Accounting Law

MF Global's Accounting Is Under the Microscope

SEC is talking to FASB about “repurchase-to maturity” agreements, which MF Global used in off-balance-sheet accounting, and whether more disclosure is needed, Schapiro says.

By Tiffany Kary

An accounting technique used by MF Global Inc., the failed broker-dealer, is being reviewed by the U.S. Securities and Exchange Commission, agency Chairman Mary Schapiro said.

The SEC is in talks with the Financial Accounting Standards Board, which sets accounting standards, about “repurchase-to maturity‚” agreements that MF Global used in off-balance-sheet accounting, Schapiro said today during a hearing before the U.S. Senate Agriculture Committee in Washington.

“We are talking with FASB about whether we need more disclosure of those,” Schapiro said. They are the only type of repurchase agreements that can be used off balance sheet, she said, speaking alongside Commodity Futures Trading Commission Chairman Gary Gensler.

Both the SEC and FASB also are looking into whether the methods MF Global used to account for its investments in European debt were legal.

“How is it possible that someone is able to bet the farm here, multiple times, and it disappears from the balance sheet because of this repo-to-maturity technique?” asked Senator Kent Conrad, a North Dakota Democrat, noting that the technique made it appear as though the risk had been “sold.”

“That is a loophole so big you can drive a Mack truck through it,” Conrad said. “If that‚’s not closed, we should ask ourselves what we‚’re doing.”

European Bet

MF Global Holdings Ltd., the parent company of the broker once run by former New Jersey Governor and Goldman Sachs Group Inc. co-chairman Jon Corzine, filed the eighth-largest U.S. bankruptcy after a wrong-way $6.3 billion bet on bonds of some of Europe‚’s most indebted nations.

To execute his European debt trade, Corzine used repurchase agreements, or agreements to repurchase in the near future at an agreed-upon price. In earnings calls, MF Global said it was seeking to profit from the difference between the yield it received on the European bonds and the interest rates it paid under the repurchase agreements.

While MF Global disclosed in a May 20 filing that its net holdings among five European countries was $6.3 billion, it also said the figure was “net of hedging transactions.‚” The firm had actually expanded its bets to $11.5 billion as of June 30, according to data in the SEC filings.

Account Shortfall

James Giddens, the trustee overseeing the liquidation of the broker-dealer, has said the shortfall in MF Global‚’s U.S. segregated customer accounts may exceed $1.2 billion. Many of MF Global‚’s customers were farmers who used futures accounts to hedge prices for grain and other products.

 “The economic welfare of the U.S. relies on people being able to protect themselves against price risks -- of corn or oil or wheat or interest rates going up or down,‚” Gensler said when asked about the importance of restoring confidence in commodity markets.

Separately, Gensler said the CFTC may consider tightening regulations on how segregated accounts are defined.

 “It‚’s pretty straightforward; segregated accounts are meant to be segregated,‚” Gensler said. “We did as an agency back in 2005 widen that. It‚’s my hope we can narrow that back down again.”

SEC Examiners

Other regulatory changes that may help prevent another MF Global include periodic checks on segregated accounts, the two chairmen said. Schapiro said her agency has 300 examiners for 5,000 broker-dealers and Gensler said his has fewer than 20. Both rely on self-regulating bodies, such as the Chicago Mercantile Exchange, which oversees futures commission merchants such as MF Global.

Originally published on Reprinted with permission from Bloomberg News. Story copyright 2014 Bloomberg News communications. All rights reserved.