FM: You say the fines need to be harsher, but is there anything else that can be done to make sure these firms are compliant?
TD: Of the $5.5 billion that was held at MF Global, CME had $2.2 billion. When MF Global collapsed and there was X amount of money missing, whether it was $700 million or $1.2 billion, CME still had $2.2 billion. Not one penny was missing from CME at the clearinghouse level; the money was missing at the firm level. That is an important distinction to show how we were managing the business from our end for our clients. Others have said that is a good example of [why] funds should be held at the clearinghouse level and not at the firm level.
FM: What do you think of that?
TD: It needs to be fleshed out more because I am sure there are some people who would be adamantly opposed to that, but there are ways that you could do both. Maybe there is a hybrid of both. Maybe there are certain clients that should have their funds held at the clearinghouse level vs. other clients that can keep them at the firm level. Maybe there could be an opt-in to do it. There are things like that that are very much acceptable to CME. I am concerned about every account, [but] some of the smaller farmer/rancher accounts that are bona fide pure hedgers may need to have a different distinction than some of the other participants in the marketplace. I say that because they are smaller accounts, they are pure bona fide hedge accounts, there is no speculative trading going on, they’re basically just hedging their crop or hedging their livestock risks. They are normally smaller accounts with smaller positions; maybe they should have a different distinction. There are many people in the world that count on this constituency in order to eat, in order to be productive; one of the greatest assets this [country] has is it farming and ranching community. Maybe there are certain things we need to do to segregate them out differently. Bring them into the clearinghouse. And maybe there is an insurance type of [program] you can have for that smaller constituency, but [insuring] $158 billion in customer segregated [funds] would [require] a pretty enormous premium, and I don’t know that anyone would entertain that. But if you wanted to entertain something smaller for this particular constituency, that may make sense, and if others want it maybe they have to opt-in to it at a cost. I don’t have all the answers but these are some of things we are [thinking about]. I am trying to get feedback out of Washington and every member of Congress — I testified three times in nine days — and everyone started out saying ‘I have farmers and ranchers as part of my constituents calling me about this.’ I get it loud and clear. This is a big part of the business, not from the revenue side but from an importance of contracts [standpoint] and making certain that they have confidence in their ability to hedge their products for the food production of the United States and for exports. I would be very supportive of looking at doing certain things for the farmer/rancher who is looking for additional protection.
FM: There is some confusion over the shortfall. If total seg funds were $5.5 billion and the secured close to $5 billion, why is the shortfall $1.2 billion? Do you understand this discrepancy?
TD: We said we don’t believe it is $1.2 billion. That has not changed. We know that 72¢ on the dollar has gone back to every participant. We know that the trustee is holding [more than] $1 billion to date. So we believe that the shortfall in seg funds is somewhere between $700 million and $900 million depending on the clawbacks or things of that nature that the SEC says that were comingled from securities monies into the seg pool. Some people believe there was securities money from the broker/dealer side that was in the customer seg that they are trying to clawback.