Sad Proof

This Sunday’s New York Times Business Section carried an interesting column (“Sad Proof of Europe’s Fallout.”) It essentially claims that MF Global “was felled by over-the-top leverage and bad derivative bets on debt-weakened European countries.”  It goes on to say that one of the lessons of MF Global’s failure was that when Euro-shocks “reach our shores, they usually ride in on a wave of derivatives.”

Pretty compelling stuff.

Except that it’s not true.

MF Global did not use derivatives to make its bets on European sovereign debt.  As the company stated in its third-quarter earnings release on October 25th:

“As of September 30, 2011, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland.”

So it seems clear that MF’s European sovereign debt holdings were just that, bond positions financed via repo transactions.  Repos, of course, are NOT OTC derivatives.  (They’re also not listed derivatives.)  They are basic tools of corporate finance commonly used to finance cash bond positions.

We would have thought that, with a little checking, this point would be pretty obvious to one and all.  We would have also thought that reporters (and consultants who are used as expert sources on financial matters) would know that because MF Global was an SEC registered Broker-Dealer and CFTC registered Futures Commission Merchant, regulators at all times had full transparency into the nature and extent of MF Global’s trading and risk positions.

In short, there were no derivatives, no opaque financial instruments and no hidden risks in the story of MF Global’s downfall.  There were, though, a lot of inaccuracies in the way that story was told.

Sad proof indeed.

8 thoughts on “Sad Proof

  1. Pingback: ISDA dumps on the New York Times | The OTC Space

  2. Pingback: Legal Liability of CME Regarding MF Global | Points and Figures

  3. Pingback: CDS demonization watch, ISDA vs Morgenson edition | Felix Salmon

  4. I think it depends on what you mean by OTC derivative. Just because it’s not governed by an ISDA Master doesn’t make it not a derivative. Many practitioners would consider repos a form of derivative. But I do agree with the main point of the post, which is to rebut the implication that derivatives are the cause of everyone’s problems.

  5. Pingback: A Derivatives Fight Over MF Global — Clearing and Settlement

  6. That reporters can be factually inaccurate doesn’t surprise me, but it’s a pity you don’t explain if not due to high leveraged bets, what precisely was it that sent this company to CH11?

    On the defense of regulators,where you make the following statement

    We would have also thought that reporters (and consultants who are used as expert sources on financial matters) would know that because MF Global was an SEC registered Broker-Dealer and CFTC registered Futures Commission Merchant, regulators at all times had full transparency into the nature and extent of MF Global’s trading and risk positions.

    I can only wonder you where you have been the last three years, if you truly believe the regulator can be relied on to oversee and regulate the financial industry?

  7. Pingback: ISDA says the New York Times got it wrong about MF Global: it was repos and not derivatives | Securities Finance Monitor

  8. Pingback: ISDA has a blog! « mathbabe

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s