Andrew Abraham

andy-0101 My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I adhere to the philosophy of trend following. Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets me apart from other traders is that I am not only concerned about the return on investment but how much risk I will have to tolerate to achieve my goals.

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Does MF Global’s Failure Point to Regulatory Gaps?

Does MF Global’s Failure Point to Regulatory Gaps?
SEC Chairman Mary Schapiro told CNBC that MF Global collapsed because it made bad decisions. But how did regulators not see its exposures or excessive leverage?
Tags: MF Global, SEC Chairman Mary Schapiro, Regulation, Fixed Income,
By Ivy Schmerken @ischmerken
NOVEMBER 08, 2011

Should regulators share any of the blame for the collapse of MF Global and its failure to segregate customer funds? According to Mary Schapiro, chairman of the SEC, in an interview with CNBC, the brokerage firm was forced into bankruptcy as a result of its own foray into high-risk European bonds and failure to segregate customer assets from the firm’s accounts and not any lack oversight from regulators.
“Let’s remember that MF Global’s decisions were MF Global’s decisions about how to invest and what risks to take,” she says. “Their failure is a result of those decisions,” Schapiro told the CNBC reporter.
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Even though MF Global was regulated by several agencies whose job it was to spot improprieties and violations, Schapiro contends in the video interview that regulators were not responsible for the firm’s demise. Then who was? MF Global is responsible because it made bad decisions and it failed to segregate customer funds, which is a cardinal rule for both securities and futures regulations, Schapiro explained in the video interview.
While the head of the SEC is correct is suggesting the fault lies with MF Global’s CEO Jon Corzine who led the firm off a cliff, it appears that regulators should have questioned why MF Global had 41 times leverage.
Schapiro’s take on this is that the firm was not systemically important and if it had been, then it would have been subject to rules of the Financial Stability Oversight Committee (FSOC) on interconnectedness, leverage and size.
“This was not a firm that was of such magnitude and size. It did not rise to the level of potentially of becoming systemically important institution.”
But did regulators fall down on the job in letting futures and commodities brokerage firm get to the point of failure? Schapiro acknowledges that MF Global had several regulators including the CFTC, FINRA and the SEC, examining it and that the firm was told to increase its capital last year and did so.
However, regulatory oversight of medium-sized brokers is under scrutiny especially after the panic that ensued last week over a second broker, Jefferies & Company’s exposure to European debt. Probing concerns about regulatory oversight of mid-level brokers, an article in the New York Times last Thursday found that at least six different agencies had a role “in minding separate parts of the store” at MF Global.
As evidence of the regulatory gaps, FINRA carries out exams of the 300 largest brokers of the 4,500 that the agency oversees and for dozens of firms like MF Global it outsources the work to outside parties, noted the NY Times. [In a flattering profile, today’s NY Times suggests that Gary Gensler is the only regulator who suspected that $600 million in customer assets were missing. Gensler has recused himself from the investigation because he previously worked for 18 years under Jon Corzine at Goldman Sachs. But a commentator on the site claims that Gensler knew in June, long before the October surprise of Corzine’s proprietary $6.3 billion position in Euro junk, and didn’t move fast enough to save customer’s money.]
While coordination between regulators was something that Dodd-Frank was supposed to address, that is not the reason why MF Global has failed, according to Schapiro in the interview.
Let’s remember the rules that they potentially violated existed a long time. Potentially … it is the sanctity of customer assets and the requirement that they be segregated. Dodd frank doesn’t really change that. Those are the rules that were in place to protect investor’s funds.
But there were six regulators looking at the firm at a time when the agencies are strapped for resources. The MF Global situation points to the cliche that there were so many cooks in the kitchen no one had a handle on the big picture. Consolidation of regulatory agencies was talked about and rejected after the 2008 financial crisis and prior to the regulatory overhaul. The point of Dodd-Frank was to enable regulators to put together data on exposures to prevent a firm from failing, but only if the firm is deemed systemically important. But MF Global was not systemically important, so therefore, according to this logic, a firm should be allowed to fail and regulation is still successful if the firm can be unwound through the bankruptcy courts.
It appears that MF Global was too small to care about, and that customers with $600 million in missing funds are paying the price.

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