WASHINGTON, April 5, 2012 – The National Grain and Feed Association (NGFA) issued its preliminary recommendations in response to the estimated $1.6 billion in customer-segregated funds allegedly misplaced in the days before the Oct. 31 bankruptcy of MF Global Inc.
“The demise of MF Global has shaken the confidence of many futures market participants concerning the safety of segregated customer funds,” the NGFA said in letters this week to the Senate and House Agriculture Committees and the Commodity Futures Trading Commission (CFTC). “We believe these preliminary recommendations are essential to begin reestablishing confidence among futures market participants and to help safeguard customer funds.”
While the NGFA said its initial recommendations will help enhance reporting, transparency and accountability in handling customer funds, they represent only first steps that should be implemented to safeguard customer funds in the aftermath of the MF Global Inc. bankruptcy. The organization said it plans to complete its evaluation and offer additional potential recommendations by early June.
The NGFA’s efforts are led by its MF Global Task Force, comprised of members from its Risk Management Committee and Finance and Administration Committee, as well as representatives from agribusiness lenders. NGFA’s initial recommendations for addressing the aftermath of the MF Global bankruptcy are as follows:
-The CFTC should require daily reporting of segregated fund positions by futures commission merchants (FCMs) to both their Self-Regulatory Organization (SRO) and to the CFTC.
-The CFTC should require daily reporting of segregated fund investments by FCMs, detailed by maturity and quality, to both their SRO and to the CFTC.
-The CFTC should conduct a formal review of FCM investment options for customer funds, with a view as to whether the agency should further limit allowable investments only to very safe instruments.
-The CFTC should require reporting by FCMs to their SRO and to the CFTC of significant changes in investment policies or holdings.
-FCMs should be required to provide greater transparency to customers of where customer funds are invested, potentially achieved through such means as posting on the CFTC website, FCM websites and/or publication in customer prospectuses.
-The CFTC and SROs should enhance monitoring of FCM reporting. Both sets of regulators should conduct more detailed and more frequent audits, as well as unannounced spot checks of FCMs.
-To assign accountability and to aid in establishing that fraudulent activity has occurred in the event customer funds are misappropriated, the CFTC should require the signature of two authorized principals of an FCM, such as the chief executive officer, chief financial officer or other senior officers, to move funds out of segregated customer fund accounts to non-customer accounts.
-FCMs should be required to provide immediate notice to their SRO and to the CFTC if the firm moves more than a specified percentage (to be determined by the CFTC) of excess segregated funds to non-customer accounts.
-FCMs should be required by their SRO periodically to certify policies and procedures to ensure the safeguarding of customer-segregated accounts and compliance with applicable laws and regulations regarding such accounts. All SRO examinations should require principals of FCMs to certify that policies and procedures are adequate, effective and being observed by the FCM, the NGFA said. At least annually, SROs should be required by the CFTC to review policies and procedures to determine adequacy and compliance.
-A rigorous review by the CFTC of capital requirements for FCMs and broker-dealers needs to be conducted, with a view to scrutinizing the current practice of allowing double-counting of required capital when a firm operates as both an FCM and a broker-dealer.
Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton has publicly recommended similar actions to prevent another corruption of customer accounts.
"MF Global can’t be reduced to an esoteric policy matter,” he said in a speech last month to the Exchequer Club in Washington, DC. “It is a real circumstance with real victims. If I have anything to say about it, for those that violated the law, it will have real culprits who pay the full price for their misdeeds.”
Chilton continued to say that the number one job of his agency is to ensure that customer funds are held secure in segregated accounts. To ensure the agency does all it can to avoid another MF Global in the future he suggested:
- Insisting upon regular and robust deep data dives. “By this I mean we need to routinely ensure that customer funds are where they are supposed to be. Rather than accepting a firm’s word that the money is where it is supposed to be, we need to do the Jerry Maguire and insist that they ‘show us the money.’”
- Allowing customers a choice of how or if their funds in segregated accounts are used. “People make choices about the types of investment that can be made with their money in their pension funds. They should be able to do the same with segregated funds. They should also be able to say: ‘My money sits there as margin and nothing can be done with it.’”
- Establishing an insurance fund through Congress to serve as a backstop for customers should there be a loss in the future. “The securities world has such an insurance fund. We all know the banking world has the Federal Deposit Insurance Corporation. We need such an insurance fund in the futures world.”
The National Futures Associated (NFA) is proposing, among other solutions, something dubbed the “Corzine rule,” which is similar to the NGFA’s recommendation that the CFTC require the signature of two authorized principals of an FCM to move funds out of segregated customer fund accounts to non-customer accounts.
The collapse of the broker-dealer under CEO Jon Corzine last October, the eighth largest bankruptcy in U.S. history, marked the first time a failed institution lost segregated customer account funds. Corzine claimed to have no knowledge of any transfers from customer accounts to the firm’s accounts when he testified in front of House and Senate committees last winter.
The “Corzine rule” would require that any time a futures brokerage wants to transfer a certain amount of funds in a customer account to a firm-based account, a principal at the firm, such as the CEO, would have to approve it and provide “immediate notice” to regulators. The NFA board is expected to vote on the rule in May.
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