Allan D Grody looks at how to recover from MF Global, the smallest Too-Big-to-Fail Systemically Important Financial Institution (SIFI) that was on no one’s radar screen.
During MF Global’s debacle, the Trustee reported it transferred 10,000 commodities customer accounts representing $1.5 billion in collateral supporting three million open positions having a notional value of $100 billion. One could think small potatoes when looking at trillion dollar notional values in OTC derivatives markets. However, the Trustee went on to say this represented 40% of all commodity futures exchange activity in US markets and had they not acted swiftly it could have caused serious market disruption. While this says much about quick regulatory response it says a lot more about SIFI and Global-SIFI (G-SIFI) designations based on asset size that doesn’t yet accommodate all significant financial institutions failures.
There is yet another SIFI designation, one based on the criteria of “interconnectedness” yet to be defined. Presumably when the final SIFI criteria is fleshed out firms with 40% market share in financial markets, whether capital, contract or currency markets, will fall within such a SIFI designation. When this occurs we can all take comfort that governments now have the right financial institutions on their radar screens —- each perhaps like the dots representing airplanes in flight on an air traffic controllers screens. What is even more important is that members of the financial industry gain access to such data, for competitive reasons in redacted form, so they can protect themselves from their neighbors’ excesses. Like members of the airlines industry, each airline needs to know the flight patterns of its friendly competitors in order not to collide.