Posts tagged 'repo-to-maturity'

Effectively controlling assets, MF Global edition

MF Global lost ‘effective control’ of its sovereign bond assets. This gifted the broker some rather favourable accounting treatment. The broker’s clients, meanwhile, wanted to keep effective control of their own assets, and not just in the accounting sense, but in a very real sense.

As creditors and clients pick over the corpse of MF Global, reaching into its pockets for anything that can compensate them, we’re learning a lot about accounting for repos, and about what does and doesn’t work when it comes to protecting client assets. Read more

The Jefferies issue

As FT Alphaville has noted, Egan-Jones downgraded Jefferies, citing the disclosure in Jefferies’ 10Q that the firm’s “sovereign obligations” amounted to €2.68bn, or 77 per cent of its €3.49bn shareholder equity.

Jefferies, meanwhile, responded that the positions were net short thus not a problem. What’s more that they were not “repo to maturity” or off-balance sheet. Read more

Re-recognised in 2011

What the market may have overlooked in the last quarter and this one, handily written up by Florida-based accountants MBAF (back in August):

During the final months of 2011, banks will need to begin preparing for compliance with a recent Financial Accounting Standards Board requirement on the accounting treatment of repurchase agreements.  Read more

CME Group says MF Global broke rules

MF Global broke rules on keeping customer money separate from its own trading accounts, according to the CME Group, which acted as self-regulatory body to the collapsed broker-dealer as well as hosting its trades, the FT reports. According to people familiar with the situation on Tuesday, the Commodity Futures Trading Commission was investigating MF Global’s accounting – after regulators discovered an alleged shortfall in client funds of several hundred million dollars – and the Federal Bureau of Investigation was looking into the matter. MF Global declined to comment. But a lawyer for MF Global told a New York court on Tuesday that “to the best knowledge of management, there is no shortfall”. Kenneth Ziman told the bankruptcy court that most of MF Global’s US assets were held at its brokerage unit. Regulators have not ruled out the possibility that all the clients’ funds will ultimately be accounted for as the firm’s positions are unwound but believe MF Global has, at the least, broken rules on segregating funds. For more on the off-balance sheet trades which prompted MF Global’s sudden need for cash see FT Alphaville.

MF Global and echoes of Repo 105

What caused MF Global’s downfall?

According to Bradley Abelow, MF Global’s Chief Operating Officer, much of the blame may lie with Finra’s unreasonable request for MF Global to add capital to support its off-balance sheet exposure to European sovereign debt and reveal them publicly. These were, as we have discussed, structured as repo-to-maturity trades. They were also maintained off-balance sheet. Read more

MF Global says funds are accounted for

A lawyer for MF Global has rejected claims of a shortfall in client funds at the brokerage unit, Bloomberg reports. “To the best knowledge of management, there is no shortfall,” Kenneth Ziman told US bankruptcy judge Martin Glenn in Manhattan, when asked whether an alleged shortfall in customer accounts would affect the case. Most of MF Global’s US assets are held at its brokerage unit, Ziman said. The brokerage unit is not part of the main bankruptcy case, in which creditors are trying to recover on their claims against the company. The WSJ says in addition to the CFTC voting to issue subpoenas, the FBI was “planning to examine” whether client funds were missing, citing people familiar with the situation. However those sources reportedly said it was not clear whether there funds were intentionally diverted or if an accounting error or delays in recording transactions. The FT meanwhile looks at the role of “repo-to-maturity” trades in MF Global’s predicament, and Reuters considers the accounting angle.

MF Global and the repo-to-maturity trade

If ever there was an example of an “overnight repo Black Swan” event, MF Global’s “repo-to-maturity” laddered trades seem to be it. Though, in this case, they’re probably better described as the realisation of the “short-term repo Black Swan”.

A.k.a institutions’ growing tendency to risk it in the short-term repo universe, to beat the crappy returns being offered in the “risk-free” market. Read more