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Thursday, 3 November 2011

MF Global’s bankruptcy – a fail or a mirage?

 

A mission of MF Global to bring superior market access as well as to provide the powerful trading and hedging solutions to its clients came to the end with the authorization of the board of directors to file for Chapter 11 Bankruptcy Petition on October 31, 2011. According to the quarterly report, MF Global experienced a $191.6 million net loss and Moody’s Investors Service and Fitch Ratings cut the firm’s credit rating to the junk. MF Global announced that regarding to the Europe’s debt crisis, its $6.3 billion worth Short-Term European Sovereign Portfolio deteriorated and the company failed to raise additional capital. However, making loss in derivatives’ trade is almost impossible.

Strike price and date of expiry matter in derivatives’ trading as long as puts, calls and forwards are related through the put-call parity. This relationship gives flexibility to transform derivatives and gain from whatever the circumstances in the markets are. Moreover, according to the balance sheet for the second quarter of 2011, Revenues, Net of Interest and Transaction-Based Expenses comprised $205.9 million which shows that performance from its main activities was profitable. Additionally, the $133.5 million worth Employee Compensation and Benefits made up more than a half of net revenues, the $6.3 billion short-term European Sovereign Portfolio comprised 15% of the $41.05 billion total assets while the $1.2 billion total equity accounted for 2.9% of the total assets.

Bloomberg reported that MF Global performance is under investigation by US regulators after it filed for bankruptcy protection. The news that the company violated requirements to keep clients’ collateral separate from its own accounts was published on the 1th of November and more mismatches regarding publicly available information and reality may be discovered.