MF Global crisis: no time to dip into excess

Excess funds are placed in segregated accounts for just such a crisis

In last week’s hearing, MF Global Inc. CFO Christine Serwinski, who was on vacation at the time, testified that she would not have permitted the transfer even though it was lawful. Serwinski explained her philosophy in her written testimony: “I had stated clearly and repeatedly that the firm should maintain a positive “firm invested” balance every day in its segregated and secured report. To me, even though the regulations would allow it, I was not comfortable with the firm putting customer funds at risk even just overnight in that manner.”

So everything we have heard as to why an FCM holds excess funds in segregated customer accounts has to deal with a situation like the one confronting MF Global during the last week of October. Customers were pulling money out due to the downgrade and rumors of the imminent demise of the firm. Situations like this are why you have excess capital and not the time you would try and access that money. Serwinski testified that excess capital had already gone negative on Wednesday.

If ever there was a time that you wanted to have an extra buffer to ensure you did not violate regulations it was then. The crisis that was happening is why an FCM puts excess funds in seg accounts. Yet Jon Corzine ordered the transfer according to the O’Brien e-mail. He understood that the company was under stress and that customers were pulling accounts. But obviously the safety of customer funds was not his priority. His priority was to salvage his overleveraged position, which is what caused stress in the first place. Positions he was warned months earlier by regulators and more than a year earlier by his own risk officer, were simply too large.

That is the ugly part of this. The argument over whether Corzine meant to commit a crime or not is irrelevant. His reckless actions caused the shortfall. He was warned about it by in house risk managers and government regulators well in advance of the crisis but stubbornly held on to a trade he should not have made.


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About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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