Impact of the MF Global bankruptcy and the lessons for global regulators
The filing of bankruptcy by MF Global shows how interconnected the global markets really are. It also highlights the integral role and impact of the regulators and credit rating agencies on the activities of trading firms. There have been murmurs that this event could have a widespread impact on the health of global markets. At first instance, I do not believe that we are looking at an event with wide-spread impact. There certainly will be a significant local impact as MF Global is one of the largest trading firm on leading exchanges such as the CME, and its counter-parties and stakeholders would be keen on ensuring that they do not sustain long-term damage due to the event. However, as the bankruptcy has come in the wake of the recent debt restructuring in Europe and MF Global is much smaller in size then Lehman was, it is a much more 'controlled' event than the sub-prime crisis was in 2007-08. From a regulatory point of view, the various regulators are now better placed to be able to manage the repercussions of such an event than they were a couple of years ago. One of the worrying issues that has come up though is the possibility of deficiency in funding the customer futures segregated accounts at the firm. It is believed that there has been a shortfall of a few hundred million dollars in the segregated accounts (in which funds are kept separate from the futures broker's own funds). In spite of the increase in regulatory oversight and pressures of trading participants to conform, MF Global has still managed to operate without adhering to the rules. The lesson to be learnt is that the regulator would have to be even more alert to the possibility of rules such as those for segregation and margining not being followed, especially as the amount of funds that is going to be kept with brokers and clearing houses is going to rise manifold once the OTC derivatives clearing moves to the CCPs. This instance can be taken as a wake-up call by regulators world-wide and reminds them that it is not sufficient to have laws in place, enforcement would also have to be stringent. Otherwise, the systemic risk might actually go up instead of reducing under the new central clearing regime.