now introduce our panel today, mr. michael roseman, former chief risk officer mf global holdings limited, michael stockman, global chief risk officers m flood watch global holdings limited. gentlemen, before we proceed, ask you to raise your right-hand. do you solemn swir and affirm that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth? >> i do. >> thank you. without objection your written statements will be made part of the record. you'll be recognized five minutes to summarize your testimony. mr. roseman. >> chairman, ranking member, and members of the subcommittee, my name is michael roseman, former risk officer of mf global group from january 2008 to january 2011. thank you for the opportunity to testify today. i hope that my comments will help you continue to build on your knowledge of the events

that led to the collapse of mf global. >> mr. roseman, i would ask you to pull your microphone a little closer to you there. >> that good? regarding my background aerospace engineering graduating from the university of north carolina -- university of delaware as aerospace engineer. 1984 received an mba from north carolina and pursued a career in financial services. i first joined a company for risk analysis. moved and co-managed us dollar tc option portfolio. for a number of years before returning to risk management as global head of market risk. in 2001 i joined a bank in montreal as head of u.s. risk oversight onfor all trading, underwriting and investment

activities in the united states and with a mandate to strengthen risk management activities and capabilities in the u.s. then in 2004, i joined new edge as chief risk officer of the americas, again, with a mandate to elevate risk management capability sz to fully support growing brokerage businesses. i led and coordinated efforts to implement new best practice policies, systems, analytics and controls and supported businesses agreeing both transparency to and governance of the risk across organizations. enaugust of 2008, i joined mf global as chief risk officer reporting to cfo responsibility for risk department worldwide. i also had mandate to elevate risk management capabilities, support objectives and risk management recommendations made by two consulting firms that had been hired by the company.

as coo provided leadership for and oversaw adherence to risk management framework across all categories of risk including chairing of the monthly enterprise risk committee. further i was a member of executive mlgt team and provided regular reports to the board. over the next two years i coordinated closely with executive management and the board to implement a new comprehensive enterprise risk management framework including establishment of new risk management committees, enterprise risk policies and board approved risk statement with associated delegations of authority across all categories of risk. among other things i coordinated either enhanced risk systems, strengthened the 24 hour global risk monitoring, comprehensive enterprisewide controls across the organization and with the ceo to establish a culture of sound risk management throughout the company. as a key part of my cro

responsibility, i reviewed mg global's firm wide exposure to the risk. approved risk to executive management and to the board. both executive management and the board received a monthly enterprise risk report that detailed firmwide exposures against risk appetite and approved limits. as cro i presented the board limited requests from executive management along with their associated risks. regarding the sovereign debt positions, mfo had global and sovereign limits in place to control exposure of all activities in all countries as well as to control specific sovereign exposures. with respect to italy, spain, portugal, ireland and greece, there were sovereign limits in place to support the european brokerage activity prior to mr. corzine joining mf global. these limits were well within

the company's approved risk appetite, adjusted when conditions deteriorate in greece and i believe positions in march 2010 were less than $500 million total across these issuers. in june, july 2010 i received requests to adjust the european sovereign limits from business units. i reviewed the positions and limits in detail with the business heads and with mr. corzine. i expressed my cautions on the request, outlined potential capital risk by the credit default swap market. along with continued political and financial uncertainty in relevant countries. while mr. corzine and i had different views on default risk we agreed on a $1 billion limit across sovereigns. by mid september i recall that the position limits increase $15 to $2 billion. during this time period i expressed increasing concerns

with regard to potential capital risk associated with growing positions and began to express cautions on the growing liquidity risk. additionally around this time the strategy significantly increased through security trades as being evaluated, given a profitability of the transactions and the importance of generating earnings. at this point i indicated to mr. corzine we would need to consult the board for approval and increase sovereign limits given increased materiality of the risk as related to the board's approved risk appetite. as such the decision was made to consult with the board to discuss the strategy, the risk, and the sovereign limits and subsequently sovereign limits presented to and approved by the board. by late october i recall the positions were approaching some $3.5 to $4 billion. i was asked to present another to the board on behalf of kmek tiff management to increase the

total of the sovereign limit. at this point not only was i concerned with the capital risk. but given the size i was now concerned with the liquidity risk relative to risk appetite and take into account liquidity risk by other positions held by the company. i began discussed my concerns about the positions and risk scenarios with mr. corzine and with others. however, the risk scenarios presented were challenges being implausible. at the end of 2010 board meeting, at the end of november 2010 board meeting, i presented a new request along with a detailed analysis, according risk stress scenarios, margin requirements price changes securities and as well as potential initial margin calls from the repo counter-parties. these were presented at sovereign levels as well as coordinated levels across all sovereigns and repo

counter-parties, an analysis of cbs market and highlighted significant risk given sovereign default risk associated with unresolved issues in europe. during this meeting all the risks were debated. in particular liquidity scenarios were debated and challenged by some members of the board as not being plausible. ultimately the board approved the request conditioned on limits evaluated again in 2011, which is when i left the company. i'd be happy to answer the committee's questions. >> thank you. you're recognized. >> thank you, sir. chairman, ranking member, distinguished members of the subcommittee, thank you for the opportunity to make this brief statement. i am deeply saddened by the bankruptcy of mf global and its impact on its customers,

shareholders, and employees. although i was only at the company for approximately nine months, i hope my testimony today will help the committee in obtaining a clear picture of what happened at mf global during my tenure at the company. i worked in the financial service industry for more than 25 years. of particular note i served as risk officer at ubs for a decade, eventually rising to the position of chief risk officers of the americas for that institution. since 2006, i've been a member of the mba advisory board at dartmouth college, also served as a visiting scholar in the fall of 2009. i began interviewing for the position of chief risk officer at mf global in the fall of 2010. during the interview process, i was informed mf global was in the process of transitioning it's business model from a traditional commodities broker to a full scale investment bank and that the company was seeking

a new risk officer with experience and skill set to assist in that transition. in or about january 2011, mf global offered me the position of chief risk officer and i joined the company in that capacity reporting directly to the chief operating officer. responsibilities included assessing market and credit risk for the company. i provided analysis about these risks to senior management and the board who used this in setting the company's business strategy. i was ably assisted in performance of my duties by a strong staff of approximately 60 dedicated employees located in company offices around the world including u.s., europe and asia. although the chief risk officer did not have formal responsibility for managing the company's liquidity risk, my staff and i performed numerous

analysis measuring the company's liquidity needs under various stress scenarios. my understanding, my responsibility was largely the same as my predecessor mr. roseman. there's been substantial discussion about mulch f global's participation in reaction of sovereign debt known as repo to maturities. the company's european somp debt trading strategy was firmly in place when i joined the company in late january 2011, as maengsed by mr. roseman at that time the board approved a sovereign limit of $4.75 billion. after i joined mf global the risk department regularly analyzed the company's sovereign positions. the first several months of my tenure based on analysis performed by the can see department, i believe the risk profile was acceptable in light

of the then prevailing market conditions. among the many metrics supporting this assessment were credit ratings, kraed spreads, probabilities of default among other things. in addition the risk department under my direction analyzed potential liquidity needs associated with these trades under stressed market conditions and had received information from other departments that the company possessed adequate liquidity sources to address such potential needs. as the credit markets deteriorated in the summer 2011, i came to the view it would be prudent to mitigate increased risk associated with european sovereign debt trading positions and to consider entering into hedging transactions to reduce the company's exposure. in july 2011 i initiated several discussions with senior management to express this view and explore such risk mitigation

strategies. i also highlighted the increased default and liquidity risks associated with the sovereign rtms written and oral presentations to the board at the august 2011 bored meeting. in my view the board and senior management were highly sophisticated. the strategy was in place, new and understood how rtms worked. they were well aware of the increased risk caused by weakening market conditions in the summer as highlighted in my reports to the board. to the best of my recollection, following my presentation in august of 2011 board meeting, the board and senior management made an informed business judgment to cease adding to the company's long positions in european sovereign debt and to allow kpitsing long position -- positions to roll off there by reducing the company's exposure

over time. it's my understanding none of the sovereign debt securities underlying rtms has defaulted or been restructured and all of the securities in the rtm portfolio that reach maturity have been paid in full. i am, of course, aware and deeply saddened about the numerous press reports of the more than billion dollars in customer funds that are missing and unaccounted for. i have no personal knowledge of any missing funds or unrec sized customer accounts. while at mf global i did not have responsibility for treasury functions such as fund transfers and the maintenance of segregated customer funds. like everyone else, i'm truly hopeful all the missing customer funds will be located and promptly returned to their rightful owners. that concludes my statement, and i look forward to being as helpful as i can today. thank you.

we'll go into questions. mr. stockman, in a march 2011 memo to the board, you highlighted some of the market risk associated with the firm's european rtm trades. under the heading market risk you identify liquidity risks associated with potential haircuts from mf global's counter-parties. one scenario i think that's in that report requires that if that scenario were to play out, the company would have to come up with about 761 million additional dollars. are you familiar with this memo? >> yes, sir. >> and do you agree with the conclusions that you reached in that memo about the market risk and liquidity risk associated with european rtm trades? >> yes. i think that was a fair representation of some stressed market conditions that we should

analyze. >> and then you -- then i believe in october you produced a document called break the glass scenarios and in this particular document you said forgs sce forget scenario one and two, we're in a different environment now. you outlined additional scenarios where additional liquidity requirements would be needed based on some additional scenarios. is that correct? >> sir, was that in august documented? >> this is october. it's stress scenario analysis downgrade mf global, potential impact of mf global. >> i see. the scenarios referred to in the march memo specific to sovereign risk. the break the glass scenario, albeit may have some similar

numberology, i'm not sure we're talking apples and oranges yet. >> let me ask this question, did you prepare this document, the october document? >> i did not prepare that document. that was the work product of finance and treasury group. i had a senior member of my staff assist the preparation of that document. while i was at the company i actually did not see a final outcome of the document there that you're referring to. >> so they were doing a stress scenario analysis and you're the risk management officer and you didn't see this document? >> i did not see the final outcome of that document while i was at the firm. >> so the stress scenarios you were familiar with were the ones

done in august. is that correct? >> correct. >> and you had a different scenario in your august memo than you had in your march memo. is that correct? >> agreed. understood. >> and what was the difference in the the difference in moving from the march scenario to august scenarios were as the market conditions had changed over time, my risk department and myself always tried to keep pace with updating the market conditions and stress scenarios as the market conditions changed. and so -- >> mr. chairman, could you have him pull the mike a little bit closer. >> i'm sorry. so the scenarios you're referring to, scenarios one and two in march were effectively updated to incorporate more recent market conditions and apologies for the different

numberology but the basic point was those updated scenarios were to capture some of the more recent market volatility and so forth. >> did you have greater concern about the liquidity and market risk in august than you had in march? >> as a general matter, that's correct. >> and did you express that to mr. corzine and to the board? >> yes, sir. in a series of meetings as i became more concerned in particular in july. >> in that scenario that you did in august, did you still feel like the company had the ability to meet the liquidity needs should those scenarios play out? >> at the -- i apologize. could you just ask that question again. >> so scenario three and four that you did in august requires you spell out additional

liquidity requirements should those scenarios play out. were you able to validate that if those scenarios did was suffi did -- liquidity for the firm to sustain those numbers? >> i see. the various discussions increased liquidity scenarios were discussed and debated at the board. so i would have to suggest that there was full information to senior management and board members and with the understanding that these scenarios could play out and that liquidity, potential liquidity would be available. >> would be available? and -- >> to the best of my recollection. >> but you didn't verify -- you just reported you did not verify whether the liquidity was available to -- is that not part of your responsibility, or was it part?

>> the actual liquidity function is part of the cfo and treasury area with respect to sources of liquidity. as it relates to the various discussions and information that i was disseminating in july, those people, those individuals responsible for insuring that lick kid ti was available saw this information and then made an informed judgment. >> so i just want to go back here. in march you said to the board you were concerned and previously mr. roseman said he was concerned about these positions. in august, you become more concerned about these positions. and then in october, the company puts together a break the glass thing with much more aggressive scenarios. and then on october 24th, mr. corzine, this is seven days

before the bankruptcy, stated that mf global's rtm positions are relatively -- have relatively little underlying principal risk and the structure of the transactions themselves essentially eliminates market and financing risk. do you agree with that statement? >> i apologize, you could just run that statement by me again? >> mr. corzine on october 24th said in a statement with an investors says mf global's rtm positions have little risk and the structure of these transactions themselves essentially eliminates market and financing risks. >> i had no reason to doubt mr. corzine's comments at that point. >> you wouldn't doubt it? is that your testimony? >> yes. >> and seven days later the company goes bankrupt? how do you justify that?

>> well, sir, the down follow of mf global in those final weeks is a very complex issue. and contained the confluence of at least three challenging events. one the negative earnings related to a tax writeoff, tax deferred asset writeoff. second, the down grades that were happening at that point in time. third, the perception in the marketplace regarding the riskiness of the sovereign strategy. all seem to come together in a very short period of time. and so that the outcome, unfortunately, was unpredictable

as we walk through that challenging period of time. >> i see my time expired. and now, you are recognized for five minutes. >> thank you, mr. chairman. thank you. i want to thank my colleagues for their -- your allowing me to run in and out. i apologize, i have another mock-up down the hall. a very important bill. i'll be in that all day. mr. roseman, i want to ask you some questions based on your written testimony. i'm going ask them in the order they appear. on page three, you make a statement that over time stake holders including the rating agencies, et cetera, et cetera, gained confidence in mf bloebgls improvements. i have the record of s & p's and moody's rating of mf global and the only time there was, i guess you could consider it an upgrade, was friday, july 18th, 2008, when all they did is just take way the negative outlook. they kept the bbb rating.

all they did is take away the negative outlook. and that was actually before you took office. am i missing something? do i have information that i should have? >> during the discussions with the rating agencies, with myself and others in executive management, they did continue to express their interests. >> but they didn't take action on ratings? they said good things but then didn't take into account the rating? >> then i maybe misstated. >> that's fair. >> okay. i guess from your testimony, it certainly teams as though presuming that in june or july -- i'm sorry, may of 2010 you agreed on a billion dollar nominal limit across the board. yet by mid september, only a few months later, obviously the people who ran the business had completely ignored that board approval, your agreement. and had blown through it to the amount of $2 billion. and then later on, one month

after that, they doubled it again. there's no indication here that the board took any action in between that time so that there was an agreement at a billion, this ended up at $4 billion by october of 02010. am i reading this right? >> no, you're not, sir. >> okay. >> when the billion dollar limit was approved, that was taken under management delegation authority for ris africa the board. so that approval did not have to go to the board of directors. subsequently, any other limit increases before the $2 billion was also taken incertainly ater approved by myself and mr. corzine. they do not pose, what i consider a material issue relative to risk appetite, per se. >> so you're saying that you and mr. corzine were authorized and did in fact agree to go to $2 billion? >> up to $2 billion when it became -- >> that is mid-september.

what about the $4 billion of october 2010? >> whether it got $2 billion, i don't remember the exact number. then i indicated to mr. corzine we would have to approach the board of directors for approval for further increases. >> so he went to $4 billion without your agreement, without board approval? >> no, i believe at that time i recall going to the board and discussing the strategy and the limits to get further increases and there were a few periods in between my written statements where there were meetings with the board, executive committee to approve the limits. >> so then you're suggesting -- again, the written testimony is not that clear then. you're telling me now that at no time did the investment limits exceed what was agreed to by you and/or the board? >> that is my recollection, yes. >> okay. that is fair enough. this statement in my opinion is not that clear. because if they had, i guess

during that time did anybody know you were doing that? i guess the board did know, obviously. were you telling the general public? were you telling investors? were you telling the crediting rating agencies? >> prior to that time, within the $2 billion number, in my opinion, because the risks were controlled and positions were controlled in six month, 12-month periods, it did not pose a material risk to the company. >> that's not what i asked. i asked, were you telling the credit rating agencies? were you forming your investors that you had indeed hit that number? >> i'm not aware of myself notifying, to answer your question specifically, the rating agencies. and i'm not aware, it's possible that others had notified them of those positions. but again, we have to keep into account the materiality of the positions and the short datedness of the positions. >> so basically, you think there

was nothing wrong going up todzed 4 billion when the board approved $4.75 billion if i'm reading this correctly? >> i would say my comfort level and the board's risk appetite started getting exceeded around the approved risk appetite at that tile, i should clarify, exceeded around $2 billion. that required to go back -- >> so around $2 billion and you and the board were getting uncomfortable? >> no. it's relative to the stated risk appetite that had improved given the prior strategies of the company. at that point, because the strategy was evolving, was escalated to the board for additional -- for approval of those specific limits. control the risk. >> i'm missing something. i'm asking simple questions. you're telling me the board approved up to $4 billion.