MF Global Files For Bankruptcy On European Sovereign Debt Exposure via Repo Trades

These swaps and shadow banking markets continue to put financial firms at risk even after the 2008 financial crisis. MF Global went bankrupt (DealBook) today because they took on European sovereign debt exposure, via "repo-to-maturity" trades with so called "limited risk", until things turned for the worse by the end of October. MF Global explained the events leading up to its Chapter 11 filing in a bankruptcy declaration today: 1) On October 24, 2011 MF Global was downgraded by Moody's to one notch above junk; 2) On October 25, 2011 MF reported a $191 million loss for the second quarter and was forced by FINRA to "announce that MFGI held a long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity"; and 3) on October 27 it was downgraded by Moody's and Fitch to junk, which forced collateral calls from counterparties and concerned clients to pull their money from the institution. Also read the bankruptcy petition (via DealBook). The blog Distressed Debt Investing has more detail on the bankruptcy filing and the bonds.

MF explained their low-risk revenue strategy in an October 2011 fact sheet embedded below. It's another example of how these so called low-risk trades can end up destroying financial institution equity in a matter of days. Here's an excerpt from the fact sheet.

"Revenue diversification strategy

In keeping with MF Global’s ongoing strategy to diversify revenue streams, the firm expanded client facilitation and principal activities across a variety of asset classes. As previously disclosed, we have seen revenue opportunities in the short-duration European sovereign markets. 

The following provides more detailed information on MF Global’s short-term European sovereign portfolio and solid financial position. 

Background on transactions: European sovereign portfolio as of September 30, 2011

• MF Global maintains a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity) 

• We entered into reverse repurchase and repurchase transactions to maturity, as the firm does in U.S. government securities 

• The firm’s European sovereign portfolio financed to maturity (repo-to-maturity) includes:


And towards the end of the document they talk about risk being limited.

"Risk is limited

We believe there is limited risk associated with these positions:

• The majority of positions are cleared through a central clearing house, mitigating counterparty and settlement risk; MF Global retains obligation to post margin

• All are short-term in duration, and the firm believes exposure to default is minimal

• The entire portfolio matures well before the expiration of the European Financial Stability
Facility on June 30, 2013

— As stated previously, the latest maturity of the entire portfolio is only through
December 2012 

• While the potential exists for accounting fluctuations associated with a derivative that is a
non-cash mark-to-market of these transactions, there has been no mark-to-market import at
quarter end

• Should there ever be a mark, because this is a repo-to-maturity portfolio, the mark would
move back to zero at maturity

Firm’s financial position is strong

• MF Global maintains a strong capital position. MF Global’s liquidity position at September 30, 2011, included:

— $3.7 billion in available liquidity
— $2.5 billion in total capital
— $496 million in excess capital
— $256 million in free cash
— $1.3 billion in unused, revolving credit facilities
— Our market capitalization totals $683.8 million

• As of September 30, 2011, our balance sheet contains extremely liquid and high-quality assets

— Consists primarily of client payables (margin) and short-term Treasuries and agencies
— Minimal Level Three trading assets"

MF Global Short Term European Sovereign Portfolio

MF Global article firehouse:

Distressed Debt: MF Global Bankruptcy (Distressed Debt Investing)

MF Global and the repo-to-maturity trade (FT Alphaville)

Regulators Investigating MF Global (DealBook)

UPDATE 1-MF Global slow to turn over data to regulators-source (Reuters)

Someone Is Going To Jail For This: MF Global Caught Stealing Hundreds Of Millions From Customers? (Zero hedge)

MF Global is MF Kaput (Points and Figures)

MF Traders Blocked by CME, Intercontinental Has Clients Fleeing (BusinessWeek)

MF Global Exposes Prop-Trading Risk That Volcker Wants to Curb (BusinessWeek)

MF Global Files for Bankruptcy as Broker-Dealer Unit Liquidates (SF Chronicle w/ Bloomberg)

MF Global bankruptcy sends client funds into limbo (MarketWatch)

Presenting The Bond That Blew Up MF Global (Zero Hedge)

Dick Bove Goes For The Post-Lehman Twofer: MF Global Is Fine (CNBC Video at Zero Hedge; Watch Bove on Bloomberg TV in my previous post)

Insight: Did Corzine's risk taking cripple MF Global? (Reuters)

UPDATE 1-Court OKs trustee for MF Global brokerage (Reuters)

Corzine Had MF Global Leveraged 80 to 1 (Forbes)

Failure of MF Global highlights eurozone risk exposure (Financial Post)

New York Fed Statement Regarding Termination of MF Global Inc. as a Primary Dealer (

JC Flowers Fund Said to See $47.8 Million Loss on MF Global (BusinessWeek)

Somewhat related: The overnight Black Swan (FT Alphaville)

The Repo Handbook by By Moorad Choudhry (Google Books) - Via FT Alphaville

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