The dramatic final days of MF Global | FT Alphaville

The dramatic final days of MF Global

From the Powerpoint of the trustee’s update on their investigation — re-ordered slightly, for narrative flow.

Let’s start with the timeline of margin calls…

Margin calls, MF Global, October 2011 - source: Trustee

(On October 24, Moody’s downgraded MF’s debt to Baa3, on October 25 the company reported an unexpected loss; on October 26, S&P downgraded.)

Then, the segregated customer funds, which were apparently routinely dipped into (our emphasis):

The investigation to date has found that transactions regularly moved between accounts and that funds believed to be in excess of segregation requirements in the commodities segregated accounts were used to fund other daily activities of MF Global. In the past, such transfers were in amounts of less than $50 million, but as liquidity demands increased and could not be met from internal sources, much larger amounts were used, apparently with the assumption that funds would be restored by the end of the day. By Wednesday, October 26th, as the result of increasing demands for funds or collateral throughout MF Global, funds did not return as anticipated.

Customer funds segregation chart - late October 2011 - MF Global trustee report

And then it got even more messy, especially with regards to settlment fails (emphasis ours):

The number of transactions executed by MF Global during the last week prior to the initiation of insolvency proceedings escalated to unprecedented volumes.  The rush to meet funding needs for collateral, margin and customer liquidations led to billions of dollars in securities sales, draws on credit facilities, and a web of inter-company loans across affiliates, some foreign.  The company’s computer systems and employees had difficulty keeping up with the unprecedented volume of transactions.  A number of transactions were recorded erroneously or not at all.  So called “fail” transactions—where either the buyer or seller fails to deliver the 5 cash or the security, respectively—were five times the normal volume during the firm’s final week.

Hmm… maybe those settlement fails are worth keeping an eye on?

Anyhow, here’s some transactions the trustees did trace:

MF Global - cash movement, October 1 - 31, 2011 - trustee

That’s only cash transactions, because they haven’t yet been able to track down the corresponding movement of securities:

To understand where the funds went during October 2011, the analysis conducted by the Trustee’s professionals has included 840 cash transactions in excess of $10 million that total $327 billion, and an ongoing analysis of related securities transactions involving a value of over $100 billion. These large cash transactions alone span 47 bank accounts across eight financial institutions. An additional 20,000 cash transfers that total $9 billion involve transfers of less than $10 million.

You go, forensic accountant investigators!

Related links:
MF Global used customer funds earlier – FT
MF Global Trustee Sheds New Light on Chaos at Firm – DealBook