SEC Seeks Full Disclosure of Banks’ Sovereign Debt Holdings

The Securities and Exchange Commission is urging banks to make public details of their sovereign debt exposure in the wake of MF Global’s bankruptcy.

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The regulator’s Division of Corporation Finance issued guidance on Friday saying that disclosures by publicly-traded financial institutions have been “inconsistent in both substance and presentation,” making it difficult for investors gauge the amount of risk being taken by banks.

The SEC said that banks should reveal both direct and indirect exposures “separately by country, segregated between sovereign and non-sovereign exposures.” It also said they would provide more details on hedging and the sums they would have to raise should they be forced to close out their positions.

This non-binding guidance was issued shortly after MF Global filed for Chapter 11 bankruptcy protection about two months ago. Within a week of revealing its $6.3 billion bet on European sovereign debt, MF Global found itself in the midst of a liquidity crunch spurred by investor and customer concern over the broker’s debt holdings.

In learning more about how banks reduce the risk of credit losses, including derivatives and off-balance-sheet financings, the SEC hopes to reduce the threat of further liquidity shortfalls.

Meanwhile, the Financial Industry Regulatory Authority is stepping up its oversight of leverage at brokerages after concluding that MF Global had not been fully candid in disclosing its exposure to European sovereign debt as little as one month before filing for bankruptcy.

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