Rehypothecation and MF Global

Calculated Risk has a post on what rehypothecation is, and includes this:

Bruce Krasting adds: The Fed, MFG and Reg. T

I think there is sufficient evidence today to conclude that Re-Hypothecation is at the root of the customer losses at MFG. ... Let me add one additional bit of info.

The Canadian customers of MFG got their money back within 10 days of the MFG bankruptcy. The accounts that have lost money are either USA or UK based. In Canada, re-hypothecation is not permitted. I got these comments from a Canadian MFG account holder:

The trustee where segregated MF Global Canada customers' funds were held was RBC Dominion Securities. I don't think any of these funds ever left the trustee in Canada. Likelihood is if they left, the Canadian government would have made the parent Royal Bank of Canada eat up the losses and make full restitution.

If MF Global moved their US client assets to their UK subsidiary, and then followed the UK rules on rehypothecated assets - the client money is gone and nothing illegal happened. That would be the worst possible outcome.

Dodd-Frank should be replaced with much more stringent regulations, and the CFTC should be given some real teeth to enforce real futures trading regulations.  I can't believe what MF Global did might be legal, and would love to see a number of people, including Jon Corzine prosecuted.  Unfortunately, it sounds like MF Global was able to use customer accounts to back up their leveraged bets, and creditors were legally able to seize the customers' accounts as collateral.  This shows how corrupt the New York and London financial centers are, as are the hedge funds and investment banks who do their grifting there.  The world would be a better place if the United States and UK had regulated markets like Canada, not the criminal enterprises we actually have.

The NYT has more on MF Global and the CFTC:

I had always assumed it was impossible and that strict internal controls existed at all brokerage firms so that firm officials couldn’t tap segregated customer funds even if they were willing to break the law. Thanks to MF Global, it’s now apparent that isn’t necessarily true. “If people are determined to misuse customer funds, they will misuse them,” said Ananda Radhakrishnan, the director of the division of clearing and risk at the Commodities Futures Trading Commission. That’s because the commodities and securities industry is mostly self-regulating, and self-regulation ultimately depends on the integrity of the regulated. Broker-dealers — securities firms that execute trades of stocks, bonds and other assets for customers — are overseen by the S.E.C., while futures commission merchants, which trade commodities, derivatives and futures, are regulated by the C.F.T.C. Like most large brokerage firms, MF Global was both a broker-dealer and a futures commission merchant, though its primary business was commodities futures trading.
The federal regulators issue and enforce the rules, but day-to-day oversight for securities firms is delegated to the Chicago Board Options Exchange, a for-profit company, and the Financial Industry Regulatory Authority, or Finra, a nonprofit organization financed by the brokerage industry. For commodity dealers, it’s the National Futures Association and the Chicago Mercantile Exchange. They conduct periodic examinations and audits and, in addition, member firms are required to have internal controls and compliance mechanisms to make sure that customer assets remain safely segregated at all times.

Ah, self-regulation-that'll work out.  I know what the Republican solution to this is-even less regulation.