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Old Dec 9th, 2011, 09:56 AM   #1
western
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Join Date: Mar 2008
Posts: 161
I found some very interesting data today.

In this FT times article, the head of the CME states that auditors visited MF Global on Thursday, Oct 27th and found everything to be ok. Segregation of customer funds was "intact." However, on Friday, the very next day, the segregation report showed a $900million shortfall.

http://www.ft.com/cms/s/0/09bdd8ea-2...#axzz1g34ckmF8

So what happened between Thursday and Friday?

Rehypothecation is what happened.

In this FINRA report, on page 9 it states that firms only need to make rehypothecation calculations at the end of the week.

"Under Rule 15c3-3, this computation must be made weekly, for those firms that carry customer funds exceeding $1 million, as of the close of the last business day of the week,"

http://www.finra.org/web/groups/indu...es/p122388.pdf


My guess is that MF global had a custom of pledging out customer assets every friday as part of their re-hyopthecation efforts. This caused the discrepancy of customer funds from thursday to friday, and since MF global declared bankrupcy during the weekend, those customer funds ended up being stuck at outside firms.
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Old Dec 9th, 2011, 10:03 AM   #2
western
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Join Date: Mar 2008
Posts: 161
If my hypothesis above is true, it has very disturbing implications for the securities industry.

It means that the missing customer funds at MF Global are NOT a result of active fraud or theft by MF executives, but rather an unintended side-effect of a perfectly legal mechanism that allows brokerage firms to transfer customer assets to outside firms.
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Old Dec 9th, 2011, 10:27 AM   #3
Swan Noir
 
 
Join Date: Jun 2009
Location: NYC
Posts: 2,377
Keen observation. It is amazing how much you can do in the investment business that is perfectly within the law and in accordance with the regulations in place that puts client funds at risk.

It is a sewer of legal corruption built upon a base of insane leverage that uses customer capital to gear it all up. Whether your hypothesis pans out as true or not ... good insight!

Quote:
Quote from western:

If my hypothesis above is true, it has very disturbing implications for the securities industry.

It means that the missing customer funds at MF Global are NOT a result of active fraud or theft by MF executives, but rather an unintended side-effect of a perfectly legal mechanism that allows brokerage firms to transfer customer assets to outside firms.
    Quote
Old Dec 9th, 2011, 09:24 PM   #4
stock777
 
 
Join Date: Jul 2001
Posts: 16,315
really. do you imagine it would take them a month to figure this out if thats all it was?
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Old Dec 9th, 2011, 09:39 PM   #5
jnbadger
 
 
Join Date: Nov 2004
Location: Wisconsin
Posts: 1,647
I had no idea. After all of the series 7 BS I went through, and the CE I still go through, I always thought it was mandatory that funds be kept segregated constantly. Not reconciled once per week.

Jesus, that is truly scary.
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Old Dec 9th, 2011, 10:03 PM   #6
western
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Join Date: Mar 2008
Posts: 161
Quote:
Quote from stock777:

really. do you imagine it would take them a month to figure this out if thats all it was?
Who knows. If all the money was there as of Thursday, but suddenly gone Friday, you'd think it would be a simple matter of retracing whatever transactions occured on Friday.

It may be a matter of conflicting motivations.

MF's counterparties probably have a good sense of what happened, but they are keeping quiet because they want to hold onto the MF funds they already have and not give them back to MF's customers.

The trustee has an incentive to drag this out as long as possible to rack up his billing fees. Its the same guy whose doing the Lehman case which is still going on.

The regulators may be afraid of letting the public know that MF's failure was not due to fraud but rather a result of poorly designed rules that affect all brokers.
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