MF Global
Encyclopedia
MF Global formerly known as Man Financial, was a major global financial derivatives
broker
. MF Global provided exchange-traded
derivatives, such as futures
and options
as well as over-the-counter
products such as contracts for difference
(CFDs), foreign exchange
and spread betting
. MF Global was also a primary dealer in United States Treasury securities. On October 30, 2011, a unit of the New York-based brokerage reported a “material shortfall” in customer funds. Customer accounts with $5.45 billion were frozen Oct. 31, the same day the parent company - MF Global Inc. - filed the eighth-largest U.S. bankruptcy. The shortfall in customer accounts may be as large as $1.2 billion, or 22%, according to the trustee overseeing liquidation. MF Global Holdings Ltd. may have moved hundreds of millions of dollars from its futures client accounts to other accounts before its Oct. 31 bankruptcy. The brokerage used a large number of complex and controversial repurchase agreements or "repos"
for funding and for leveraging profit.. Some of these complex repos have been described as a wrong-way $6.3 billion trade MF Global made on its own behalf on bonds of some of Europe’s most indebted nations. Failure in the liquidity of the repo positions provide the most plausible explanation of the liquidity crisis at the firm. The bankruptcy highlights the ongoing difficulty in regulating complex global financial firms as well touching on the European sovereign debt crisis.
MF Global was the brokerage segment of Man Group
until 2007, when the business decided to split the investment and brokerage businesses so they could each focus on their own markets. An IPO was done for the brokerage business which was renamed MF Global to distinguish it from the investment business which remained as Man Group. The company was registered in Bermuda
, but subsequently moved its registration and headquarters to the United States
.
in England in 1783, which evolved into broader commodities trading before its later transformation into a financial services
business during the 1980s.
Its former parent, then known as ED&F Man, diversified from pure cash commodities into commodity futures in the late 1970s, and established the Anderson Man futures brokerage in 1981. It later changed its name to ED&F Man International and then Man Financial, before adopting the current brand following the IPO and separation of the brokerage from the asset management operation.
ED&F Man operated as a partnership
through to the 1970s, when it started an international expansion which, by 1983, saw its staff climb to 650 employees. ED&F Man listed on the London Stock Exchange
in 1994, changing its name to Man Group
in 2000. Its agricultural business, which retained the ED&F Man name, was sold to management the same year.
The rapid expansion of the Man Investments unit in the emerging hedge fund
management business shrouded many investors from the development of its brokerage unit.
Man Financial embarked on a series of acquisitions, which expanded its product capability and geographic reach, starting in 1989 with the purchase of the Chicago-based GNP Commodities, and including well-known industry names such as Geldermann, Tullett & Tokyo Futures, First American Discount Corp., Australia's Ord Minnett and GNI.
The 2002 purchase of GNI was the largest of these and gave Man Financial access to the then growing Contract for difference
market and GNI's trading platform GNI touch.
However, 2005 saw Man Financial make its largest deal with the transformative $323 million acquisition of client assets and accounts from entities of Refco
, following the U.S. financial-services group's collapse in late 2005. The Refco deal followed a hotly-contested auction with Cerberus Capital, the private equity
group, and boosted Man Financial's scale in retail
and institutional business.
In June 2007, Man Financial was spun off from Man Group as a separate, public entity, via an IPO
, and renamed MF Global.
On February 28, 2008, MF Global announced a bad debt
provision in the amount of $141.5 million. The provision was the result of unauthorised trading by a representative in a MF Global branch office, who on February 27, 2008, while trading
in the wheat futures market
in his personal account, substantially exceeded his authorized trading limit. MF Global held a conference call at 11 a.m. EST on February 28 to discuss the matter.
MF Global was fined $10,000,000 by the CFTC
over the incident and an unrelated Natural gas
incident from 2003. The CME Group
also fined MF Global $495,000 over the wheat incident.
On March 17, 2008, shares of MF Global plummeted on liquidity fears. The CME
, ICE
, Nymex and CFTC
issued statements confirming MF Global was in compliance with regulatory and financial requirements.
In October 2008, former Chicago Board of Trade
CEO Bernard W. Dan became the CEO of MF Global, stating that he would improve MF Global's risk management.
In November 2009, MF Global moved its corporate headquarters from Bermuda to the United States.
In March 2010, Jon Corzine
, who had ended his term as governor of New Jersey
in January 2010, became the CEO, replacing Dan.
and Fitch cut the company's credit rankings to junk. Corzine was working to find a buyer, according to several reports.
The firm's board met through the weekend of October 29/30 in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. It was stopped from doing new business with the New York Fed until it showed it was able to fulfill its responsibilities as a primary dealer, according to a statement on the regulator's website. Trading in MF Global's stock was halted.
On Monday October 31, 2011, MF Global filed for Chapter 11 bankruptcy
. The Wall Street Journal reported that MF Global would seek Chapter 11 bankruptcy protection after investing $6 billion in sovereign bonds issued by European countries. According to the CME Group Inc., MF Global broke rules on keeping customer money separate from its own trading accounts. On August 31, 2011 MF Global had $7.3 billion in customer assets, according to Commodity Futures Trading Commission data. The MF Global bankruptcy was the largest Wall Street firm to collapse since the Lehman Brothers
incident in September 2008.
In papers filed in U.S. Bankruptcy Court in Manhattan
, MF Global listed debt of $39.7 billion and assets of $41 billion.
U.S. regulators have subpoenaed MF Global’s auditor, PricewaterhouseCoopers
LLP, for information on the segregation of assets belonging to clients trading on U.S. commodity exchanges . The company is being investigated by regulators for money missing from client accounts. The shortfall in client accounts at MF Global Holdings Ltd may be around $1.2 billion, according to the trustee liquidating the company. The U.S. Securities and Exchange Commission is also reviewing trades in MF Global Holdings Ltd. (MF) convertible bonds to determine whether some investors sold the debt based on confidential information before the firm’s demise,.
Days after being named to head the investigation for Penn State trustees of the Penn State sex abuse scandal
, former FBI director Louis J. Freeh was named trustee for the MF bankruptcy case. He was appointed by U.S. Trustee Tracy Hope Davis working under the authority of U.S. Bankruptcy Court Judge Martin Glenn.
In the immediate wake of the bankruptcy, Corzine and the board were criticized in the financial press for their apparent non-awareness of the company's condition in the immediate lead-up to the event and their apparent inabilities to manage the risk the company had assumed.
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...
broker
Broker-dealer
A broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
. MF Global provided exchange-traded
Futures exchange
A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future. These types of...
derivatives, such as futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
and options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
as well as over-the-counter
Over-the-counter (finance)
Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....
products such as contracts for difference
Contract for difference
In finance, a contract for difference is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time...
(CFDs), foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
and spread betting
Spread betting
Spread betting is any of various types of wagering on the outcome of an event, where the pay-off is based on the accuracy of the wager, rather than a simple "win or lose" outcome, such as fixed-odds betting or parimutuel betting. A spread is a range of outcomes and the bet is whether the outcome...
. MF Global was also a primary dealer in United States Treasury securities. On October 30, 2011, a unit of the New York-based brokerage reported a “material shortfall” in customer funds. Customer accounts with $5.45 billion were frozen Oct. 31, the same day the parent company - MF Global Inc. - filed the eighth-largest U.S. bankruptcy. The shortfall in customer accounts may be as large as $1.2 billion, or 22%, according to the trustee overseeing liquidation. MF Global Holdings Ltd. may have moved hundreds of millions of dollars from its futures client accounts to other accounts before its Oct. 31 bankruptcy. The brokerage used a large number of complex and controversial repurchase agreements or "repos"
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
for funding and for leveraging profit.. Some of these complex repos have been described as a wrong-way $6.3 billion trade MF Global made on its own behalf on bonds of some of Europe’s most indebted nations. Failure in the liquidity of the repo positions provide the most plausible explanation of the liquidity crisis at the firm. The bankruptcy highlights the ongoing difficulty in regulating complex global financial firms as well touching on the European sovereign debt crisis.
MF Global was the brokerage segment of Man Group
Man Group
Man Group plc is a British alternative investment management business. It provides a range of funds for institutional and private investors globally. The company manages about US$68 billion and employs around 1,700 people in 15 locations worldwide.Man’s headquarters are at Riverbank House...
until 2007, when the business decided to split the investment and brokerage businesses so they could each focus on their own markets. An IPO was done for the brokerage business which was renamed MF Global to distinguish it from the investment business which remained as Man Group. The company was registered in Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
, but subsequently moved its registration and headquarters to the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
History
MF Global traces its roots to the sugar trading business started by James ManJames Man
James Man was the founder of Man Group, the United Kingdom's largest alternative investment management business and a constituent of the FTSE 100 Index.-Career:...
in England in 1783, which evolved into broader commodities trading before its later transformation into a financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
business during the 1980s.
Its former parent, then known as ED&F Man, diversified from pure cash commodities into commodity futures in the late 1970s, and established the Anderson Man futures brokerage in 1981. It later changed its name to ED&F Man International and then Man Financial, before adopting the current brand following the IPO and separation of the brokerage from the asset management operation.
ED&F Man operated as a partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
through to the 1970s, when it started an international expansion which, by 1983, saw its staff climb to 650 employees. ED&F Man listed on the London Stock Exchange
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
in 1994, changing its name to Man Group
Man Group
Man Group plc is a British alternative investment management business. It provides a range of funds for institutional and private investors globally. The company manages about US$68 billion and employs around 1,700 people in 15 locations worldwide.Man’s headquarters are at Riverbank House...
in 2000. Its agricultural business, which retained the ED&F Man name, was sold to management the same year.
The rapid expansion of the Man Investments unit in the emerging hedge fund
Hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
management business shrouded many investors from the development of its brokerage unit.
Man Financial embarked on a series of acquisitions, which expanded its product capability and geographic reach, starting in 1989 with the purchase of the Chicago-based GNP Commodities, and including well-known industry names such as Geldermann, Tullett & Tokyo Futures, First American Discount Corp., Australia's Ord Minnett and GNI.
The 2002 purchase of GNI was the largest of these and gave Man Financial access to the then growing Contract for difference
Contract for difference
In finance, a contract for difference is a contract between two parties, typically described as "buyer" and "seller", stipulating that the buyer will pay to the seller the difference between the current value of an asset and its value at contract time...
market and GNI's trading platform GNI touch.
However, 2005 saw Man Financial make its largest deal with the transformative $323 million acquisition of client assets and accounts from entities of Refco
Refco
Refco was a New York-based financial services company, primarily known as a broker of commodities and futures contracts. It was founded in 1969 as "Ray E. Friedman and Co." Prior to its collapse in October, 2005, the firm had over $4 billion in approximately 200,000 customer accounts, and it was...
, following the U.S. financial-services group's collapse in late 2005. The Refco deal followed a hotly-contested auction with Cerberus Capital, the private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
group, and boosted Man Financial's scale in retail
Retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
and institutional business.
In June 2007, Man Financial was spun off from Man Group as a separate, public entity, via an IPO
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
, and renamed MF Global.
On February 28, 2008, MF Global announced a bad debt
Bad debt
A bad debt is an amount that is written off by the business as a loss to the business and classified as an expense because the debt owed to the business is unable to be collected, and all reasonable efforts have been exhausted to collect the amount owed...
provision in the amount of $141.5 million. The provision was the result of unauthorised trading by a representative in a MF Global branch office, who on February 27, 2008, while trading
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...
in the wheat futures market
Minneapolis Grain Exchange
The Minneapolis Grain Exchange was formed in 1881 as a regional cash marketplace to promote fair trade and to prevent trade abuses in wheat, oats and corn....
in his personal account, substantially exceeded his authorized trading limit. MF Global held a conference call at 11 a.m. EST on February 28 to discuss the matter.
MF Global was fined $10,000,000 by the CFTC
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
over the incident and an unrelated Natural gas
Natural gas
Natural gas is a naturally occurring gas mixture consisting primarily of methane, typically with 0–20% higher hydrocarbons . It is found associated with other hydrocarbon fuel, in coal beds, as methane clathrates, and is an important fuel source and a major feedstock for fertilizers.Most natural...
incident from 2003. The CME Group
CME Group
The CME Group bases prices for US gasoline on Brent Crude rather than West Texas Intermediate Crude , which many believe is responsible for artificially high gas prices for US consumers...
also fined MF Global $495,000 over the wheat incident.
On March 17, 2008, shares of MF Global plummeted on liquidity fears. The CME
Chicago Mercantile Exchange
The Chicago Mercantile Exchange is an American financial and commodity derivative exchange based in Chicago. The CME was founded in 1898 as the Chicago Butter and Egg Board. Originally, the exchange was a non-profit organization...
, ICE
IntercontinentalExchange
IntercontinentalExchange, Inc., known as ICE, is an American financial company that operates Internet-based marketplaces which trade futures and over-the-counter energy and commodity contracts as well as derivative financial products...
, Nymex and CFTC
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
issued statements confirming MF Global was in compliance with regulatory and financial requirements.
In October 2008, former Chicago Board of Trade
Chicago Board of Trade
The Chicago Board of Trade , established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million...
CEO Bernard W. Dan became the CEO of MF Global, stating that he would improve MF Global's risk management.
In November 2009, MF Global moved its corporate headquarters from Bermuda to the United States.
In March 2010, Jon Corzine
Jon Corzine
Jon Stevens Corzine is the former CEO of Goldman Sachs and of MF Global, and a one time American politician, who served as the 54th Governor of New Jersey from 2006 to 2010. A Democrat, Corzine served five years of a six-year U.S. Senate term representing New Jersey before being elected Governor...
, who had ended his term as governor of New Jersey
New Jersey
New Jersey is a state in the Northeastern and Middle Atlantic regions of the United States. , its population was 8,791,894. It is bordered on the north and east by the state of New York, on the southeast and south by the Atlantic Ocean, on the west by Pennsylvania and on the southwest by Delaware...
in January 2010, became the CEO, replacing Dan.
Bankruptcy protection
On October 25, 2011 MF Global reported a $191.6 million quarterly loss as a result of trading on European government bonds. In response Moody'sMoody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
and Fitch cut the company's credit rankings to junk. Corzine was working to find a buyer, according to several reports.
The firm's board met through the weekend of October 29/30 in New York to consider options including a sale to avert failure, according to a person with direct knowledge of the situation. It was stopped from doing new business with the New York Fed until it showed it was able to fulfill its responsibilities as a primary dealer, according to a statement on the regulator's website. Trading in MF Global's stock was halted.
On Monday October 31, 2011, MF Global filed for Chapter 11 bankruptcy
Chapter 11, Title 11, United States Code
Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Chapter 11 bankruptcy is available to every business, whether organized as a corporation or sole proprietorship, and to individuals, although it is most...
. The Wall Street Journal reported that MF Global would seek Chapter 11 bankruptcy protection after investing $6 billion in sovereign bonds issued by European countries. According to the CME Group Inc., MF Global broke rules on keeping customer money separate from its own trading accounts. On August 31, 2011 MF Global had $7.3 billion in customer assets, according to Commodity Futures Trading Commission data. The MF Global bankruptcy was the largest Wall Street firm to collapse since the Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...
incident in September 2008.
In papers filed in U.S. Bankruptcy Court in Manhattan
Manhattan
Manhattan is the oldest and the most densely populated of the five boroughs of New York City. Located primarily on the island of Manhattan at the mouth of the Hudson River, the boundaries of the borough are identical to those of New York County, an original county of the state of New York...
, MF Global listed debt of $39.7 billion and assets of $41 billion.
U.S. regulators have subpoenaed MF Global’s auditor, PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
LLP, for information on the segregation of assets belonging to clients trading on U.S. commodity exchanges . The company is being investigated by regulators for money missing from client accounts. The shortfall in client accounts at MF Global Holdings Ltd may be around $1.2 billion, according to the trustee liquidating the company. The U.S. Securities and Exchange Commission is also reviewing trades in MF Global Holdings Ltd. (MF) convertible bonds to determine whether some investors sold the debt based on confidential information before the firm’s demise,.
Days after being named to head the investigation for Penn State trustees of the Penn State sex abuse scandal
Penn State sex abuse scandal
The Penn State sex abuse scandal refers to allegations that former Pennsylvania State University football assistant coach Jerry Sandusky sexually assaulted or had inappropriate contact with at least eight underage boys on or near university property...
, former FBI director Louis J. Freeh was named trustee for the MF bankruptcy case. He was appointed by U.S. Trustee Tracy Hope Davis working under the authority of U.S. Bankruptcy Court Judge Martin Glenn.
Board of directors
At the time of its bankruptcy filing, MF's board of directors was:- Jon S. Corzine, Chairman and Chief Executive Officer
- David P. Bolger, independent member, formerly Chicago 2016 and Aon Corporation
- Eileen S. Fusco, attorney and CPA formerly for Deloitte & Touche
- David Gelber, independent member, formerly ICAP plc, Citibank NA, Chemical Bank and HSBCHSBCHSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
- Martin J.G. Glynn, independent member, former CEO HSBCHSBCHSBC Holdings plc is a global banking and financial services company headquartered in Canary Wharf, London, United Kingdom. it is the world's second-largest banking and financial services group and second-largest public company according to a composite measure by Forbes magazine...
- Edward L. Goldberg, founder of Longview Investments, LLC, formerly Merrill LynchMerrill LynchMerrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
- David I. Schamis, managing director at J.C. Flowers & Co. LLCLimited liability companyA limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
, - Robert S. Sloan, founder and managing partner of S3S3-Airlines:* Santa Barbara Airlines IATA airline designator* S03, Ashland Municipal Airport FAA LID-Locomotives:* ALCO S-3, an American diesel switching locomotive* NER Class S3, a North Eastern Railway steam locomotive...
In the immediate wake of the bankruptcy, Corzine and the board were criticized in the financial press for their apparent non-awareness of the company's condition in the immediate lead-up to the event and their apparent inabilities to manage the risk the company had assumed.