MF Global
MF Global Holdings Ltd., formerly known as Man Financial, was a major global financial derivatives broker, or commodities brokerage firm that went bankrupt in 2011. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting. MF Global Inc., its broker-deal
Overview
MF Global Holdings Ltd., formerly known as Man Financial, was a major global financial derivatives broker, or commodities brokerage firm that went bankrupt in 2011. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting. MF Global Inc., its broker-dealer subsidiary, was a primary dealer in United States Treasury securities. A series of perceived liquidity problems and large fines and penalties dogged MF Global starting in 2008, and led to its bankruptcy in 2011. In 2011, MF Global faced major pressures to its liquidity over several months. Some analysts and financial commentators indicate that MF Global probably experienced a number of trading days in 2011 during which the firm's bets on sovereign debt would have required the use of customer funds to meet capital requirements, thereby maintaining operating funds and possibly overall solvency. A large part of these pressures on MF Global were a result of the firm's involvement in a significant number of repurchase agreements. Many of these repo agreements were conducted off their balance sheet. Also, MF Global made a $6.3 billion investment on its own behalf in bonds of some of Europe's most indebted nations. Failure of those, and other repo positions, contributed to the massive liquidity crisis at the firm. MF Global experienced a meltdown of its financial condition, caused by improper transfers of over $891 million from customer accounts to a MF broker-dealer account to cover losses created by trading losses. On October 31, 2011, MF Global executives admitted that transfer of $700 million from customer accounts to the broker-dealer and a loan of $175 million in customer funds to MF Global's U.K. subsidiary to cover (or mask) liquidity shortfalls at the company occurred on October 28, 2011. MF could not repay these monies with its own funds. Improper co-mingling, or mixing, of company and client funds took place for days before the illicit transfer and loans, and perhaps for many other days earlier in the year. According to the New York Times, "MF Global dipped again and again into customer funds to meet the demands", perhaps beginning as early as August 2011. MF Global declared bankruptcy on October 31, 2011, and the company was liquidated beginning in November 2011. The trustee liquidating the company said that the losses incurred by customers of MF Global stood at $1.6 billion at April 2012. In January 2013, a judge approved a settlement that would return 93 percent of customers' investments, with the prospect of additional payouts from the company's general estate. In December 2014, MF Global Holdings settled a U.S. government lawsuit, agreeing to pay $1.2 billion in restitution and a $100 million fine for customer losses tied to the company's 2011 collapse.
Origins
MF Global traces its roots to the sugar trading business started by James Man in England in 1783, which evolved into broader commodities trading before its later transformation into a financial services business during the 1980s focused on commodity futures trading.
The 1900s: Growth, diversification
MF Global's former parent, then known as ED&F Man, diversified from pure cash commodities into commodity futures in the late 1970s, and established the Anderson Man futures brokerage in 1981. It later changed its name to "ED&F Man International" and then "Man Financial". ED&F Man operated as a partnership through to the 1970s, when it started an international expansion which, by 1983, increased its staff 650 employees. ED&F Man listed on the London Stock Exchange in 1994, changing its name to "Man Group" in 2000. Its agricultural business, which retained the ED&F Man name, was sold to management the same year.
The 1980s-Early 2000s: Acquisitions, expansion and brokerage unit growth
The rapid expansion of the Man Investments unit in the emerging hedge fund management business shrouded many investors from the development of its brokerage unit. Man Financial embarked on a series of acquisitions, which expanded its product capability and geographic reach, starting in 1989 with the purchase of the Chicago-based GNP Commodities, and including well-known industry names such as Geldermann, Tullett & Tokyo Futures, First American Discount Corp., Australia's Ord Minnett and GNI.
2002-2007: Acquisitions of a trading platform, client assets
The 2002 purchase of GNI was the largest of these and gave Man Financial access to the then growing Contract for difference market and GNI's trading platform GNI touch. However, in 2005 Man Financial made its largest deal with the transformative $323 million acquisition of client assets and accounts from entities of Refco, following the U.S. financial-services group's collapse in late 2005. The Refco deal followed a hotly contested auction with Cerberus Capital, the private equity group, and boosted Man Financial's scale in retail and institutional business.
2007 Spin-off and going public
MF Global was the brokerage segment of Man Group until 2007, when the Man Group decided to split the investment and brokerage businesses so they could each focus on their own markets. Man Financial was spun off from Man Group as part of the initial public offering (IPO) and separation of the brokerage from the asset management operation. The brokerage business made the final identity change to MF Global simultaneously with that IPO, which occurred in June 2007. The then-separate investment business retained the name of Man Group. The company was registered in Bermuda, but subsequently moved its registration and headquarters to the United States.
2008-2009: Major fines, liquidity concerns and stock price decline
On February 28, 2008, MF Global announced a bad debt provision in the amount of $141.5 million. The provision was the result of unauthorized trading by a representative in a MF Global branch office, who on February 27, 2008, while trading in the wheat futures market in his personal account, substantially exceeded his authorized trading limit. MF Global held a conference call at 11 a.m. EST on February 28 to discuss the matter. MF Global was fined $10,000,000 by the CFTC over the incident and an unrelated natural-gas incident from 2003. The CME Group also fined MF Global $495,000 over the wheat incident. On March 17, 2008, shares of MF Global plummeted on liquidity fears. The CME, ICE, Nymex and CFTC issued statements confirming MF Global was in compliance with regulatory and financial requirements.
March 2010: Jon Corzine named CEO
Jon Corzine, former CEO of Goldman Sachs, Governor of New Jersey, and United States Senator, began his tenure as CEO of MF Global in March 2010. Corzine spent nearly all of the 9 years prior to joining MF Holdings as either U.S. Senator or governor. From 1994 to 1999, Corzine held the role of chief executive officer for Goldman Sachs.
October 2011: MF Global bankruptcy and customer funds shortfall
On Sunday, October 30, 2011, a unit of the New York-based brokerage first reported to the Chicago Mercantile Exchange (CME) and the Commodity Futures Trading Commission (CFTC) a "material shortfall" of hundreds of millions of dollars in segregated customer funds. Customer accounts were frozen the same day. On October 31, 2011, MF Global reported the shortfall in customer accounts at $891,465,650 as of close of business on Friday, October 28, 2011. According to the trustee overseeing liquidation the shortfall may be as large as $1.6 billion. In March 2012, Bloomberg reported on a memo produced by congressional investigators that quoted an internal company e-mail relating to a $175 million transfer which was a subject of their investigation. Initial media reports suggested impropriety on Corzine's part, but this was later disproved. According to The New York Times, the employee responsible for the transfer emailed Corzine stating the transfer was a "House Wire", meaning it came from the firm's own account. The instructions Corzine had given were to deal with several overdrafts at JPMorgan Chase, but never related to any specific accounts or specific transfers made. A spokesperson for Corzine responded that Corzine "never directed Ms. O'Brien or anyone else regarding which account should be used to cure the overdrafts, and he never directed that customer funds should be used for that purpose. Nor was he informed that customer funds had been used for that purpose." In fact, as The New York Times reported, Corzine had been given specific assurances that the transfer in question was proper, and that no customer funds had been used. Subsequent court filings also attest to this fact. On November 5, 2013, The New York Times reported that MF Global customers would likely recover 100 percent of their funds. A spokesman for Corzine said "Mr. Corzine is very pleased that all customers will receive a full recovery. This is a great outcome, which has been anticipated for many months." Customers have since received distributions making them whole.
Re-purchase agreements used extensively by brokerage
The brokerage used a large number of complex and controversial repurchase agreements or "repos" for funding and for leveraging profit, many off their balance sheet. Some of these complex repos have been described as a wrong-way $6.3 billion bet MF Global made on its own behalf on bonds of some of Europe's most indebted nations. Failure of the repo positions helped cause the liquidity crisis at the firm. The sudden disappearance of so much liquidity may indicate a scandal and crisis related to the widespread practice among US and UK brokers of rehypothecation of customer collateral.
Bankruptcy protection sought
On October 25, 2011, MF Global reported a $191.6 million quarterly loss as a result of trading on European government bonds. In response Moody's and Fitch cut the company's credit rankings to junk. Corzine was working to find a buyer, according to several reports. The firm's board met through the weekend of October 29 and October 30 in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. It was stopped from doing new business with the New York Fed until it showed it was able to fulfill its responsibilities as a primary dealer, according to a statement on the regulator's website. Trading in MF Global's stock was halted. On Monday October 31, 2011, MF Global filed for Chapter 11 bankruptcy. This became the eighth largest bankruptcy protection filing in the history of the United States to that time. The Wall Street Journal reported that MF Global would seek Chapter 11 bankruptcy protection after investing more than $6.3 billion in sovereign bonds issued by European countries. According to the Commodity Futures Trading Commission data, on August 31, 2011, MF Global had $7.3 billion in customer assets. The MF Global bankruptcy was the largest Wall Street firm to collapse since the Lehman Brothers incident in September 2008.
Bankruptcy filing, the fallout and possible causes
At 10:21 AM Eastern Time in Manhattan on October 31, 2011, The New York Times reported that "in papers filed in U.S. Bankruptcy Court in Manhattan, MF Global listed assets of $100 million to $500 million and liabilities of more than $1 billion." By late afternoon (4:21 PM Eastern), Bloomberg News filed a story reporting that "the firm listed debt of $39.7 billion and assets of $41 billion in Chapter 11 papers filed yesterday in U.S. Bankruptcy Court in Manhattan" after making bets on European sovereign debt. MF Global filed for bankruptcy protection because of heavy purchases of sovereign debt from some mired in the European Debt Crisis (including Ireland, Italy, Portugal, and Spain). The problems of the week preceding the Chapter 11 filing scared off investors en masse. These massive purchases of debt were highly leveraged by MF Global, using client monies in client accounts under the control of the firm. Upon the filing, credit ratings agencies immediately cut the ratings of MF Global to junk status. Some commentators have suggested the failure of MF Global highlights the difficulty in regulating complex global financial firms, the dangers of off-balance-sheet accounting as well as touching on the European sovereign debt crisis. Most observers of all political stripes considered MF global to be over-leveraged and under-capitalized. Many took its collapse as a reminder that whatever the root causes of the 2008 financial crisis, some of the primary problems remain because of the lack of needed regulatory changes.
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