MF Global collapse

He bet $6.3B on Europe's shakiest bonds. The margin calls got paid with customer money.

The world stops matching the model. Regime change and leverage turn a small error fatal.

Room: Q4 Where models die
Year: 2011
Impact: $1.6B
Sector: Futures brokerage
Region: N. America
Category: Economic

Why this room

The trade was a repo-to-maturity book in short-dated European sovereign debt, held on the modelled assumption that holding to maturity made mark-to-market and funding variation immaterial and that the positions could be booked as sales and removed from the balance sheet. The model failed on the funding dimension rather than the credit dimension: spread widening, a FINRA-mandated net capital charge, rating downgrades and clearing-house margin calls turned a carry trade several times larger than total equity into a liquidity drain, and the firm covered the drain by breaching customer segregation. This sits in q4 because the fatal error was a regime change in collateral and funding conditions acting on leverage, with the customer shortfall as the terminal symptom rather than the originating cause.

The record

As of 30 September 2011 MF Global held a net long position of approximately $6.3 billion in short-term European sovereign debt (Belgium, Italy, Spain, Portugal and Ireland), with margin posted exceeding $400 million.certain
The SIPA Trustee put the shortfall in segregated customer property at approximately $1.6 billion: about $900 million in domestic accounts plus about $700 million tied to customer trading on foreign exchanges.certain
The CFTC charged that MF Global unlawfully used nearly $1 billion of customer segregated funds in the final week of October 2011; 31 October 2011 was the bankruptcy filing date and 28 October 2011 the firm's last business day.certain
MF Global Holdings' filing on 31 October 2011 was the eighth-largest bankruptcy in US history; the group reported total assets of $45.9 billion at mid-2011.high
Jon Corzine was ordered on 5 January 2017 to pay a $5 million civil monetary penalty and was permanently barred from registering with the CFTC or acting for a futures commission merchant.certain

Sources

The book

This entry is one of 111 in the register. The full story, and what it cost the people who lived it, is in Risky Business by Claudia Zeisberger, David Munro and Joanna Reijgersberg-Siew.

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