MF Global Unauthorized Wire Movements: A Signal for Industry Change

Edward Haslam
December 1, 2011

When firms put a business process under a microscope seeking improvement, the result might be automation of the workflow, integration with other systems, and/or implementation of the straight-thru processing. The particular areas of focus typically depend on the industry climate (regulatory and investor concerns) – for example, when there was a need to quickly and accurately execute trades to take advantage of the market changes or trends, many firms focused on trade order management processes and systems. Not surprisingly, there has recently been a heightened interest in processes related to safeguarding of cash; when a large firm like MF Global fails, this is a wake-up call for the industry at large.

In the case of MF Global, the main concern is the customer money that went missing while the situation was unraveling. A recent article published by Dimond Kaplan & Rothstein states that “Under U.S. Commodity Futures Trading Commission rules, customer money was supposed to be held in segregated accounts. It appears that MF Global failed to do that, and instead used customer funds for its own purposes. It has been reported that there are unexplained wire transfers from MF Global.” Key to this statement is the issue around management of wire instructions and the approval of cash movements.

Last year, IntegriDATA (third-party cash wire management solution provider) conducted an independent survey on cash wire movement practices. The survey revealed that for many firms the process remains manual or is only partially automated. Most respondents agreed with the statement that the level of automation needs to be increased across all areas of the process. The survey also indentified some major pain points in the process including creation of wires, integration with internal systems, and the delivery of wire requests.

Cash wire automation is, in a sense, the final frontier for transaction processing automation. Until recently, investors had been “comfortable” with investment managers’ manual processes, so long as these were secure. Investors are now demanding improved security and controls around cash management, and these items are becoming important selling points for new clients. Also, due to the major regulatory changes, in the near future many firms will be facing more rigorous control and due diligence reviews.

In the past year, IntegriDATA has had active discussions with over a hundred buy-side firms (various sizes and business nature) as well as most major prime brokers and custodians. There is certainly a universal acknowledgment of the need for the automation of wire processing across the board. This is especially relevant to firms with high volume of transactions (e.g. bank debt trades, FX settlements, collateral movements, intra-fund transfers, expenses), in which case a higher degree of risk is taken on, and the demand for multiple levels of approval and review rises in tandem. Prime brokers and custodians also wish for more straight-thru processing in this area.

If your firm is seeking to further automate its cash management functions – either through purchasing a third-party system or building a solution in-house, we suggest including the following key objectives: ­

  • Security through segregated roles and permissions
  • Single point of sign-off for all wires
  • Historical storage of all wires
  • Transparency of all workflow activities
  • Integration with internal systems
  • Electronic STP for wire movement delivery

Find out how cash wire movement best practices can be achieved via IntegriDATA’s CashWire Management System.