Heed the ‘transparent’ lessons from MF Global: What exactly sparked the dramatic demise of MF Global?… [I]f you leave aside the micro-mysteries surrounding the broker’s back office, in a macro, market sense, the issue of “transparency” is important. In particular, this debacle shows that investors are becoming savvier about some of the macro risks stalking financial institutions….
During the collapse of Bear Stearns, for example, hedge funds suddenly discovered, to their cost, how much power the brokers can wield when they hold customer assets, particularly when there are margin calls. Then, when Lehman Brothers collapsed, hedge funds realised the hard way that British bankruptcy law does not ring-fence customer assets during liquidation. Investors have also made the painful discovery that credit risk and asset price swings are not the only thing which can damage portfolios; counterparty and liquidity risks matter too….
[H]edge funds face growing pressure from their own clients to get better custody services in place…. Now, I would not pretend that this shift towards more transparency is complete, far less perfect; there is more to be done. It is hard for investors to work out where the collateral backing deals is “really” sitting, or what “really” lies inside any structured asset deal. The back offices remain dangerously opaque…