By Ann Saphir
CHICAGO | Mon Oct 22, 2012 7:59pm EDT
CHICAGO Oct 22 (Reuters) - The U.S. Commodity Futures Trading Commission on Monday won court approval to intervene in a $205 million dispute between oil major ConocoPhillips and the bankruptcy trustee for MF Global Inc.
At issue is the treatment of letters of credit that the oil company -- a longstanding MF Global customer -- had lodged with the now bankrupt brokerage to back its energy trades.
The CFTC told a federal court in a filing last week it should be allowed to intervene because of the public policy interest in "the correct interpretation" of law and rules governing the futures industry. A judge approved its application to intervene on Monday.
The regulator, which favors the trustee's interpretation of the letters of credit issue, will be able to present its views in court and try to influence a decision that could cost Conoco tens of millions of dollars should it go against the company.
The dispute focuses on the value of the letters of credit and how much Conoco is owed in compensation by MF Global.
The brokerage's bankruptcy trustee has returned some money to former customers, with as much as 80 percent for some kinds of account holders, and less for others. None have received all back and bankruptcy law requires customers to share equally in any losses.
In the case of Conoco, MF Global bankruptcy trustee James Giddens returned the undrawn letters of credit to the company and counted the full face value of the letters towards Conoco's compensation claim.
If that accounting is allowed to stand, Conoco could be required to return tens of millions of dollars to the estate, under the argument that the letters of credit are worth more than the percentage of its accounts to which Conoco is entitled. For a FACTBOX on the Conoco-MF Global trustee dispute, please see [ID: nL2E8HRFJ2]
Conoco argues the letters of credit should not be counted against its claims, and that it is owed money from the MF Global estate. The trustee, James Giddens, says letters of credit are treated like cash for the purposes of repayment because they were put up as collateral in place of cash.
The CFTC sides with Gidden's position.
The oil company earlier this year asked the New York federal court to remove the dispute over the letters of credit from bankruptcy court. Giddens fought the venue change, but Conoco won earlier this month.
A unit of Koch Industries is waging a similar fight with the MF Global trustee over his treatment of the company's $20 million of credit.
All told, nine MF Global customers used letters of credit to back their trades, with an unknown total face value.
MF Global filed for bankruptcy on Oct. 31, 2011, after revelations of heavy bets on European sovereign debt prompted credit downgrades and demands for payments from banks and other business partners. Regulators say the firm dipped into customer funds to cope with its liquidity crisis, leaving an estimated $1.6 billion shortfall in customer funds.
At least one former MF Global customer with a letter of credit has agreed to Giddens' treatment of such letters: CME Group, whose GFX unit had a $15 million letter of credit with MF Global when the brokerage collapsed.
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