MF Global General Counsel Advocated for Crucial Regulatory Change

Did the general counsel for MF Global Holdings Ltd. play an important part in the firm’s demise? Veteran in-house attorney Laurie Ferber, who has been MF Global’s GC since 2009, is the subject of a Bloomberg Businessweek feature that examines the key role of an obscure piece of regulation—and the changes to it for which Ferber was a “long-time advocate.”

In “Tiny Rule Change at Heart of MF Global Failure,” columnist and former investment banker William D. Cohan zeroes in on Regulation 1.25, a Commodities Futures Trading Commission rule. He writes:

Before 2000, the rule permitted futures brokers to take money from their customers’ accounts and invest it in a number of approved securities limited to “obligations of the United States and obligations fully guaranteed as to principal and interest by the United States (U.S. government securities), and general obligations of any State or of any political subdivision thereof (municipal securities.)” That is, relatively safe securities with high liquidity.

Ferber was one of the finance-sector advocates for a change to the rule that would allow firms to do “internal repos,” which are short-term securities investing with money from customer accounts. The updated rule allowed “investments in general obligations issued by any enterprise sponsored by the United States, bank certificates of deposit, commercial paper, corporate notes, general obligations of a sovereign nation, and interests in money market mutual funds.”

As Cohan notes, “This practice, of course, may well be the centerpiece of the MF Global disaster.” He also speculates on the role that the CFTC rule will have in the ongoing investigations into the firm’s catastrophic failure:

We’ll see if MF Global will claim that the changes to Regulation 1.25 during the past decade gave it cover for its actions. It now seems clear that investing customer money in the risky, distressed long-term bonds of European countries shouldn’t have been permitted. Then again, it’s more than a little amazing that the CFTC allowed futures brokers like MF Global to do internal repos with client funds under any circumstances.