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Nov 16, 2012 02:50 PM IST | Source: ft.com

MF Global accused of misleading regulators

MF Global misled regulators over the size of its eurozone bond bets, a powerful US congressional committee has claimed in a damning report into the broker's collapse under former chief executive Jon Corzine.

MF Global accused of misleading regulators

MF Global misled regulators over the size of its eurozone bond bets, a powerful US congressional committee has claimed in a damning report into the broker's collapse under former chief executive Jon Corzine.


MF Global declared bankruptcy last year, after making billions of dollars worth of complex bets - known as "repo to maturity" trades - on European government debt. The broker's failure left USD 1.6 billionn worth of missing customer funds and provoked congressional outrage, and numerous lawsuits and regulatory investigations.


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"When MF Global first entered European repo-to-maturity trades in September 2010, the company neither acknowledged the exposure it had to European sovereign debt when questioned by its regulators, nor did it clearly describe the size and nature of its portfolio to the public in the company's regulatory filings," the House financial services committee's investigations panel alleged in a copy of a report obtained by the Financial Times and due to be published on Thursday.


The 101-page report has been months in the making. Alongside a post mortem published by one of MF Global's bankruptcy trustees, it is the most detailed account yet of the futures broker's high-profile collapse. According to the report, the Financial Industry Regulatory Authority contacted MF Global, along with other brokers, in September 2010 to ask about exposure to the troubled eurozone. MF Global said it did not have any European government bonds, even though it already had, under the direction of Mr Corzine, made the convoluted repo to maturity trades.


It was only when Finra contacted an MF Global subsidiary to ask about a recently reported loss that the regulator learnt of the European debt trades, the report said.


Finra then determined that the trades required MF Global to take capital charges on the positions based on the US Securities and Exchange Commission's so-called "net capital rule." MF Global allegedly complained about Finra's decision to the SEC. SEC staff members "were surprised to learn that MF Global had not taken haircuts on its European bonds, and found the company's representatives to be unfamiliar with published SEC guidance interpreting the net capital rule," the report said.


MF Global eventually took an extra USD 183m capital charge on its eurozone exposure, but not before unsuccessfully arguing with regulators that its Belgian, Italian, and Spanish bonds should be treated like US Treasuries for capital purposes, the report claimed.


The report blamed Mr Corzine for attempting to transform the company from a modest brokerage to a full-service investment bank with a heavy focus on risky proprietary trading.

Steven Goldberg, spokesman for Mr Corzine, said on Wednesday that the former MF Global chief executive "disagrees strongly with several of the assertions" in the panel's report. "At all times Mr Corzine acted in good faith and did what he believed was necessary to turn around MF Global," said Mr Goldberg.

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