On the evening of Feb. 26, 2008, a commodities broker affiliated with MF Global’s Memphis office began trading commodities futures on the Chicago Mercantile Exchange (CME) from his personal trading account using MF Global’s electronic trading system. The broker entered into a large number of sell contracts for May wheat, far exceeding his authorized margin credit. At the close of overnight trading, the broker’s aggregate position in May wheat showed a significant prospective gain. However, when trading opened again in the morning, the price of May wheat rose dramatically and, by the time the broker’s trades were closed out, the final loss on the transactions was in excess of $141 million. Under the rules of the CME, as a clearing member, MF Global was legally obligated to cover the loss.
Due to the magnitude of the loss, the CME requested an intraday settlement from MF Global. By the afternoon of Feb. 27, 2008, MF Global had transferred sufficient funds from its settlement bank to the CME Clearing House to cover the loss. MF Global recorded a $141 million loss on its books as a bad debt and then submitted a claim to its insurers to recover the loss under the terms of its fidelity insurance bond. The primary and excess insurers denied coverage and ultimately commenced a lawsuit against MF Global seeking an order confirming their disclaimer position.1
Insurers’ Motion
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