February 07, 2012

A report issued yesterday by the trustee of MF Global’s Bankruptcy revealed the chaos that reigned at MF Global in the firm’s final days from Oct. 26 until its bankruptcy filing on Oct. 31, 2011.

The four-page statement issued yesterday by James Giddens, the trustee appointed by the bankruptcy court who is in charge of liquidating the firm to recover customer’s missing funds, described what led to MF Global’s unraveling in the final week.

After a three-month investigation, the trustee’s investigators have traced the majority of the transactions, totaling more than $105 billion, made in and out of MF Global, in addition to $100 billion in securities transactions during its final week of operations.

Why did it take three-months to understand what transpired in the futures and commodities brokers last week? Investigators had to piece together the movement of cash and related securities “that were not always accurately and promptly recorded due to the chaotic situation and the complexity of the transactions,” the report explained.

The number of transactions executed by MF Global during the last week prior to the bankruptcy 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.

MF Global’s trading systems couldn’t keep up with the volume of transactions that were flying out the door to meet margin calls and collateral obligations from exchanges and trading counterparties, suggesting that this contributed to chaos of the final days and investigator’s ability to trace the $1.2 billion in missing customer funds.

The flood of transactions was so intense that the company’s computer systems and employees had difficulty keeping up with the “unprecedented volume of transactions,” states the report. In addition, “a number of transactions were recorded erroneously or not at all.” The fail rate on transactions – where either the buyer or seller fails to deliver the cash or the security, respectively – were five times the normal volume during the firm’s final week.

While farmers, ranchers, hedge funds, CTAs and other clients are still waiting for their money, the pressure has been mounting on the trustee to cover their assets.

But the trustee doesn’t sound too positive about recovering or clawing back the money for MF Global’s customers, warning that this will entail "very complex legal and factual determinations. But ultimately this is consistent with the trustee's role, which is to advocate for MF Global's clients, states the trustee.

ABOUT THE AUTHOR
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...