I found some very interesting data today.
In this FT times article, the head of the CME states that auditors visited MF Global on Thursday, Oct 27th and found everything to be ok. Segregation of customer funds was "intact." However, on Friday, the very next day, the segregation report showed a $900million shortfall.
So what happened between Thursday and Friday?
Rehypothecation is what happened.
In this FINRA report, on page 9 it states that firms only need to make rehypothecation calculations at the end of the week.
"Under Rule 15c3-3, this computation must be made weekly, for those firms that carry customer funds exceeding $1 million, as of the close of the last business day of the week,"
My guess is that MF global had a custom of pledging out customer assets every friday as part of their re-hyopthecation efforts. This caused the discrepancy of customer funds from thursday to friday, and since MF global declared bankrupcy during the weekend, those customer funds ended up being stuck at outside firms.