U.S. Fed bought MBS to cover cancelled deals with MF

NEW YORK Thu Nov 3, 2011 7:39pm GMT

Related Topics

NEW YORK (Reuters) - The U.S. Federal Reserve bought $950 million (591 million pounds) in mortgage-backed securities from other firms to replaced cancelled transactions with bankrupt futures broker MF Global MFGLQ.PK, the New York Fed said on Thursday.

The replacement purchases were part of $5.5 billion in net buying of mortgage-backed securities in the week ended November 2.

The purchase program, conducted by the New York Fed for the U.S. central bank, is the latest measure announced on September 21 to help the mortgage market and the overall economy.

MF Global filed for Chapter 11 bankruptcy on Monday as its shares plummeted in recent days on worries over its perceived risky bets on European sovereign debt. James Giddens was selected as its trustee to liquidate the business.

The New York Fed also stripped MF Global of its status as a primary dealer.

During this time, the New York Fed "took progressive and proportionate steps to manage its exposure to the firm and ensure the ongoing effective implementation of monetary policy through open market operations," it said in a statement.

The New York Fed said it stopped doing new business with MF Global. It also required MF Global to post margin on $950 million worth of forward mortgage-backed securities transactions it had with the company.

The margin was intended to protect the Fed "against potential exposure to MF Global due to fluctuations in the market value of the positions."

When MF Global could not post the margin, the New York Fed declared a default on these deals, cancelled them and bought mortgage securities from other firms.

The cost of replacing the cancelled deals with MF Global was $3.1 million, based on the net difference between the price of the original trades and the price of the replacement purchases, the New York Fed said.

"The margin posted by MF Global was sufficient to cover the replacement cost," it said, so the Fed "did not suffer any loss as a result of the firm's failure."

(Reporting by Richard Leong; Editing by James Dalgleish)

FILED UNDER: