Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Kudos to Finra on MF Global

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I know it's not considered particularly cool to praise financial regulators but from the looks of things, Finra did a pretty good job on MF Global.

Reuters reports:

Around June, the Financial Industry Regulatory Authority (Finra), one of many regulators that policed the firm, became concerned that MF Global had a substantial position in European sovereign debt and was not appropriately holding capital against it, the source told Reuters.

Finra began conversations with MF Global about whether it was appropriate under Generally Accepted Accounting Principles to consider the exposure to be off balance sheet, according to the source, who was not authorized to speak publicly.

Finra felt that regardless of GAAP, MF Global should recognize how much the market value of the sovereign debt-related holdings had declined, and consulted with the U.S. Securities and Exchange Commission, the source said.

After lengthy conversations with Finra and the SEC, MF Global yielded and infused the additional capital called for, something the firm disclosed on September 1.

It seems to me a very good thing that regulators were able to see beyond the accounting rules into the economic reality. MF Global had exposure to mark-to-market changes in the prices of European bonds because its repo counterparties could demand additional collateral.

Those additional collateral demands would not be irrational since counterparties are entitled to not have to take on issuer risk in repo transactions. That's the whole point of them.

So making sure MF Global had capital to meet likely collateral calls was a good idea. Forcing MF Global to disclose its positions was also a good idea, since it is very obvious that the market regarded them as important.

What Finra did here, it seems, is create transparency and enable the market to render a judgment on the financial viability of MF Global.

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