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What MF Global's Customers Can Expect (Update 2)

Stocks in this article: MF JPM IBKR

Updated to include additional Dodd-Frank information, comments from Securities Investor Protection Corporation CEO Stephen Harbeck, and investor comments.

NEW YORK ( TheStreet) -- Large creditors like JPMorgan Chase (JPM) may not be alone in facing losses from failure of MF Global (MF), if speculation of missing client funds turns out to be correct.

MF Global filed for Chapter 11 bankruptcy on Monday, after negotiations of a rescue deal with Interactive Brokers Group (IBKR) were terminated, with various media reports that Interactive Brokers got cold feet because client funds were missing.

JPMorgan is MF Global's largest creditor with $1.2 billion in exposure according to the bankruptcy petition.

The Wall Street Journal on Wednesday reported that MF Global admitted to federal regulators that customer money was missing, citing an unnamed federal official, and also said that the Commodity Futures Trading Commission (CFTC) would issues subpoenas to MF Global and that the FBI was planning to investigate as well.

The Securities Investor Protection Corp. (SIPC) on Monday quickly initiated the liquidation of brokerage customer accounts at MF Global, with a federal judge appointing James W. Giddens as trustee for the liquidation.

SIPC CEO Stephen Harbeck said that the liquidation proceeding was started because "customer accounts were at risk since counterparties were refusing to do business with MF Global," and because the company was "incapable of making the calculations required of them under the financial responsibility rules."

Brokerage Firm Failures and SIPC Coverage

When a brokerage firm fails and cash or securities appear to be missing from customer accounts, the SIPC will oversee an orderly liquidation of brokerage customer accounts, providing up to $500,000 in coverage for missing cash and securities, including a $250,000 limit for missing cash. The cash limit was increased from $100,000, under the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama last July.

Dodd-Frank also increased the SIPC's available credit line from the U.S. government to $2.5 billion from $1 billion.

It is, of course, too early to say whether the SIPC will discover any cash or securities missing from MF Global's customer accounts. If any brokerage client assets are found to be missing, the trustee will go through the process of gathering information to determine how much coverage will apply to each customer.

The SIPC protection does not cover MF Global's commodities futures contracts that fall outside the brokerage umbrella. Those fall under the umbrella of the CFTC, which does not have an insurance fund similar to the SIPC.

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