Bloomberg News

MF Global ‘Break-the-Glass’ Plan Outlined Options for Downgrade

February 14, 2012

Feb. 2 (Bloomberg) -- Senior executives at MF Global Holdings Ltd., anticipating collateral calls on European debt trades, raised the possibility of removing the transactions from central clearinghouses designed to reduce risk, according to a contingency plan drafted weeks before the firm’s bankruptcy.

The 23-page “break-the-glass” plan prepared by the broker’s treasury, finance and risk divisions at the request of the board of directors said the bets on European debt were “the biggest draw on cash” as the company confronted a possible credit crunch, according to a copy obtained by Bloomberg news.

The undated document indicates the plan was designed to address the effects of a credit-rating downgrade on the company’s solvency and liquidity. The document instructed employees to maintain daily records of segregated customer funds and “communicate to key clients about safety of their excess and margin balances.”

The company questioned if the firm should hedge the bets, known as “repo-to-maturity,” or RTM, transactions, for up to three months and move them out of clearinghouses run by LCH.Clearnet Group Ltd. The plan concluded that the company needed “a clear strategy and plan for RTM portfolio.”

“How will LCH respond, how much in excess margin will be required, time period, can/will they force us out?” the plan asked in a part of the document marked “immediate decision making required.” The plan indicated the company could move some of the cleared positions to the over-the-counter market because of more favorable terms.

European Bets

Jon S. Corzine, MF Global’s former chairman and chief executive officer, bet $6.3 billion on Italian, Spanish and other European debt in an effort to transform the commodity brokerage into an investment bank. When the firm collapsed, as much as $1.2 billion in client funds set aside as collateral for futures trades went missing.

Michael G. Stockman, the firm’s chief risk officer at the time, said in congressional testimony today that the contingency plan had been prepared in October at the board’s request. The plan was provided to lawmakers, who have not made the document public.

Representative Randy Neugebauer, a Texas Republican who serves as chairman of the Financial Services investigations subcommittee probing the failures, said the plan represented “much more aggressive scenarios” than had been considered by the firm in the months prior.

The Commodity Futures Trading Commission, Securities and Exchange Commission, Justice Department and bankruptcy trustee overseeing the liquidation are investigating the missing money.

MF Global used about $700 million of customer funds to “meet liquidity issues” in the days prior to the bankruptcy, according to CME Group Inc., which had auditing authority over the brokerage.

The CFTC and SEC are in the process of completing Dodd- Frank Act regulations that aim to have most swaps guaranteed by clearinghouses that stand between buyers and sellers. The 2010 financial overhaul aimed to reduce risk in the $708 trillion private swaps market through the use of clearinghouses.

--With assistance from Miles Weiss in Washington. Editors: Maura Reynolds, Lawrence Roberts

To contact the reporter on this story: Silla Brush in Washington at Phil Mattingly in Washington at

To contact the editor responsible for this story: Maura Reynolds at

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