MF Global and Re-Hypothecation?

By: Ian Campbell | Tue, Dec 13, 2011
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I think you may find this commentary of significant value if you are unaware of the 'money manager' practice of re-hypothecation, or are not familiar with the detail of it and its possible implications in the current world economic and banking environment.

A December 9 article titled 'MF Global judge approves (U.S.)$2.2-billion transfer to customers' - reading time 4 minutes - reports on just what its title says. I suggest you read this article, which reports on the findings Friday of U.S. Bankruptcy Judge Martin Glenn who overruled MF Global creditor objections, and approved the distribution request made by the liquidating trustee. The article also reports:

Before turning to a general discussion of re-hypothecation, it seems to me that anyone participating as an investor or trader in the financial markets must in their own best interest seriously reflect on what the MF Global bankruptcy, and how MF Global got there currently may broadly reflect on the financial positions and conditions of investment banks and hedge funds, and depending on their own individual investment circumstances how these things may impact their own investments. I strongly recommend you discuss this with smart financial people you know, and with your investment/trading advisor(s).


Turning specifically to the concept of, and issues around, re-hypothecation, I suggest you read pages 10 - 18 of a 19 page PDF titled 'Trading With Other People's Money, The Collapse Of The World Financial System - Why MF Global Is Worse Than Europe' - reading time for the 9 referenced pages 15 minutes.

While I read the first nine pages of the PDF I suggest you scan them or simply go directly to page 10. I found most of the content of the first nine pages to be an 'author's rant' about the U.S. political and legal system. While pages 10 - 18 beginning with the heading 'Trading With Other People's Money - The International Loopholes That Are Threatening The Entire Financial System' include some of that, those pages discuss the concept of re-hypothecation at some length. Re-hypothecation as the author describes it occurs "when a bank or broker utilizes collateral posted by clients, including those of hedge funds, to back the broker's own trades and borrowings" (see top of page 15 of the PDF). The author says that this practice today involves trillions of dollars and is "faultlessly legal" under current U.S. (and I think after reading the PDF in some applications, U.K.) law. On page16 of the PDF the author reproduces what he claims to be Clause 7 of MF Global's client agreement, or at least one of MF Global's client agreements if indeed it had more than one. That Clause 7 is quoted as:

"7. Consent To Loan Or Pledge You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, re-pledge, transfer, hypothecate, re-hypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements (repos) or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control."

As I read the referenced PDF, it is this clause that enabled MF Global to re-hypothecate funds under its management, and make the bet on the aforementioned U.S.6.3 billion in Euro Sovereign Debt that it apparently did - and which transaction 'went south' and triggered its October 31 bankruptcy filing.

The disconcerting thing about what is said in the referenced PDF is, of course, if what it says about re-hypothecation of customer funds in the case of MF Global is accurate, how many other 'MF Globals' currently are out there waiting for the next 'shoe to drop?

It seems to me if there is anything to what is said in the referenced PDF, that if you invest or trade in the financial markets through intermediaries that you check with your investment advisor(s) to determine if any (or all) of your investment funds are subject to re-hypothecation as that term is used in the PDF. Having followed the MF Global situation for several weeks now, and having read the referenced PDF, my view is 'checking this re-hypothecation issue out' in the current investment environment is nothing more or less than 'chicken soup'. It can't hurt and it might help. Let me know what you find out by writing to me at

I have already forwarded this PDF to my own investment advisor (who was unaware of re-hypothecation), have discussed the content of the PDF with him, and have requested that he speak with the senior person in his firm to determine if what the PDF says makes sense or not. Again, I suggest you do likewise with your own advisor(s).



Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Business Transition Simplified

Through his website and his Business Transition & Valuation Review newsletter Ian R. Campbell shares his perspectives on business transition, business valuation and world economic and financial markets influences on those two topics. A recognized business valuation and transition authority, he founded Toronto based Campbell Valuation Partners Limited (1976). He currently is working to bring his business valuation and transition experience to both business owners and their advisors in our new economic, business and financial markets normal.

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