PFGBest mess raises systemic issues for futures industry

Insurance need?

The crisis at PFG is increasing the call for a Securities Investment Protection Corporation (SIPC) style insurance plan for futures segregated funds. This came up following the MF Global debacle but was largely dismissed because of the high cost of such a program.  This morning CFTC Commissioner Bart Chilton reiterated his support for such an insurance program in an emailed statement to the Wall Street Journal.

“The only mechanism which can mitigate the impact of fraudsters is account insurance,” Roe says. “We have proposed a liquidity facility for victims of failed commodity brokerage firms. However, there is tremendous resistance to the concept of account insurance for commodity customers from the industry. It will require substantial public pressure resulting in legislative action from Congress to make such an insurance mechanism a reality.”

Former CFTC Chairman Philip McBride Johnson rejected the notion of an insurance program, preferring the creation of a central customer funds repository. Johnson says a repository plan eliminates the risk and be cheaper. “All customer funds would move solely and directly between the trader and the repository. Each customer would maintain a trading account with the broker and a funds account with the repository,” Johnson notes, adding the broker customer relationship would not change much, “But customers would send their initial and maintenance margins directly to the repository for deposit in their separate accounts there, and all return payments would flow directly from the repository to the customer.”

CME Group initiated a scaled down version of an insurance program, CME Group Farmer & Rancher Protection Fund, covering family farmers and ranchers up to $25,000 and agricultural cooperatives up to $100,000.

Robb Ross, principal of commodity trading advisor (CTA) White Indian Trading, says the best solution may be to have all customer funds held at the exchange clearinghouse. Ross, whose CTA had customers at MF Global during it bankruptcy as well as customers at PFG, fears this could harm commodities trading. “Who is going to trade commodities,” he wonders.

Following MF Global's collapse on Oct. 31, 2011, a number of customers migrated to PFG. Ironically, Roe notes that the SIPA Trustee’s rolling distributions to customers actually may have shielded them from additional losses at PFG. "The remaining 28% of your 4d and 100% of your 30.7 property trapped in MF Global’s SIPA liquidation will be sent to you via check.  Sadly in a zero interest rate environment, a bankruptcy claim may be the safest place for your money."

Insider insight

On Tuesday, July 10, Attain Capital addressed the PFG scandal in its managed futures blog. In "Broken Promises, Shattered Trust," Attain, which was a client of PFG, among other FMCs, detailed its front-row seat as the crisis unfolded, first with what appeared to be wild rumors, then news of Wasendorf Sr.'s attempted suicide then, finally, confirmation that more than $200 million was, indeed, provisionally missing. 

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