In an age of heightened regulation that witnessed rampant bank and market failure, outright fraud, and more prosecutions of insider trading, one would think that the protection of customer funds would be a moot point. But, it wasn't.

The story of MF Global is just one example of a collapse with ongoing consequences. For Jon Corzine, erstwhile Goldman Sachs chair and New Jersey politico, the undoing of MF Global marks the latest of a series of undertakings with good intentions gone bad. The company declared bankruptcy in 2011 because of the nature of its business. Here's what happened.

MF Global's Beginnings

MF Global was a commodities brokerage house, also known as a futures commission merchant (FCM). It offered clearing and 澳洲幸运5开奖号码历史查询:execution services. The company spun out of Man Financial in 2007 in a less-than-remarkable 澳洲幸运5开奖号码历史查询:initial public offering (IPO) at a time when global 澳洲幸运5开奖号码历史查询:financial markets were under stress.

It had ambitions to become a financial services firm akin to Goldman Sachs or JPMorgan. Blighted with a bent for aggressive (even excessive) risk-taking, the firm posted a big loss. But it gained a substantial 澳洲幸运5开奖号码历史查询:capital infusion from J.C. Flowers, which helped put the firm back on its feet, even if only for a short while. The company was also plagued by a scandal in 2008 involving a rogue trader in Memphis that resulted in a $141 million loss for the firm.

Jon Corzine was hired in 2010 to help turn the firm around. Corzine, who was a former chairman of Goldman Sachs, U.S. Senator, and New Jersey governor, put together a team that would share his ambitions for MF Global, yet with few naysayers on either the management team or the board.

A fatal flaw in the management design and an apparent violation of the canons of enterprise 澳洲幸运5开奖号码历史查询:risk management was his assumption of the role of both 澳洲幸运5开奖号码历史查询:chief executive officer (CEO) and head trader—two functions that should remain separate. The role and responsibilities of the 澳洲幸运5开奖号码历史查询:chief risk officer (CRO) were insufficient.

MF Global's Downfall

The firm's undoing resulted from what many call a repurchase to maturity trade, whereby the firm financed its 澳洲幸运5开奖号码历史查询:balance sheet by posting collateral to a counterparty that extends the firm credit, then repaid the 澳洲幸运5开奖号码历史查询:counterparty when the collatera💫l—in this case, euro-denominated sovereign debt—matured.

Some, however, disagree with this interpretation, calling the firm's transaction a 澳洲幸运5开奖号码历史查询:total return swap, which is a form of 澳洲幸运5开奖号码历史查询:credit risk management. In this scenario, MF Global sold protection to buyers long the 澳洲幸运5开奖号码历史查询:underlying assets (eurozone sovereign credits) and received both yield and 澳洲幸运5开奖号码历史查询:capital gains from them. MF Global sold insurance and purchased price and credit default risk of what were increasingly shaky assets.

As the seller who received the total return on the reference asset, MF Global did not own the reference assets. Rather, it was subject to price and 澳洲幸运5开奖号码历史查询:default risk in an 澳洲幸运5开奖号码历史查询:off-balance sheet (OBS) transaction, being sy🍨nthetically long on the assets and their attendant rওisks.

A drawback of the total return swap is that the underlying assets must be easily tradable, that is, liquid. European sovere🍰igns failed to meet this criterion. Who wanted꧟ to conduct business with a firm subject to increasing default and liquidity risk?

MF Global ended up declaring bankruptcy on Oct. 31, 2011. This would be the eighth-largest corporate failure in the United States. According to reports, more than $1.6 billion was missing from the firm's customer accounts.

The Aftermath

These circumstances ultimately scuppered the firm's salvation by Interactive Brokers in the 11th hour. The rash of credit downgrades would not exactly enhance the firm's standing. While no eurozone country defaulted, the perception became the reality, as lenders to the firm issued 澳洲幸运5开奖号码历史查询:margin calls, fearing for their safety.

MF Global admitted to accessing what should have been separate client funds to meet its obligations. This latter action would appear to constitute fraud, but investigations by the 澳洲幸运5开🍃奖号码历史查询:Securities and Exchange Commission (SEC) and the Dep𓄧artment of Justice yielded no criminal charges ag♛ainst MF Global or its officers.

In January 2017, a federal court ordered Corzine to pay a $5 million civil penalty in a suit settled with the 澳洲𝓡幸运5开奖号码历史查询:Commodity Futureꦉs Trading Commission (CFTC). By February 2017, all of the misappropriated funds were restored to customers and creditors from liquidated bankruptcy assets.

Unlike bank deposits or brokerage accounts, futures accounts carry no backstop akin to 澳洲幸运5开奖号码ᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ历史查询:Federal Deposit Insurance Corporation (FDIC) insurance or 澳洲幸运5开奖号码历史查询:Securities Investor Protection Corporat🎃ion (SIPC) coverage.🉐 For this reason, account seg🌟regation is deemed sacrosanct.

The Bottom Line

Since there were no systemic ripple effects, MF Global doesn't seem to have been 澳洲幸运5开奖号码历史查询:too big to fail. The implications for other similar firms aren't insignificant, though. There's been discussion to design an insurance system for futures brokers along the lines of a SIPC or FDIC, as existing regulation appeared less than up to the task of protecting clients. The boondoggle visited upon MF Global casts yet another pall on the financial services 🐻profession and its trustworthiness.