CNBC
written by Reuters staff
Thursday December 8, 2011
MF Global's collapse has highlighted major gaps in customer protection that require a complete overhaul of U.S. futures regulations, a futures self-regulatory official said on Thursday.
Daniel Roth, chief executive of the National Futures Association, which self-polices the industry, plans to lay out a blueprint of possible reforms at a House Agriculture Committee hearing where MF Global's former chief executive Jon Corzine is also expected to testify.
"Thousands of customers have suffered and continue to suffer from a breakdown in the regulatory protections they have come to expect," Roth said in prepared testimony. "We should be able to identify certain frailties of current structure that will need to be addressed. No ideas should be off the table in this process."
Roth's ideas include storing customer money with a third-party custodian, instead of with a futures brokerage directly, and having self-regulatory organizations perform surprise spot-checks more frequently to confirm account balances.
MF Global filed for bankruptcy protection on Oct. 31, after it was forced to reveal it had made a $6.3 billion bet on European sovereign debt . Investigators are searching for hundreds of millions of dollars in missing customer money from futures accounts, and they are probing whether MF Global raided customer funds for the firm's own use.
The Commodity Futures Trading Commission and Securities and Exchange Commission, as well as several other self-regulatory organizations, oversee different aspects of MF Global's business, but there is no single regulator in charge of policing the whole firm.
The search for the missing money has raised serious questions about the effectiveness of U.S. futures regulations in protecting customer money, which is required to be segregated from firm funds.
The NFA was not the primary regulator for MF Global's futures business, which was overseen directly by the CME Group [CME 244.58 -8.57 (-3.39%) ]. But NFA did participate on an audit committee that received regular updates about MF Global's condition in the weeks leading up to its bankruptcy filing.
In his testimony, Roth laid out numerous possibilities for reforms, both with how firms are policed and also with the mechanisms in place to protect customers in the event of a bankruptcy filing.
One way to avoid future insolvencies, he said, is to change the way clearinghouses collect margin, forcing brokers to hand over enough margin to back each and every one of its customer positions, regardless of whether the bets of some customers exactly offset those of other customers.
Using so-called gross margining puts more of customers' money to the clearinghouse, and leaves less of it in the brokerage's own accounts, where MF Global is said to have misused it.
In addition, Roth also questions whether the futures industry needs an insurance-type program in place similar to the one run by the Securities Investor Protection Corp, or SIPC, which covers claims from the investors of collapsed securities brokerage firms.
Currently, there is no such industry-backed fund in place to cover claims for futures customers.
"We need to examine the pros and cons of establishing a formalized mechanism to address customer losses due to a (futures commission merchant) insolvency," he said.
John Fletcher, a general manager of the Central Missouri Agri-Service who plans to testify on behalf of the National Grain and Feed Association, also will tell lawmakers that regulatory changes may be in order. But he stopped short of advocating any specific approach, saying the issues raised by MF Global need to be "examined carefully and quickly."
"It may be that some entity other than FCMs should be responsible for holding and safeguarding customer funds," he said. "Rather than a clearing firm, should the clearinghouse or the exchange itself or some independent third party perform the role?"
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