Best practice for risk managers after the collapse of MF Global.
MF Global taught a hard lesson. The possibility of
catastrophic failure came as no surprise after Lehman and Bear
Stearns. Yet no one in 2011 was prepared for all the
transgressions that surrounded one company’s
abrupt deterioration and the hundreds of millions of dollars
for which an army of federal investigators has yet to
The industry’s lesson is the stark necessity of
counterparty risk management on all sides, no matter the
regulatory infrastructure, the familiarity of relationships and
practices, or the comfort of ratings from agencies with
conflicted fee arrangements. As clearers become more sensitive
to high frequency trading and direct-access accommodation,
clients need to be aware of correlations in trading strategies
that appear in times of acute stress. Indeed, the greater the
accommodation to one firm, the more it can infer from the sum
of similar accommodations granted elsewhere. The most
accommodative direct-access clearer, for years, was MF
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