The International Swaps and Derivatives Association (ISDA) issued a strong response to a news article which claimed MF Global was able to gain its vast long exposure to European sovereign debt was through over-the-counter (OTC) derivatives, assserting the information is wrong in substance and fact.
The New York Times (NYT) claimed MF Global, which the holding company filed for bankruptcy protection on October 31, collapsed under the weight of the derivative positions it has placed on European sovereign debt.
The NYT said on November 5 that MF Global’s failing “was a result of complex swaps deals it had struck with trading partners. While those partners owned the underlying assets — in this case, government debt — MF Global held the risk relating to both market price and default.”
ISDA said today (October 8) MF Global did not use derivatives to make its bets on European sovereign debt, rather it was repurchase loan agreements (repos)..
ISDA’s position does appear very plausible. MF Global stated in its third-quarter earnings release on October 25:
“As of September 30, 2011, MF Global maintained a net long position of US$6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal, and Ireland.”
In a withering conclusion, ISDA said, “We would have also thought that reporters (and consultants who are used as expert sources on financial matters) would know that because MF Global was an SEC registered Broker-Dealer and CFTC registered Futures Commission Merchant, regulators at all times had full transparency into the nature and extent of MF Global’s trading and risk positions.”