India Learns Lessons from MF Global Debacle
By Shefali Anand
India’s stock market regulator, the Securities & Exchange Board of India, seems to be a believer in learning from others’ mistakes.
SEBI officials have been searching for lessons from the debacle at U.S. brokerage firm MF Global Holdings Ltd., which went bankrupt late last year.
More than three months after its collapse, U.S. and other officials have not been able to find around $1.2 billion of customer money that had been entrusted to MF Global. A sizeable chunk of this money could have “vaporized” as a result of chaotic trading at MF Global during the week before the company’s Oct. 31 bankruptcy filing, a person close to the investigation told the Wall Street Journalrecently.
Typically, when clients entrust their money to a broker to buy securities, clients’ money is kept in a separate account and is not to be used by the brokerage company for its own use. However, many officials believe that some MF Global employees may have effectively used clients’ money to meet MF Global’s needs, such as putting it up as collateral to banks. Investigations are ongoing.
Some fear that many clients of MF Global may never get their money back.
In an effort to prevent such an occurrence in India, SEBI is now looking at beefing up systems in India for keeping client assets and brokers’ assets separate. Ensuring client segregation is an “extremely important” item on their regulatory agenda for this year, said SEBI executive director S. Ramann at a conference in Mumbai on Tuesday.
He said at present in India, when a client’s money moves into a broker’s account, it is recorded and visible to the regulator. However, when the broker sells securities on behalf of the client, the money flows into a pool account which has money from other clients as well. Here, it can be murky to figure out who exactly owns what and how the money is being used.
“What we really need to see is a greater amount of audit trail,” said Mr. Ramann.
He didn’t specify if, or when, new rules would be issued.