(Business Law Currents) A legal loophole in international brokerage regulations means that few, if any, clients of MF Global are likely to get their money back. Although details of the drama are still unfolding, it appears that MF Global and some of its Wall Street counterparts have been actively and aggressively circumventing U.S. securities rules at the expense (quite literally) of their clients.

MF Global's bankruptcy revelations concerning missing client money suggest that funds were not inadvertently misplaced or gobbled up in MF's dying hours, but were instead appropriated as part of a mass Wall St manipulation of brokerage rules that allowed for the wholesale acquisition and sale of client funds through re-hypothecation. A loophole appears to have allowed MF Global, and many others, to use its own clients' funds to finance an enormous $6.2 billion Eurozone repo bet.

If anyone thought that you couldn't have your cake and eat it too in the world of finance, MF Global shows how you can have your cake, eat it, eat someone else's cake and then let your clients pick up the bill. Hard cheese for many as their dough goes missing.

FINDING FUNDS

Current estimates for the shortfall in MF Global customer funds have now reached $1.2 billion as revelations break that the use of client money appears widespread. Up until now the assumption has been that the funds missing had been misappropriated by MF Global as it desperately sought to avoid bankruptcy.

Sadly, the truth is likely to be that MF Global took advantage of an asymmetry in brokerage borrowing rules that allow firms to legally use client money to buy assets in their own name - a legal loophole that may mean that MF Global clients never get their money back.

David Fuller's view The obvious question for many of us who had barely heard of "rehypothecation" is: What happened to segregated accounts? They have (or had) long been a cornerstone of regulation in terms of protecting clients' funds from being co-mingled with those of rogue traders or used by brokers as collateral for additional leverage. For the record, rehypothecation is defined as: "The pledging of securities in customer margin accounts as collateral for a brokerage's bank loan." I first became aware of it on reading this informative column by Gillian Tett in August 2010. She pointed out that post Lehman, the practice was in decline. Well, unfortunately for some, not in the case of MF Global.


My belief is that every Fullermoney subscriber shares our interest in and enthusiasm for the markets, which I have often described as manmade resources for us to harvest when the timing is right. What concerns me about this industry, and not for the first time, is that too many people who may be clever but are also amoral, or worse, are mainly interested in gaming the system. Some may say that it was always that way. Perhaps, but the tools at the disposal of malefactors were less lethal.

What are some of the consequences resulting from this latest failure of governance?

This is the latest in a long, sad history of abuses, confirming that self-regulation of the financial industry does not work. The surprise is that anyone actually believed that minimal and clearly ineffectual regulation would work. I trust that the people who bankrupted MF Global will be held accountable, especially if one penny of clients' money has been misappropriated, as seems extremely likely.

My conjecture, when discussing the MF Global scandal last month, is that this saga has contributed to widespread deleveraging in commodities. That process may not be over, judging from the price trends for many resources.

Obviously there are more important influences, such as global supply and demand in terms of the production and consumption of commodities. Prices for raw materials are also influenced by the business cycle which has weakened this year. Nevertheless, we know that resources have been viewed as an asset class in recent years, leading to a fashion for commodity tracker funds. At the margin, they can have a considerable influence on price trends for industrial and agricultural resources.

The commodity price reset that Fullermoney has mentioned in recent months continues, as you can see from these charts of the Continuous Commodity Index (Old CRB) (weekly & daily). This is good news in terms of commodity price inflation and it will make it easier for central banks to maintain policies of monetary accommodation. That should continue to act as a cushion for stock markets, and they need it in this environment.