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Analysis: The hurdles in the administration of MF Global 17 November 2011

When the Investment Bank Special Administration Regulations were approved by Parliament at the beginning of the year, many had expected them to be used before the year was out, given the current economic climate.

Sure enough, on 31 October 2011, KPMG became the first UK practitioner to handle a UK corporate case under the new rules. Trading brokerage MF Global filed for bankruptcy protection in the US, while KPMG was thenappointed to handle the affairs of MF Global UK under the new Special Administration Regime rules (SAR).

SAR is designed to help practitioners deal with corporate insolvencies in financial services more swiftly when client assets have been caught up in a business that has failed.

The regulations were adopted in February 2011 after the collapse of Lehman Brothers and have special objectives for an administrator with regards to client liabilities and interaction with regulators and markets.

KPMG’s Richard Fleming, Richard Heis and Mike Pink have now become the first administrators to work on a UK SAR case and have prioritised the return of client money and remaining assets – predominantly margined futures, options exchange transactions and repurchase agreements.

There is no doubt that practitioners across the industry will be watching this case closely as there will be some very complex issues arising MF Global – an international financial business in every sense.

Although the SAR regime has been designed to give administrators freedom – something which was deemed vital during the consultation period – it remains to be seen how many times Messrs Fleming, Heis and Pink will have to involve the courts for decisions.

Experience counts

Seasoned practitioners which have handled complex financial services cases in the past are well aware of the hurdles that this trio could face, but admit that the new system will eventually make future cases easier once SAR has been established.

Chartered accountant and practitioner John Alexander of Carter Backer Winter, has dealt with myriad cases in the sector over several decades.

Among them was that of Arc Capital & Income, an investment firm which went into administration because of its exposure to Lehman Brothers-backed structured products.

He says the stumbling blocks that the Financial Services Authority (FSA) and other regulators became aware of during the early stages of this insolvency (as well as other Lehman related cases) ensured a new system had to be introduced.

He explains: "We were appointed administrators of Arc in October 2009. It had over £100m in assets under management and, to the surprise of the FSA, we said we had to close off all of the positions and pay proceeds pari passu to all creditors and investors.

"We told the FSA that there was £100m of healthy investments held in trust for clients which should be returned and only those creditors that invested in Lehman’s products should suffer any loss.

"Trade creditors – like utility suppliers, etc – would be treated the normal way. We had some client cash, so that once these products matured, we could repay the money."

Court direction

Alexander says Carter Backer Winter needed a lot of court direction and considerable consultation with the FSA during this process because there were many scenarios that the regulators just hadn’t considered.

Thankfully, under the new SAR rules, it is hoped administrators will not have to go through such a drawn out process. Having started this case in October 2009, Carter Backer Winter is only now at the stage where it can hand the remaining investor details over to the administrators of Lehman Brothers, having paid those whose assets were (quite rightly) ring-fenced.

While the SAR rules are indeed intended to allow administrators to be more nimble when breaking down the respective client assets, this case will be scrutinised by the industry because of its international flavour.

After all, KPMG has been appointed to look after the UK arm of MF Global, but MF Global itself was an international, sprawling business, with clients and transactions in many territories and regions.

Brian Johnson, partner and corporate recovery specialist at Fisher Partners, says while New York courts are generally sympathetic to the rules of other countries, they may not be quite so sympathetic if there is any perceived harm to American creditors.

He explains: "There is always a problem when you have international, complex transactions that are cross jurisdiction and there could be unrealistic expectations of what is possible.

"It will be interesting to see whether KPMG can achieve what the regulators would like them to in such a short timescale."

Additional scrutiny

Like any case that is the first of its kind, KPMG will inevitably be in the spotlight, but being a pathfinder can come with its perils, as Johnson recalls.

He says: "In this sort of case, there is quite a reputational benefit to be had. However, way back when the Wrongful Trading legislation came out, a partner at Coopers & Lybrand vowed to be the first person to bring a case under these rules. He brought it and was successful.

"It developed a reputation for the individual but the costs were about the same as the recovery that was achieved, so there was no benefit to creditors.

"Of course, in this case, the assets should be vast and, if handled correctly, the court is likely to allow them to recover their costs. I don’t see how KPMG can lose out on this sort of job and in many respects I am very envious of them."

By Joe McGrath


Related reading:

- MF Global UK administrators issue apology

- MF Global files for bankruptcy




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