Statement of Special Administrators proposals under Rule 59 of the Rules F&O FSA FSCS FX Futures and Options Financial Services Authority Financial Services Compensation Scheme Foreign Exchange Regulations RTM Rules The Investment Bank Special Administration Regulations 2011 Repo to Maturity The Investment Bank Special Administration (England and Wales) Rules 2011 GMRA Group Global Master Repurchase Agreement The Company and subsidiaries SAR Special Administration Regime, including The Investment Bank Special Administration (England and Wales) Rules 2011 and The Investment Bank Special Administration Regulations

4 Glossary of terms (cont.) SIPA SIPA Trustee SIPC Special Administrators Special Administration Order US US Trustee Weil Securities Investor Protection Act (US) Trustee of MF Global Inc. / Mr J Giddens Securities Investor Protection Corporation (US) Richard Heis, Michael Robert Pink, and Richard Dixon Fleming of KPMG LLP The Special Administration Order granted by the High Court of Justice, Chancery Division, Companies Court, No of 2011 United States of America Trustee in Bankruptcy of MF Global Holdings Ltd / Mr Louis J Freeh Weil, Gotshal & Manges $ United States dollar (unless otherwise stated) The references in this Report to the Act, Rules or Regulations are to Schedule B1 of the Insolvency Act 1986 (as amended), the Investment Bank Special Administration (England and Wales) Rules 2011 and The Investment Bank Special Administration Regulations 2011 respectively. 3

5 Contents Page Introduction 5 Executive summary 7 Financial Information 12 Status of statements and distributions 14 Client money 19 Client assets 24 House estate 29 Progress in the Special Administration to date 32 other key areas Costs of the Special Administration 40 Appendices 1. Statutory information 2. Purpose of the Special Administration 3. Proposals 4. MF Global UK Statement of Affairs 5. Special Administrators Abstract of receipts and payments for the period 31 October 2011 to 30 April Analysis of time costs for the period 31 October 2011 to 30 April Summary of affiliate debtor claims

6 Introduction

7 Introduction Background and events leading up to the administration Creditors meeting on 9 January 2012 Richard Heis, Michael Pink and Richard Fleming of KPMG LLP were appointed Special Administrators of MF Global UK Limited at 5pm on 31 October 2011, by order of the High Court following an application by the Directors of the Company. The functions of the Special Administrators are being exercised jointly and severally by the Special Administrators. This appointment followed the filing for Chapter 11 bankruptcy protection in the US by MFG Holdings and MF Global Finance USA Inc on 31 October Also on 31 October 2011 the SIPC instigated the SIPA liquidation of MFG Inc by a petition to the US District Court for the appointment of a SIPA trustee. The Company traded as a broker-dealer in commodities, fixed income, equities, foreign exchange, futures and options and also provided client financing and securities lending services. Richard Heis, Michael Pink and Richard Fleming were also appointed as Administrators of MFG Services on 31 October 2011; it provides employee and pension services in relation to the MFG UK operations. They were subsequently appointed Administrators to MF Global Overseas Limited and MF Global Finance Europe Limited on 2 November Blair Nimmo was appointed as Administrator of MFG Services on 19 December This Report provides creditors and clients with an update of progress in the special administration for the six month period from 31 October 2011 to 30 April 2012 in accordance with Rule 122. For the Purpose of the Special Administration please refer to Appendix 2. The Special Administrators convened a meeting of creditors and clients with claims, pursuant to Rule 61, to enable creditors and clients to consider their Proposals and to decide whether to form a creditors committee. The proposals are provided in Appendix 3. The meeting was held on 9 January 2012 at the Barbican Centre, Silk Street, London, EC2Y 8DS, England. At the meeting the resolution to approve the Special Administrators proposals was passed by both creditors and clients with 88.81% and 89.74% of those voting in person or by proxy voting in favour respectively. The Company s clients and creditors also elected a creditors committee, consisting of three client and two creditor representatives. Website Information about the Special Administration can be found on the MFG UK website This is regularly updated. 6

8 Executive summary

9 Executive summary Key achievements and milestones during the period Management of the Company Implemented a successful HR retention strategy (with the help of MFG UK management), which will ultimately lead to more timely and costeffective resolution of issues Maintained continuity of the Company s IT systems at the same time as saving 2 million per month in ongoing IT costs Successfully negotiated the reduction of the Company s property commitments Devised new management structures to integrate MFG UK personnel into the administration workstreams Communications Constitution of the Creditors Committee, with 4 meetings being held to date Maintained frequent dialogue with the FSA on the progress of the special administration Established a protocol with FSCS for the compensation of investors and FSCS has started paying claims Established a website for clients which is subject to frequent updates House estate Obtained control of over $1 billion of house monies and assets, with progress being made to secure the return of the remaining balances Sold a number of businesses and shareholdings, realising over $40 million of value to the estate Submitted claims into MFG affiliate estates where applicable Issued notice of intended dividend Set bar date for participation in dividend MF Global Finance USA Inc has appealed against the rejection of their claim and we are currently assessing the implication of this Reconciliations Liquidated over 1.6 million open futures and options positions Re-established connectivity to agent banks, central counterparties and clearing houses. This has enabled us to reconcile the 31 October 2011 balance sheet, book liquidation trades and send statements to virtually all of MFG UK s 6,000 clients with active accounts by the end of May 2012 Established an information sharing protocol with the SIPA Trustee to enable the reconciliation of respective balances between the US and UK brokerage estates 8

10 Executive summary (cont.) Key achievements and milestones during the period (cont.) Return of client monies Obtained control of over $900m of segregated monies Submitted claims into the estate of MFG affiliates where applicable Developed a distribution model which has enabled the declaration of an interim dividend of 26% despite the legal uncertainties caused by the Supreme Court ruling in Lehman Brothers International Europe v CRC Credit Fund Limited & Others and the significant number of clients disputing their account status Distribution of $92.1 million of client monies as at 29 May 2012 Return of client assets Set a claims bar date of 29 February 2012 Returned circa $10 million of client assets prior to the setting of the bar date Drafted a distribution plan for the return of client assets for approval of the Creditors Committee and the FSA, and for submission to the Court Legal matters Commencement of the Hindsight and 30.7 court proceedings (see page 11) Established legal principles to assist in the determination of segregated vs non-segregated disputes following the Supreme Court ruling in Lehman Brothers International Europe v CRC Credit Fund Limited & Others. Resolution of 200 classification disputes by 31 May 2012 Updated the Court on 3 February 2012 at a session where clients and creditors were able to attend and make representations 9

11 Executive summary (cont.) Key risks and uncertainties US issues The Special Administrators have recently received the SIPA Trustee s claim in relation to amounts owed under the Eurozone government bond positions (the RTM positions ). While the quantum of such losses is commercially sensitive, it is the Special Administrators position that any losses incurred on these trades should be passed on directly to MF Global Inc. This is potentially the single largest variable affecting the return to general creditors The 30.7 dispute is likely to continue to have a material impact on the amounts available for distribution to client money claimants until this is resolved Recovery of some $400 million of segregated and non-segregated balances owed by MF Global Inc. To date, the Special Administrators have obtained limited visibility over the status of their claim into the MF Global Inc. estate, although the SIPA Trustee has recently commenced his determination of the MFG UK claims into the MFG Inc. estate A group affiliate MF Global Finance USA Inc. has appealed the decision to reject its claim in the unsecured estate. We are analysing the implication of this particularly in relation to our ability to declare a dividend to unsecured creditors by 30 June Seg vs non-seg disputes and tracing of associated balances Contrary to the books and records of MFG UK, some 1,100 claimants have asserted they should have been afforded segregated protection, often without the provision of any evidence to the Special Administrators to support such assertions. These disputes will take a considerable amount of time and expense to resolve and may require court determination Complex operational and legal investigations are required to be performed to understand the implications of tracing. This could materially affect the Special Administrators ability to declare a dividend to unsecured creditors as non-seg collections may be liable be transferred to the Client Money Pool Recovery of remaining assets While significant progress has been made to date, continued efforts are being made to facilitate the return of some 0.9 billion of house assets at 30 April, some 0.2 billion of which has been collected in May 10

12 Forthcoming events Subject to the Court timetables, June and July will see the commencement of the Hindsight and 30.7 legal cases and the submission of the Client Asset Distribution Plan to court for approval. It is anticipated that, in the next month or so, the Special Administrators will provide an Estimated Outcome Statement for unsecured creditors as well as provide an update to the Client Money distribution model. June July Likely future activity 30.7 application First directions hearing to determine the 30.7 court timeline is scheduled for 1 June 2012 Hindsight application Directions hearing to appoint representative creditors is scheduled for June 2012 Distribution plan Distribution plan circulated to the creditors committee for approval prior to submission to the court Estimated outcome for unsecured creditors Distribution plan circulated to all client asset claimants prior to court hearing Depending on the timing of the receipt of certain information (mainly from the SIPA Trustee) it is the Special Administrators intention to publish an Estimated Outcome Statement within June or July Further actions are dependent on the outcome of the first directions hearing Substantive hearing to consider the Distribution Plan A substantive trial is not expected until Q at the earliest Substantive hearing Q Subject to Court approval, client assets will be returned in accordance with the Distribution Plan The Estimated Outcome Statement will be updated as and when substantial new information becomes available Declaration of dividend to unsecured creditors MF Global Finance USA Inc have appealed against the rejection of their claim and we are currently assessing the implication of this If a dividend is going to be declared, it must be declared by 30 June 2012 Updated to Client Money distribution model Expected to be published by 30 June 2012 (subject to receipt of information from the SIPA Trustee) The Client Money distribution model will be updated as and when substantial new information becomes available 11

13 Financial information

14 Financial information The Special Administrators recognise the desire of creditors, clients and other shareholders to have greater visibility over both the house and client estates and intend to publish information (subject to any commercial or legal constraints) about each class of asset when available. Directors Statement of Affairs The Statement of Affairs was prepared by the Directors of the Company, and filed at Companies House on 15 March Please refer to Appendix 4 for further details. Estimated outcome for segregated clients An interim distribution model for client money at 31 October 2011 was submitted to the Court as part of the hearing on 3 February This model can be found on at It is the Special Administrators intention to update this model by 30 June 2012 (subject to the receipt of information that would materially affect the outcome). Estimated outcome for non-segregated creditors On 28 November 2011, the Special Administrators issued a Notice of Intended Dividend in relation to unsecured creditors of MFG UK, stating their intention to make a dividend payment to creditors within two months of 30 April Further information on this will be made available by 30 June Estimated Outcome Model (EOM) Given current uncertainties surrounding a number of material balances, the Special Administrators have not produced an Estimated Outcome Statement at this stage, although would look to do so in the next month or so. Current uncertainties include: Agreement of individual trading balances with the Company s 6,000 clients Assessment of the impact of tracing The agreed quantum of the SIPA Trustee claim in relation to the RTM trades The effect of the MF Global Finance USA Inc appeal 13

15 Status of statements and distributions

16 Status of statements and distributions As at 30 April 2012, statements were produced for circa 77% of customers appearing on MFG s systems. By 29 May 2012, the number of statements produced had increased to 99% of customers. Current progress As at 29 May 2012 we have distributed approximately 6,553 statements to 6,308 distinct clients. The split of the letters produced as at 30 April 2012 between account types is illustrated below: Processing status analysis by number as at 30 April 2012 CFDs F&O FX Spread bet Total MFG System positions Non-SEG 621 1, ,250 SEG 490 2, ,003 4,791 Total (a) 1,111 3, ,100 7,041 Statements Sent but not agreed 545 1, ,047 Agreed 297 1, ,096 2,505 Total sent 842 2, ,034 5,552 Note: (a) This includes approximately 600 customers with zero/negative balances on their statements. The Special Administrators intend to issue statements to those customers with negative values once the hindsight application has been heard. It is not the Special Administrators intention to distribute statements to those customers with zero balances. In addition, as at 29 May 2012, statements had been issued to 60% of all customers who had securities either as retail collateral, custody assets or collateral. 15

17 Status of statements and distributions (cont.) As at 30 April 2012, statements had been produced for customers covering 50% of MFG system values. By 29 May 2012, statements had been sent for customers covering almost 100% of MFG system values. As at 29 May 2012 a total of $454.8 million claims had been agreed Processing status analysis by value as at 30 April 2012 $m (unless otherwise stated) CFDs F&O FX Spread bet Total MFG System Positions Non-SEG ( m) SEG ($m) Statements Sent but not agreed Agreed Total sent % of agreed Note: (a) The non-segregated MFG system positions are shown above in m, while the segregated MFG system positions are shown above in $m 16

18 Status of statements and distributions (cont.) As at 29 May 2012 $92.1 million has been paid to 1,857 clients. In addition, the Special Administrators have been working closely with the FSCS so that over 250 clients and creditors have now received compensation totalling 1.1 million, with a further 400 customers expected to receive payment imminently. Client money payments Of those claims agreed, payments of $92.1 million have been made as at 29 May This is less than 26% of the total agreed Client Money claims of $454.8 million as a result of: timing differences between the agreement of claims and the payment of dividends, as a payment run is only made once each week; or Know Your Customer checks being carried out on the identity of clients and any new bank accounts. Financial Services Compensation Scheme (FSCS) The Special Administrators have been engaged in dialogue with the FSCS since the early stages of the administration. A protocol has been established whereby: All agreed claims are notified to the FSCS on a weekly basis via a secure internet exchange portal The Special Administrators provide information to the FSCS to assist them in their assessment of eligibility, noting that the ultimate determination of whether a claim is protected is the decision of the FSCS To date, the FSCS has made compensation payments totalling 1.1 million to approximately 250 clients. 17

19 Status of statements and distributions (cont.) Statements for customers with certain categories of accounts are still to be issued in final form. The key areas affected are clients that had positions transferred at prices that were below the prevailing market value and clients who had positions on certain US exchanges (where information is at present unavailable). By the end of May it is the intention of the Administrators to have issued statements to all trading clients with the exception of a handful of customers whom the administrators intend to contact directly. However, not all of these were issued in final form for the reasons set out below. It should be noted that it is not possible to make any payment or issue a value to the FSCS unless statements are issued as final and agreed by customers. Issue Futures and Options customers who transferred positions transfers may have to be treated as if they are a dividend payment. Master/offset agreements it is possible that MFG may have the right to offset amounts in two separate customer accounts where master/offset agreements are in place. No. of customers affected Status 237 Legal advice is being sought on whether transfers should be treated as a dividend: where pricing of transfers is available, final statements are being sent by the end of May 2012, but payment is to be withheld subject to the clarification of the legal uncertainties; where pricing of transfers is not available, draft statements are being issued by the end of May Master agreements and offset agreements are being reviewed to ascertain whether offset is available and, where necessary, advice from Counsel is being sought. Draft statements are being issued to the majority of these customers by the end of May US Exchanges some data has not been received from the SIPA Trustee regarding final prices and statements cannot be produced. Settlement of failed securities transactions LSE trade fails need to be included in the final settlement 145 Frequent dialogue is occurring with the SIPA Trustee in order to resolve the issue. Draft statements are being issued to the majority of these customers by the end of May The Administrators require clients to submit an initial determination to the London Stock Exchange (LSE) as part of the LSE default procedure. The LSE will then issue a Net Amount Certificate which can be used to produce final statements. Draft statements are being issued to the majority of these customers by the end of May Note: Some clients fall into more than one category. 18

20 Client money

21 Client money $918 million has been collected in relation to client money. MF Global UK Limited (in special administration) Client monies received as at 30 April 2012 and outstanding (US $000) (a) Received Outstanding Total Banks (b) 457, ,775 Clearing Houses/Exchanges (b) 449, ,404 Affiliates (c) 6, , ,112 Other receipts/realisations (d) 4,177-4,177 Total 918, ,152 1,081,468 Note: (a) FX rate of USD : applied in relation to certain outstanding amounts. (b) Summary does not include ATT securities of some $133 million (not including US holdings). (c) Affiliates included under Clearing Houses/Exchanges in the Receipts and Payments accounts. Outstanding amounts are based on the values of claims submitted. (d) Other receipts include the LME and LSE share sales, brokerage and account fee receipts and FX movements. (e) The summary may not include all amounts due to the estate Realisation of Client Money Claims Received as at 30 April 2012 Seg Qty Seg $m Claims received and expected - affiliates third parties 2, Claims received and disputed - affiliates (f) (g) third parties (h) 1,054 1,124 - not recognised (i) Note: (f) Amounts reported here exclude the SIPA Trustee s claim for the return of $630 million of T-Bills under its 30.7 claims as this was, in the first instance, submitted as a Client Asset claim. (g) Includes a claim for $175 million which is not recognised as a Client Money claim by the Special Administrators. (h) Relates to seg vs non-seg disputes (see page 22). (i) Of which 35 claims totalling $500 million have been rejected. A significant proportion of client money was held by third parties (including clearing houses and exchanges) or affiliates as at 31 October In order to recover the amounts, the Special Administrators contacted all third parties and affiliates who held client money on behalf of MFG UK. A reconciliation process was then undertaken to reconcile between the positions per the Company records and the third party and affiliate balances. Following this, the Special Administrators then requested the repatriation of the balances. As at 30 April 2012, $918 million had been recovered by the Special Administrators in relation to client money. A further $161.8 million is due from MFG affiliates. 99% of the remaining client monies to be recovered are held at affiliate entities. The Special Administrators have submitted claims to these estates for the return of client monies, where the entity is in an insolvency process. Claims received To date, the Special Administrators have received a considerably greater number of claims against the Client Money Pool than the number of anticipated Client Money claimants. An exercise has been performed to assess the eligibility of such claims with $500 million of claims being rejected to date. These claims arose from underlying clients of MFG UK s affiliates. 20

22 Client money (cont.) Payment of the first interim distribution began in the week commencing 6 February The first interim distribution percentage is 26%, and $92.1 million has been distributed as at 29 May Claims received (cont.) The remaining claims relate to those claimants that are asserting that they should be afforded Client Money protection, that were not recorded as such in the Company s systems. The largest of these is MFG Inc s $639 million 30.7 claim. First Interim distribution A distribution model was constructed to calculate, in light of prudent reserving for all material, known factual and legal uncertainties, the level at which the interim distribution could properly be set. The summary calculation was presented to the Court on 3 February The model applied a low case assumption in each case so as not to prejudice any claimant who was yet to submit a claim or be afforded client status. In addition, there are a number of potential legal issues arising in connection with the constitution of, and claims against, the client money pool. In summary, the model made provision in respect of a number of uncertainties including: the outcome of the Supreme Court judgment in the Lehman Brothers International Europe v CRC Credit Fund Limited & Others; whether a client s client money entitlement should be based on either the value of open positions as at 31 October 2011 or their closeout values (the Hindsight principle); amounts currently withheld by affiliate entities that are subject to their own bankruptcy processes; the 30.7 claim; provision for potential further claims against the Client Money Pool; costs. In accordance with the results produced by the model, it was determined that the interim distribution percentage would be 26%. Payments of this first interim dividend commenced in the week commencing 6 February 2012 and to date $92.1 million has been distributed to client money claimants. Next steps There are a number of court applications in progress to determine the issues set out above. In particular, initial hearings relating to the Hindsight and 30.7 issues will be brought in front of Mr Justice David Richards in the next few months. Further updates on these issues will be provided in due course and the distribution calculation will be updated when appropriate. 21

23 Client money Segregated versus non-segregated determination Over 1,100 clients with claims of approximately $1.6 billion in aggregate have submitted claims which partly or wholly conflict with the Company s classification of their accounts. This is in addition to the claim from MFG Inc. Following the Supreme Court decision in Lehman Brothers, a detailed analysis is being undertaken by the Special Administrators and their legal advisers into the circumstances of each client s classification and their contractual entitlements. To date approximately 200 disputed classifications have now been resolved. Client account classification Over 1,100 clients have submitted claims which conflict with the Company s classification of their accounts. This represents approximately 25% of all claims received. The Supreme Court in Lehman Brothers International Europe v CRC Credit Fund Limited & Others considered the interpretation of the client money rules and client money distribution rules contained in Chapter 7 of the Client Assets Sourcebook issued by the Financial Services Authority ( CASS ). The decision handed down on 29 February 2012 had implications for the analysis of client money claims against the Company as follows: A detailed and thorough regulatory and legal analysis of each client s position must be conducted, to establish if they may have a contractual entitlement to client money and so should have a segregated client money claim: the result of this analysis is likely to increase the number of claimants to the client money pool and so dilute the distribution; and A forensic analysis into MF Global UK s own bank accounts must be conducted and potentially extended to other assets acquired by the Company using funds from those accounts: the result of this analysis may increase the size of the client money pool and as a consequence there may be a decrease in the size of the general asset pool available for unsecured creditors (see next page on Tracing). A similar analysis is also required for clients asserting client asset claims, where the Company previously recognised these assets as collateral, in accordance with Absolute Title Transfer provisions of its terms of business. Issues being investigated The Special Administrators have taken advice from leading Counsel in relation to a number of issues relevant to the determination of client account classification, including the following: Whether requests to change classification from non-segregated to segregated in the last few days before the appointment of Special Administrators were sufficient to change a client s contractual position despite failing to comply with all of the Company s procedures; Whether clients who may have been miscategorised as non-retail (non-segregated) from a regulatory perspective should have their accounts treated as segregated, including the impact of re-categorisation letters that were sent out by the Company to certain clients in October 2011; Changes to client conduct and trading activity; and Various other circumstantial matters. The Special Administrators have sought further information from claimants to support their assertions that they ought to have been afforded segregated status. The Special Administrators will determine in due course whether directions need to be obtained from the Court in relation to any particular issue(s). 22

24 Client money Tracing The issues around the Tracing of Client Monies could have a material impact on the amount of funds available to distribute to non-segregated creditors and the timing of any such distributions. Tracing Since MFG UK entered into Special Administration a large number of customers who were classified as creditors in MFG UK s books and records have claimed that their accounts were misclassified. The Special Administrators and their legal advisors are working through this large number of customers to determine which may be entitled to Client status. According to the ruling in In the Matter of Lehman Brothers International (Europe) (In Administration) and the matter of the Insolvency Act 1986 [2012] UKSC 6 the UK Supreme Court decided that in such cases where a creditor s status is changed post administration to Client status, along with moving such creditor s claim to the Client Money Pool, any traceable assets of such creditor should also be moved from the general estate to the Client Money Pool. The process of tracing customer money in the context of MFG UK presents a number of practical challenges: Customers would have been trading with MFG UK over a period of many years and appropriate records of cash and asset transfers are challenging to come by; Customers processed a large number of transactions in their accounts, and money would move between a series of omnibus accounts held by MFG UK related to the specific positions that a given customer was trading; Additionally, customers made frequent cash withdrawals and deposits just prior to the date of MFG UK entering into special administration to minimise the level of excess margin held at the Company; Finally, given its status as a broker, cash accounts were routinely drawn down, if not overdrawn, to maximize the efficiency of the Company s cash positions. In order to save costs to both entities we have an open dialogue on this subject with the administrators of LBIE. 23

25 Client assets

26 Client assets Client assets claims The Company held approximately 53 million worth of client assets as at 31 October The main issues affecting client asset claimants are: - The return of assets currently under the control of the SIPA Trustee of MFG Inc - Disputes over classification of accounts (i.e. Safe custody vs ATT) Client assets held as at 31 October 2011 Client Assets No. of clients No. of Assets GBP Value No. under control No. not under control Shortfall Securities - Custodian ,298, Securities - Physical , Metals ,121, (b) - Precious Metals , Total 227 (a) ,255, Source MFG UK records Note: (a) Some clients hold multiple lines. (b) Returned Summary of client asset claims received Analysis of client asset claims received and accepted Safe Retail Client Status Custody Collateral Assets total Client Asset claims received No Client Asset claim received, but other claim type received Expected Client Asset claimants, no claim Total Client Asset claim expected Source: MFG UK records and claim submissions Analysis of client asset claims received and disputed Status ATT Collateral No securities account Client Asset claims received No Client Asset claim received but 48 n/a other claim type received No claim received 50 n/a Total Source: MFG UK records and claim submissions To date, no competing client assets claims have been received for any client assets. The table on the right shows the number of client asset claims received that are disputed. Client asset claimant communication Statements for client asset accounts have been sent to all clients believed to have a client asset claim, as required by the Special Administration Rules. A detailed legal analysis is being performed on a case by case basis to ascertain the correct legal title to ATT collateral balances. Please see page 28 for more detail. Many client asset claims have been received from clients for whom the Company s records indicate no assets are held, whether in custody, under absolute title transfer or as retail collateral. Some of these clients have also submitted client money claims and/or creditor claims, often for the same amount. Checks that the correct claim forms have been submitted are being made and, subject to agreement with the client, a straightforward process is followed to treat the client asset claim as a client money claim or a creditor claim as appropriate. 25

27 Client assets Client assets and distribution plan The Special Administrators declared a Bar Date for the receipt of Client Asset claims and are in the process of finalising a Distribution Plan for the return of those assets. This is expected to be heard by Mr Justice David Richards in early July. The Bar Date for Client Asset claims was 29 February Following the announcement of the Client Asset Bar Date, all client assets could only be returned in accordance with a Distribution Plan. The return of client assets is subject to a new process established in the Special Administration Rules, which involves a separate bar date (Client Asset Bar Date) and mechanism for the return of client assets (Distribution Plan). Announcement of the Client Asset Bar Date for client asset claims (29 February 2012) The Special Administrators set the Client Asset Bar Date of 29 February 2012 for the submission of client asset claims in order to expedite the return of client assets. After the announcement of the bar date on 27 January 2012, all client assets must be returned in accordance with a Distribution Plan. Client assets returned in accordance with the Distribution Plan shall be returned with good title. Client asset claims received after the Client Asset Bar Date If sufficient assets amounting to what the client would have received are still available, then assets can be returned under the Distribution Plan. If there are insufficient assets, any assets that can be returned shall be returned under the Distribution Plan, and the client is able to submit a creditor claim for the value of client assets not returned. Distribution Plan The Distribution Plan deals with the return of client assets (other than client money) which existed at the time of the appointment of the Special Administrators. No client assets can be returned within three months after the Client Asset Bar Date. The Distribution Plan sets out (among other things): The process and mechanism involved for the return of client assets; A schedule of dates on which client assets are to be returned; Whether the Special Administrators intend to pay money or money s worth in lieu of returning assets to the client; How security interests over client assets are dealt with; and The amount and identity of client assets retained by the Special Administrators to pay expenses incurred in the return of clients assets under the Distribution Plan. The Distribution Plan may be approved by the Creditors Committee and must be approved by the Court. A draft of the Distribution Plan has been shared with the Creditors Committee and the Special Administrators intend to apply to Court for the approval of the Distribution Plan in July 2012 with the aim of commencing the return of client assets as soon as possible after the Distribution Plan becomes effective. 26

28 Client assets Client assets and distribution plan challenges and issues There are a number of challenges to overcome and issues to address in the approval and implementation of the Distribution Plan for the Company Challenges and issues Whilst the Special Administration Rules introduced the procedures for a distribution plan, no such plan has ever been proposed before: the design, approval and operation of the Distribution Plan is being dealt with for the first time by the Special Administrators and their legal advisers, by clients and creditors (including the committee), by the FSA and by the Court. Certain client assets may not be under the control of the Special Administrators. This is of particular relevance for 4.4 million of assets under the control of the SIPA Trustee or held by DTC. Certain client assets may have no value (eg delisted stocks) or may not be claimed before a final bar date (to be set at some time in the future) for the submission of client asset claims. Per the SAR, the cost of returning Client Assets must be charged to the Client Assets. Any shortfall arising to the claimant as a result of these costs will become an unsecured claim against the estate. 27

29 Client assets ATT asset status Due to the legal uncertainty surrounding the ownership of ATT assets, no ATT assets have been liquidated by the Special Administrators at this point in time. Summary 273 clients held ATT accounts according to MFG UK s records as at 31 October Most of these clients have asserted that assets posted to MFG UK should have been afforded safe custody protection. Legal analysis is being completed to ensure that the assets and accounts are correctly classified as either client or house assets. The issues being considered that could result in a change of classification are: the fact that certain ATT collateral accounts were charged a safe custody fee ; a number of clients had accounts with trust or client in the account name; some clients may have been misclassified under the MiFID rules; a number of assets were not given value as collateral (i.e. subject to 100% haircut) or may never have been actively used as collateral to support derivative positions; some clients were allowed to vote via proxy on assets held against their accounts. Due to the legal position on a number of these issues still being outstanding, no ATT related assets have been liquidated at this point in time. We do not expect to liquidate these assets until the legal title to such assets is clarified and hence the estate may still be exposed to the market risk related to these assets. Note: the statistics provided and legal issues outlined do not include assets or accounts under dispute with MF Global Inc. in relation to Rule

30 House estate

31 House estate House securities and cash held by banks and exchanges As at 30 April 2012 the Special Administrators had recovered 509 million of non-segregated assets. Since 30 April 2012, a further 234 million of nonsegregated assets have been recovered. To date, 1.1 billion of creditor claims have been received. The Special Administrators have yet to receive final determinations from the SIPA Trustee in relation to their claims into the MFG Inc. estate. MF Global UK Limited (in special administration) Non-segregated monies received and outstanding as at 30 April (a) Received Outstanding Total Banks (b) 208, , ,337 Clearing Houses/Exchanges (b) 241, , ,349 Affiliates (c) 1, , ,189 Other receipts/realisations (d) 58, , ,191 Total 509, ,719 1,449,066 Note: (a) FX rate of USD : applied in relation to certain outstanding amounts. (b) Summary does not include ATT securities of some $133 million (not including US holdings). (c) Affiliates included under Clearing Houses/Exchanges in the Receipts and Payments accounts. (d) Other receipts include the LME and LSE share sales, brokerage and account fee receipts and FX movements. (e) The summary may not include all amounts due to the estate. Claims Received as at 30 April 2012 Claims received and expected Source: Special Administrators records. Qty m - affiliates third parties Claims disputed 35 3 Claims received, not expected (f) Note: (f) Of which 4 claims totalling 135 million have been rejected (subject to appeal) MF Global Finance USA Inc have appealed the decision to reject their claim pursuant to Rule 157 of The Investment Bank Special Administration (England and Wales) Rules The claim is for $419 million. The appeal is not likely to be heard before August Non-segregated assets The Special Administrators had recovered 509 million of nonsegregated assets in the estate as at 30 April In the period since 30 April 2012 the Special Administrators have recovered a further 234 million, taking total non-segregated asset recoveries to over 743 million (approx. $1.2 billion). In excess of 90% of the non-affiliated monies outstanding at 30 April 2012 were held with five entities (four entities as at 31 May 2012). The Special Administrators continue to work with these institutions in relation to the return of further amounts. Unsecured creditors The Special Administrators are unable to provide a reliable estimate of total unsecured creditors at this time. The total liabilities are likely to be impacted by the effects of the Special Administration. Any shortfall in client money claims is provable as an unsecured claim in the house estate. Due to material uncertainties both as to the ultimate quantum of realisation of non-client assets and as to the quantum of claims and contingent claims the Special Administrators are unable to estimate the likely recovery for unsecured creditors at this stage. As part of the Company s regulatory liquidity buffer, MFG Global Finance Europe Ltd had provided a $250 million subordinated loan to MFG UK. We are in the process of reviewing the terms of this loan however we understand that this ranks for distribution after all unsecured creditors are paid in full, but before any distributions would be made to equity holders. 30

32 House estate Sale of business and investments The Special Administrators have sold the following businesses and investments of MFG: - shareholding in the London Metal Exchange - the MFG Metals Division - the spread betting customer list - shareholding in Baltic Exchange Limited - shareholding in LCH Clearnet Background The Company operated in a number of trading divisions and product areas. In addition, the Company held shareholdings in a number of companies operating in the financial sector. Immediately upon appointment, given the potential wasting asset nature of the Company s trading divisions and market risks on the shareholdings, the Special Administrators instructed their in-house Corporate Finance specialists to advise them on the saleability and potential value of these assets. We summarise below the key activities. Progress to date Following a competitive bidding process in November 2011, J.P. Morgan purchased all of MF Global s shareholding 600,000 Ordinary A shares and 25,000 Ordinary B shares in the London Metal Exchange (LME). J.P. Morgan was a long-standing member of the exchange and an existing shareholder of the LME. A contract for sale was exchanged on 22 November 2011; completion occurred on 5 December 2011, following ratification of the share transfer by the LME Board of Directors. The consideration relating to the ordinary A and B shares totalled some 27 million. The Metals Division of MFG UK was sold to INTL FCStone (Europe) Limited for $1,000,000. The Metals division was a leading LME ring dealing member providing execution and clearing of LME and OTC products to assist commercial customers in hedging their price risk in metals markets. The Metals division also served institutional investors and financial services firms in the Americas, Europe, and the Asia- Pacific region. The Metals division operated as a standalone division within the Company consisting of around 50 front office staff (37 employed by MFG Services with the remainder comprising employees made redundant by or having resigned from the US and Asian businesses), client documentation, lists and credit records. In January 2012, following a period of marketing of the business and assets in November 2011, MFG UK s spread betting customer list was sold to Spreadex Limited for 120,000. MFG held 7,000 ordinary shares of 50 pence each in Baltic Exchange Limited at appointment. Membership of the Exchange ceased following administration and MFG had to transfer its shareholding to another member within twelve months. After a period of marketing post the Christmas/New Year period, the shares in the Baltic Exchange were sold to Hadley Shipping in February 2012 for 238,000. In April 2012 MFG UK sold its 970,656 shares in LCH Clearnet ( LCH ) to the London Stock Exchange ( LSE ) for an initial consideration of 14 per share. In addition, if the London Stock Exchange s offer for LCH completes (or LSE on sells the MFG UK s Shares to a third party at a price greater than 14 per share) within a year, LSE has agreed to pay to MFG UK Limited an additional 60% of any difference between 14 and the price payable by LSE per LCH Share under the Offer (or received by LSE per MF Global Share on such onsale). MFG UK remains a Qualifying Shareholder in respect of the special dividend of 1 per share payable on the fulfilment of certain conditions under LSE's offer for a majority stake in LCH. With LSE only looking to secure a 51% holding in LCH the pre-offer sale ensured that MFGUK would not be at risk of being left with a smaller illiquid holding post Offer were the Offer over-subscribed. 31

33 Progress in the Special Administration to date other key areas

34 Progress in the Special Administration to date other key areas Structure of operations The Special Administrators have sought to organise the day-to-day activities of the Company along functional lines. Key senior MFG UK staff have been retained to assist the Special Administrators, and in some cases there has been come redeployment, given the administration workstreams. Joint Special Administrators Senior Management team Operations Human Resources Facilities Regulation and Compliance Risk Legal Finance IT Communications 33

35 Progress in the Special Administration to date other key areas Structure of operations (cont.) We set out on this slide the key priorities of the various divisions. Area Key Priorities Operations Booking of liquidation activity Reconciliation of customer balances Human Resources Maintaining a Human Resources function for the MFG Services staff that have been retained Ensuring that the Company retains the key skills required in order to operate Facilities Identifying the Company s premises strategy Regulation and Compliance Negotiations with landlords in relation to premises Ongoing monitoring of the Company s compliance with the FSA s rules Assistance with ad-hoc investigations Risk Identification of key risks and identification of strategies to neutralise such risks Assistance with the production of ISDA / GMRA termination statements Legal Investigation and determination of account status as either segregated or non-segregated Investigation of ad-hoc disputes Finance Assisting the Special Administrators with the maintenance of the Company s financial information and projection of the Estimated Outcome and other financial modelling IT Securing IT infrastructure post-administration Provide local IT support to the Special Administrators and MFG UK staff for the systems, communications and infrastructure Devising new routines to accommodate administration workstreams Communications Communication to the creditor committee on a regular basis Maintenance of the KPMG Claims 34