Must Read: Presenting The MF Global Black Box: A Minute By Minute Breakdown Of The Doomed Broker's Last Week On Earth

Tyler Durden's picture

In order to get to the bottom of every collapse (or death), a forensic analysis of the last minutes of any transition from life to death has to be perormed. So far, we have only had broad strokes of the key events in the last days of MF Global as obviously many of them will implicate the management team in gross criminal behavior. Until now, when courtesy of the CME we have received a full breakdown of every key events in the chronology of MF Global's last days on earth, starting with October 24, and the rating agency downgrade of the futures broker (the same catalyst incidentally that started the AIG death spiral waterfall... and yet clueless pundits will tell you the ratings are totally irrelevant), and ending with the firm's filing for bankruptcy protection. Anyone who has any interest in the MF Global collapse, which incidentally should be anyone who has capital in third party possession and thus has counterparty risk, should read this narrative from first to last bullet.

October 24, 2011

  • Mike Procajlo ("Procajlo") speaks with Mike Bolan ("Bolan"), MF Global, Inc.'s ("MFGI") Assistant Controller. Bolan gives Procajlo a heads-up that a downgrade is forthcoming and that the earnings call for MF Global Holdings, Ltd. ("MFGH"), scheduled for Thursday, which is expected to report losses, is being moved up to Tuesday.
  • Moody's downgrades MFGH and MFGI.

October 25, 2011

  • Procajlo speaks with Bolan via phone; Bolan confirms there has not been a customer run on the bank since the downgrade news.
  • CME senior management, including Kim Taylor ("Taylor"), Terry Duffy ("Duffy"), and Craig Donohue ("Donohue") are in Florida at the Global Financial Leadership Conference.
  • Taylor is advised by an MFGI customer of rumors circulating about problems at MF Global ("MFG" with respect to information not given as specific to a particular entity) stemming from OTC activity.
  • 11 a.m.: Taylor speaks with Laurie Ferber ("Ferber"), the General Counsel of MFGH, and Steve Monieson, another MFG employee, who tell Taylor that the rumor about problems at MFG stemming from OTC activity is not accurate. Procajlo speaks with Bolan about OTC questions.
  • 11 a.m.: Taylor, Donohue, and Duffy seek and obtain Jon Corzine's phone number. They do not recall speaking with Corzine.
  • 11:54 a.m.: Procajlo emails Grace Vogel at FINRA to see if FINRA has any additional concerns or is imposing any additional requirements in light of the downgrade news.
  • 1:30 p.m.: Taylor speaks with Ferber again, who informs Taylor that MFG does not have any large losses attributable to OTC activity.
  • 2 p.m.: CME Audit Department members, including Procajlo and Anne Bagan ("Bagan"), as well as CME Risk Department members, including Dale Michaels ("Michaels"), Amy McCormick ("McCormick") and Bryan McBlaine ("McBlaine"), speak with Bolan about MFGH's earnings release and Moody's downgrade. MFGH's net losses reported were $192M. The CME employees ask about MFGH's liquidity resources. Bolan confirms that any further downgrades will only trigger covenants related to interest rates. Bolan also confirms the firm is well-capitalized and states that MFGI has not seen customers looking to transfer.
  • 7 p.m.: At this point, CME is taking the following steps to monitor the situation:
    • (1) keeping MFGI on daily financial reporting;
    • (2) monitoring MFGI's positions, exposure, and customer transfer/segregated funds balance changes for signs of a significant loss of customer confidence;
    • (3) drafting a "good standing" press release to have ready if necessary;
    • (4) establishing a process to ensure customers looking for information get answers to their questions;
    •  (5) establishing an industry call process to ensure information flows to other affected clearing houses and regulators; and
    • (6)  considering whether other financial measures are in order, in coordination with other regulatory bodies.

October 26, 2011

  • 4 p.m.: CME arranges an industry call regarding the MFG situation.   
  • 6 p.m.: Taylor, Bagan, Tim Doar ("Doar") and possibly other CME personnel participate in a conference call with Ferber and Henri Steenkamp ("Steenkamp"), the CFO of MFGH. Ferber and Steenkamp give Taylor and Doar the sense that MFGI is actively engaged in conversations with their customers in an attempt to preserve the business.
  • 7:45 p.m.: Taylor emails Ferber regarding CME helping "to ensure a good outcome for MF and your customers. You and your clients are important to us, and the clients' continued protection is paramount."

October 27, 2011

  • MFGI and MFGH are downgraded to junk this day.
    Members of CME's Risk Department — Michaels and Suzanne Sprague ("Sprague") — as well as Scott Malcolm ("Malcolm") from CME's Audit Department — meet with MFGI in New York (planned earlier in the week) to do a risk review, the purpose of which is to talk with the firm about their liquidity and assess the situation. At the time, CME is starting to have concerns that MFGI's liquidity is drying up.
    Michaels, Sprague, and Malcolm meet with a number of individuals from MFGI, including Stephen Hood ("Hood"), MFGI's Market Risk Manager, Dennis Klejna, MFGI's Compliance Officer, the CRO Michael Stockman, and the CFO (Steenkamp). Edith O'Brien ("O'Brien"), MFGI's treasurer, may have been on the phone.
  • At the conclusion of the meeting, CME- continued to have concerns regarding MFGI's liquidity and the ability of the company to continue normal operations without a sale of all or part of the business, notwithstanding MFGI's assurances.
  • 10 a.m.: Procajlo emails Bolan, who is at MFGI in New York, for a copy of the liquidity analysis being prepared by MFGI's broker-dealer side. Bolan responds saying the analysis will be ready later that day. Procajlo never receives the analysis.
  • 1 p.m.: CME decides to send members of the Audit Department out to MFGI in Chicago. Silmar Ramirez ("Ramirez") and Jason Guch ("Guch") arrive at MFGI and request documents to tie out the Daily Statement of Segregation Requirement and Funds in Segregation for Customers Trading on U.S. Commodity Exchanges ("seg. statement") for the close of business as of 10/26. They start working on tying out the 10/26 seg. statement, which shows excess segregated funds of $116,164,132.

    In addition to tying out the 10/26 seg. statement, another purpose of their presence is to have CME people at MFGI to assist in obtaining information quickly if necessary.

    The CFTC — Melissa Hendrickson ("Hendrickson"), Lisa Marlow ("Marlow"), and Tamara Durvin (phonetic) ("Durvin") — is already present on site at MFGI when CME arrives.

    CME begins making contingency plans for transferring MFG customer accounts to other FCMs.

  • 2 p.m.: Individuals from MFGH and CME communicate via email to set up a conference call to discuss a number of items including: (1) MFGI's liquidity; (2) repo counterparties update; (3) any issues with transfers of customers to other FCMs; (4) margin calls resulting from downgrades; (5) amount of segregated assets not currently pledged to a DCO; (6) contingency plans.
  • 2:50 pm: Taylor communicates with Ananda Radhalcrishnan ("Radhakrishnan"), Director, Division of Clearing and Risk, at the CFTC regarding an FCM that has the capacity to take on some portion of MF Global's business. CME President Phupinder Gill ("Gill") also communicates with Radhakrishnan via email throughout the day.
  • 3:53 pm: Procaljo emails a letter to Christine Serwinski ("Serwinski"), the CFO of MFGI, Ferber and Bolan stating "Effective immediately, any equity withdrawals from MF Global Inc. must be approved in writing by CME Group's Audit Department."
  • 4 p.m.: CME arranges an industry call regarding the MF Global situation.
  • 5:30 p.m.: Ramirez and Guch leave MFGI for the night, having completed work on documents and information supplied by MFGI as of that time.

    Evening: Procajlo, Taylor, Doar, Gill and others participate in a call with Ferber and Steenkamp, who are in New York. Ferber and Steenkamp provide assurances that MFGI has appropriate liquidity and also that MFGI is taking steps to reduce its securities inventory (not on the FCM side).

    Additionally, CME encourages MFG to pursue a strategic solution for the company. Ferber provides comfort that MFG is aggressively pursuing a transaction.

October 28, 2011

  • 7:30 a.m.: Ramirez and Guch arrive at MFGI and continue trying to tie out the 10/26 seg. statement. They still have not received all of the documents they requested from MFGI and that they need to complete their tie out. They are also working on tying out the Daily Statement of Secured Amounts and Funds Held in Separate Accounts for Foreign Futures and Foreign Options Customers Pursuant to Commission Regulation 30.7 ("secured statement"). CME and CFTC are in communication throughout the day about MFGI's 30.7 secured computations and MFGI topping up the 30.7 secured assets.   

    The CFTC — Hendrickson, Marlow, and Durvin — is again present on site at MFGI in Chicago and appears to also be working on tying out MFGI's seg. statement.

    Morning: Duffy receives a call from Radhakrishnan and Gensler. Radhalcrishnan and Gensler tell Duffy that the CFTC has concerns about MFG and ask him about CME's thoughts with respect to MFG. Duffy tells them that he does not have the information they seek, and suggests they speak with CME Clearing House personnel. Radhakrishnan speaks with Gill later that day.

    Procajlo and senior management at CME have another call with MFGH, including Steenkamp and Ferber, who assure CME that they have drawn down all or substantially all of their line of credit — which has a limit of approximately $1.2 billion — but are not yet using the money.

    They confirm that MFGH believes finding a buyer is the best option at this point.

  • 3:54 p.m.: MFGI submits its 10/27 seg. statement showing excess segregated funds of $200,178,912.
  • 4 p.m.: CME arranges an industry call regarding the MF Global situation.
  • 6 p.m.: Ramirez and Guch leave MFGI, expecting to come back Monday and finish tying out the 10/26 seg. statement. At this time, Ramirez and Guch do not yet have all of the documents necessary to tie out the 10/26 seg. statement. Based on their review of the documents they have received, they have no reason to believe that the segregated account is out of compliance as of 10/26 close of business.
  • 8:25 p.m.: Taylor emails Radhakrishnan at the CFTC to relay information she received from Ferber. MFGI has a "very motivated buyer" and needs to obtain approvals from the SEC, F1NRA, and CFTC.

October 29, 2011

  • Procajlo is in communication with Hendrickson of the CFTC via phone about a potential sale of MFGI's FCM business.
  • 2:30 p.m.: Taylor speaks with Radhakrishnan regarding a potential asset sale of MFGI's assets. The CFTC is concerned with a transfer because of the CFTC's rules on bulk transfers, though note that they will waive the rule if an asset sale works out.
  • 3:40 p.m.: Taylor forwards to Radhalcrishnan a Bloomberg News report stating that MFGH's Board of Directors will be meeting later that day regarding options to sell the company.
  • 4:30 p.m.: Taylor speaks with Radhakrishnan, who states that the SEC told him the FSA in the UK may be starting to panic. Radhakrishnan says he is going to call the FSA to share insights into his thinking and learn FSA's thinking. Taylor and Radhakrishnan also discuss additional details regarding a potential sale.
  • 7:50 p.m.: Radhakrishnan forwards to Taylor an email chain between Ferber and Radhakrishnan regarding a meeting of MFGH's Board.
  • 11 p.m.: Interactive Brokers ("IB") is the leading candidate, looking to buy either the entire business, or possibly just the FCM.

October 30, 2011

  • 8:30 a.m.: Taylor speaks with Paul Brody ("Brody") at IB regarding details of the potential transaction.
  • 8:45 a.m.: CME is making contingency plans in case the proposed sale falls through.
  • 12:30 p.m.: Taylor receives email correspondence from Radhakrishnan indicating that the CFTC is concerned about having a  contingency plan for MFGI if the IB deal falls though.
  • 1 p.m.: Conference call between CME and IB regarding operations issues in the event the sale is completed.
  • Approx. 1 p.m. - 2 p.m..: Taylor participates in a conference call with the CFTC, SEC, and MF Global.
  • Approx. 2 p.m.: Taylor, Procajlo and others arrive at CME offices to work on matters that need to be addressed to facilitate the MFGI transaction.
  • Approx. 2 p.m.: Hendrickson, who is present at MFGI in Chicago, calls Procajlo and tells him that she has seen a draft of the 10/28 seg. statement and it shows a deficiency in the segregated funds.
  • After 2 p.m.: Ramirez and Guch are sent to MFGI's Chicago office. Malcolm is sent to MFGrs New York office.
  • 4 p.m.: CME arranges an industry call regarding the MFG situation.
  • 4:18 p.m.: Bolan responds to an email from Procajlo, in which Procajlo had indicated that Malcolm is on his way to MFGI's office in New York, by stating that MFGI has been working with Hendrickson at the CFTC and that he will update Procajlo later.

    Late afternoon or evening: Taylor briefs the CME Emergency Financial Committee concerning MFGI's status. The CME Emergency Financial Committee is composed of Donohue, Duffy, Taylor, Gill, and CME Clearing House Risk Committee Co-Chairs James Oliff and Howard Siegel.

    6 p.m.: MFGI forwards to CME a draft press release announcing deal with IB.

  • Approx. 6 p.m. and into the evening: Procajlo and Taylor engage in a series of phone calls with Ferber, Bolan and/or O'Brien.  Initially, Ferber and Bolan explain that there is an apparent deficiency, which they believe is an accounting error. At some point, MFG representatives state that they believe they found the error and it is on the liability side.

    Procajlo calls Ramirez and Ouch, who are at MFGI's offices in Chicago, to confirm that the accounting error has been identified.  Ramirez and Ouch inform Procajlo that MFGI has not found the error.

    Procajlo asks Bolan to explain what the error is in an in-person meeting with Malcolm (CME) and Jerry Nudge (CFTC), who are in MFGI's New York office.

  • 30 minutes or so later, Malcolm calls Procajlo and tells him that Bolan says the accounting error is based on a $450M mis-posting. The error Bolan described to Malcolm is not on the liability side.

    Procajlo again calls Ramirez and Guch to confirm that the accounting error has been identified. Ramirez and Guch again inform Procajlo that they are with MFGI individuals working on the reconciliation, and they are not aware of anyone having found the error.

    Taylor and others at CME have calls with O'Brien regarding the potential error.

  • Approx. 6 p.m. - 7 p.m.: O'Brien, MFGI's treasurer, calls a meeting with the CFTC, CME, and MFGI employees present at MFGI's Chicago office and confirms that MFGI has a potentially huge deficiency in the segregated account due to what MFGI states is an unidentified accounting mistake, such as a mis-booking.

    Later that evening, while at MFGI, CFTC's Marlow gives Guch and Ramirez a disc containing documents the CFTC received from MFGI supporting the 10/26 seg. statement. At this time, however, Ramirez and Guch are assisting with trying to locate the accounting error and therefore do not look at the documents to tie out the rest of the 10/26 seg. statement at this time.

  • 8:30 p.m.: Radhakrishnan talks to Gill.
  • 8:40 p.m.: Procajlo sends an email to Bagan and Debbie Kokal ("Kokal") stating that MFGI's "explanation of the $900 million  shortfall proved to be unsubstantiated."
  • 8 p.m. - 9 p.m.: Procajlo arrives at MFGI. He speaks to CFTC's Hendrickson and gets a status update.
  • Christine Serwinski arrives at MFGI.
  • 9 p.m. - 10 p.m.: Procajlo speaks with Serwinski and O'Brien, who repeat the explanation that the deficiency must be an accounting error and make statements to the effect that it is too big to be anything else.
  • 10 p.m.: Procajlo meets with Serwinski and O'Brien again and asks if MFGI has tried to locate funds MFGI can transfer into segregation first thing in the morning as a contingency in the event that they cannot locate the accounting error.
  • 10:50 p.m.: CME requests via email that "MF not add any further exposure to your house account." CME does not request MFGI to "liquidate the positions that you have in place, but that you not add to them at this point."
  • 11:30 p.m.: The CFTC leaves MFGI's Chicago offices.
  • 11:40 p.m.: Procajlo emails Bagan and Kokal, stating that he is now at MFGI's offices and the shortfall, of approximately $950 million in segregation, is still a "huge issue." No one has found the error, but the belief is still that there is an error. Serwinski is looking into coming up with additional funds to transfer into segregation as a contingency in the event that they cannot locate the accounting error.
  • Procajlo also states that he understands IB is now aware of the potential shortfall.

October 31, 2011

  • 12 a.m.: Ferber emails Taylor, stating only: "we may have it."
  • Approx. 12:30 a.m.: At this time: (1) The IB deal is ready to go — apparently including regulatory signoffs; (2) there is still a $900M apparent segregation shortfall and MFGI says it is an accounting error; (3) the transfer cannot happen until it is clear there is no segregation shortfall; (4) MFGI is starting to identify sources of funds available to top up segregation — and the latest report from MFGI is that they may have sufficient funds; (5) IB and MFGI have spoken to CME and both seem aligned on the importance of the transfer occurring promptly, and state they are open to the suggestion of having MFGI top up segregation and TB making corresponding adjustments to the deal economics.
  • Approx. 1 a.m. —2 a.m.: CME learns the deficiency is real: Serwinski and O'Brien call Procajlo into Serwinski's office and tell him there is an actual shortfall; about $700M was moved to the broker-dealer side of the business to meet liquidity issues in a series of transactions on Thursday, Friday, and possibly Wednesday. Additionally, Procajlo is told there was a loan of $175M of segregated funds to MF UK.
  • CME stops its efforts to look for the accounting error. CME understands that MFGI is attempting to find available funds and get Fedwire to open early so they can start transferring money into the segregated account.
  • 2 a.m.: Taylor emails the FSA and CFTC to let them know that IB has gone home to get some sleep, but may still be interested in the transaction.
  • 2 a.m.: Procajlo communicates via email with Thelma Diaz from the CFTC Washington D.C. office, who is on a regulatory call at the time, and discusses whether Fedwire can open early so MFGI can start transferring funds into segregation.
  • 3 a.m.: Ramirez and Guch leave MFGI for the night. Procajlo stays until 8 p.m. the following day.

    During the night, Procaljo also participated in a phone call with senior MFG employees wherein one employee indicated that Corzine knew about loans that had been made from the customer segregated accounts. CME Group has provided information about this call and related conversations, and the names of the individuals who participated, to the Department of Justice and the CFTC who are investigating these matters.

  • 4 a.m.: Taylor and Gill participate in a call with MF Global and the regulators.
  • 4:37 a.m.: Procajlo emails others at CME with a list of potential assets MFGI has identified that it could move into segregation.
  • The deal with IB to buy MFGI collapses.
  • 6:45 a.m.: Taylor emails CME senior management to inform them that the deal has collapsed, the shortfall is real, and there will likely be a bankruptcy.
  • 7:30 a.m.: Procajlo, Ramirez and Guch are on site at MFGI while MFGI attempts to make transfers of funds back into segregation. The CFTC is also present.
  • 8:30 a.m.: Taylor and Radhalcrishnan communicate via email regarding MFGI bulk transfers.
  • 9 a.m.: MFGH files for bankruptcy.
  • 10 a.m.: Taylor and Radhakrishnan communicate via email regarding the amount of shortfall.
  • 10:30 a.m.: CME's Emergency Financial Committee orders that all trading of MFGI and its customers be for liquidation only. Taylor's assistant emails a letter from Taylor to Dennis Klejna ("Klejna"), Assistant General Counsel of MFGI, stating the Committee's order. The letter further states that CME will no longer permit floor trading to be guaranteed by MF Global, and that CME will process account transfers at the Friday settlement price but that customers will need to re-margin transferred positions.

    Moody's further downgrades MFGI.

    S&P and Fitch downgrade MFGH to default following MFGH's filing for bankruptcy protection.

  • 11 a.m.: A SEPA proceeding is filed for the liquidation of MFGI and a SIPC Trustee is appointed.
  • 12:15 p.m.: CME's Emergency Financial Committee orders that MFGI liquidate its house proprietary positions. Taylor's assistant  subsequently emails a letter to this effect to Klejna and Serwinski. The Committee also authorizes CME to liquidate securities held as house and customer collateral under the control of the Clearing House to cash.

    Throughout the day, Ramirez and CME staff— Guch, Jared Jarvis ("Jarvis"), Procajlo, and Mudassir Arby ("Arby") — attempt to tie out the 10/28 seg. statement.

  • 7 p.m.: CME's Emergency Financial Committee approves a rule change releasing members qualified by MFGI, such that those members could become qualified and guaranteed by another clearing member in order to resume trading.
  • 7:46 p.m.: CME receives the amended MFGI seg. statement for 10/27 showing a segregation deficiency of $213,062,967.
  • 7:55 p.m.: CME's Emergency Financial Committee (i) authorizes the Clearing House to conduct an auction of MFGI's house positions in order to transfer the positions to another clearing member, and (ii) authorizes the Clearing House to accept certain deliveries from MFGI customers through Friday November 4 in order to minimize disruption to the markets.
  • 8 p.m.: CME notifies MFGI that it is suspended as a clearing member on all CME Group exchanges. Taylor's assistant subsequently emails a letter from Taylor to Klejna and Serwinski confirming the suspension.
  • 8:06 p.m.: CME receives MFGI's seg. statement for 10/28 showing a segregation deficiency of $891,465,650.

Source: CME