Democrat members of the House Financial Services Committee urged further regulatory action against MF Global in a report yesterday, saying the firm “blatantly misled” regulators about its sovereign debt holdings.
According to the report, an addendum to the majority-party report on MF Global’s bankruptcy by the House Financial Services Committee, MF Global told the Financial Industry Regulatory Authority (Finra) that it did not have any exposure to European sovereign debt in September 2010. Had the firm disclosed the debt at the time, “it could have forced MF Global to appropriately disclose its investment that much earlier and take appropriate capital charges for its investment at that time.”
MF Global claimed to be following Generally Accepted Accounting Principles (GAAP), in regards to its reporting.
At the time of its release, Democrats did not sign onto the majority staff report because they “did not have sufficient opportunity to review the final version,” largely because they received the report the day it became public.
In the addendum, the Democratic members say they “do not fully share this assessment,” regarding the majority-party placing most of the blame for the firm’s bankruptcy on MF Global CEO Jon Corzine and his decision to transform the 230-year-old commodities broker into a full-service investment bank.
Although that decision may have been the prime-mover in the firm’s bankruptcy, the “shift to becoming an investment bank was not problematic in and of itself, as is evident by profitable investment banks,” the report says. “But its particular investments posed substantial liquidity risks which proved unsustainable, and MF Global’s increasing exposure, inadequate capital and failure to report these investments earlier intensified the end result.”
As the firm neared bankruptcy, the report agrees with the majority's opinion that MF Global’s use of the Alternative Method (“a practice used by only a few firms to calculate the amount required to be set aside in secured amounts”) and its lack of oversight in using it as contributing factors to the loss of customer funds. Consequently, the addendum recognizes ending this accounting rule as a key way of strengthening protection for customer funds.
Ultimately, the report says that blame for MF Global’s loss of customer funds extends beyond its internal accounting practices, though. Chief among those it finds responsible are the regulators — both federal and self-regulatory organizations (SROs).
The report agrees with the staff report’s conclusion that the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) lacked sufficient coordination with one another, but notes that neither regulator had direct oversight of MF Global. Instead, primary oversight regulators of MF Global were SROs — the CME Group and Finra. “We wonder why CME Group was not able to more closely monitor an entity in such dire straits, or to order MF Global to not use the alternative method given its inadequate capital,” the report says.
As such, it recommends that the SROs enter into MOUs to share information amongst themselves to increase communication and coordination. It also lends its support to legislation introduced last week to merge the SEC and CFTC into a single regulator to streamline communication and oversight.
Other sources of blame the report identifies in its eight pages include the Federal Reserve Bank of New York, which it found has slacked in its review and approval process for primary dealer applicants, MF Global’s board of directors, which set the risk parameters and approved the company’s growing exposure, and off-balance sheet rules that allowed MF Global to treat repo-to-maturity transactions as sales instead of secured borrowings.