Print Tech Insights 6: 11/6/11 – Compliance Tech & MF Global

Compliance Tech & MF Global -

by Larry Goldfarb

The recent demise of MF Global at first glance appears to the case of an over reaching CEO combined with lax regulations and perhaps intimidated regulators.  Jon Corzine, its CEO, was reported to have bought $Billions in debt from Ireland, Spain, etc. thinking that the European Union (EU) would backstop the losses.  As we know, the EU came out recently with a debt bailout plan for Europe that included paying creditors only 50 cents on the dollar.  Upon hearing the news, Repo counterparties and lenders became nervous and stopped trading with MF Global. The firm declared Bankruptcy on October 31st.

One of the unstated problems at MF Global revolved around its compliance technology.  The firm grew significantly over the last few years by acquiring small groups of traders, small brokerage firms and research teams.  In many cases, the compliance systems that were in place when the firm split up from the Man Group in 2005 were still in place when the firm declared bankruptcy.  Monitoring and exception processing were decidedly manual and required transposing data from multiple systems into spreadsheets.  Reconciliations from the trading systems with the clearing systems were manual and difficult to accomplish.  Processes like these could not help but contribute to lax compliance processes and the absence of a strong culture of compliance.  When traders and managers know that their indiscretions produce exceptions and reprimands, they are more likely to modify their behavior.

News accounts mention that traders were buying sovereign debt “under the radar.”  Would this have been possible at a firm with a strong culture of compliance like JP Morgan or Goldman Sachs?  Their trade monitoring systems would have kicked out exceptions that would have produced reports to their risk management committees.  Given the lack of an integrated system architecture, it is unclear that MF Global had the required capability to have these meetings prior to the demise.

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At a firm I spoke to recently, the Chief Compliance Officer did not want to upgrade their trade monitoring systems because as he put it, the more we monitor and produce evidence, the easier it is for Finra to identify issues and write us up.  He said that Finra takes the approach that the harder it is for them (Finra) to get the data, the less they look at.  In view of the systems issues at MF Global and the resulting black eye for Finra and the industry, perhaps this approach should be reconsidered.

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Last week I wrote about the Schwab acquisition Compliance11.  One of my readers noted that I did not properly disclose the fact that as a co-founder, I am a shareholder of Compliance11.   My comments reflected a general view on the industry.  Of course, most of you know that I currently work for a competitor, StarCompliance, a firm that sells employee conflict of interest software.

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