IN THE LIMELIGHT: MF Global ::Business Line

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MF Global, a noted futures and options brokerage, filed for bankruptcy during the week as a $6.3 billion bet on Euro-bonds went awry.

The potent combination of high leverage, volatile markets and poor risk management are believed to have lead to the downfall of the brokerage firm.

KILLER LEVERAGE

MF Global's claim to fame is its role as a derivatives broker.

The company was a force to reckon with on the Chicago Mercantile Exchange (CME). Investor concerns over the broker included immense leverage. The company's net-worth was $1.23 billion whereas it held $41 billion in assets.

Proprietary trading, the practice of trading in various securities to boost their own profits, has come under immense scrutiny following the demise of Bear Stearns and Lehman Brothers during the sub-prime crisis. MF Global, while a fraction of the size of those investment banks, will be remembered as the first notable casualty in the ongoing European debt drama.

THE AWRY BET

MF Global had bet $6.3 billion on Euro-bonds. The simple version: It bought European bonds of countries such as Belgium, Ireland and so on. It then pledged these bonds to raise money. MF Global would then pocket the spread between the lower rate at which the lender loaned it money and the return it would enjoy from holding the bonds till they matured.

MISSING MONEY

If the lender gets squeamish about the institution it has lent to or the asset that has been placed as collateral, it can ask for more collateral to be posted.

That is what precipitated this crisis. With losses registered for four consecutive quarters and little money to spare, MF Global initially looked for interested buyers who could provide capital and help the firm tide over the tight situation. An interested buyer Interactive Brokers claimed that over $600 million of MF Global's client funds were missing. The buyer backed out from a deal leaving MF Global with few options but to file for bankruptcy and the protection which comes with the process. It remains unclear if the said funds are indeed missing.

AFTERMATH

While investigations are on, there are a fresh set of questions about who was to regulate MF Global.

There are as many as six agencies which are said to have oversight on MF Global's operations with the CME and SEC being among them.

MF Global has also been accused of mingling client funds with its own. Questions have been raised over MF Global's risk management, reporting policies and its chief Jon Corzine. (former Chief of Goldman Sachs).