Tighter Regulations to Come

Terry Flanagan

Recent events in the markets including the collapse of MF Global have put broker-dealers under increasing scrutiny.

The bankruptcy filing of derivatives broker-dealer MF Global highlighted several concerns facing the markets in recent years. Since the financial crisis, efforts have been made by regulators on increasing the transparency of the markets.

“It will tighten up a lot of the rules,” a chief compliance officer told Markets Media. “It’s always after the fact. They have to be looking at how MF Global had so much leverage, it was even more than what Lehman Brothers had.”

Fear in the markets returned in full force last week when MF Global filed for bankruptcy following a failed $6.3 bet on European sovereign debt.

MF Global did not properly separate its customer accounts and borrowed cash from those accounts to cover losses on its sovereign debt bet. The firm confirmed to regulators that over $700 million in customer funds had been misappropriated.

Clearly, regulators will be on high alert when sifting through the MF Global rubble and will look to tighten their watchful eye over the industry.

“After Madoff there was a new set of rules, and after this they will tighten it up again,” said the executive. “They will ask about how they had so much leverage. I don’t know any other firms having 40 to 1 leverage.”

Evidence of panic and fear was evident in the CBOE Volatility Index (VIX), which shot up to 35 on Nov. 1, from 24 just two days earlier, with U.S. equities also stumbling lower. Volatility has remained high since, as uncertainty continues to surround the ongoing European debt crisis.

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