Futures insurance fund idea gains momentum

August 10, 2012 09:49 AM
Other proposed reforms include daily FCM segregation reporting and new technology solutions

The Commodity Futures Trading Commission (CFTC) held a public roundtable Thursday in an effort to reassure futures industry customers rattled by the collapses of MF Global and PFGBest. At the meeting, participants, including CFTC officials and futures industry professionals, discussed possible reforms to safeguard customer funds and boost consumer confidence.

Notably, CFTC Commissioner Bart Chilton called for the creation of an insurance fund that would afford futures customers the same protections as securities investors receive under the Securities Investor Protection Corporation (SIPC) by allowing them to recoup up to $250,000 in the event of losses.

Chilton’s suggestion echoed an earlier proposal from Commodity Customer Coalition Co-founder John Roe, who advocated the idea of an insurance fund in testimony before the Senate last week. Roe’s plan would institute an “industry-funded liquidity facility” that would compensate for shortfalls and transfer client accounts to new brokers, quickly “clearing the customers from the machinations of bankruptcy proceedings.” As an example, Roe cited the effectiveness of the Canadian Investor Protection Fund, which “plugged a 20% shortfall in assets and facilitated the immediate transfer of customer property” following MF Global’s meltdown.

But the insurance fund idea isn’t without its detractors. In testimony before Congress last week, CME Group Inc. Chairman Terry Duffy acknowledged that such a program would likely boost confidence, but noted that it could have inherent risks. “It is likely to be cost prohibitive and ineffective given the size and scope of the accounts in our business,” Duffy said, “and may encourage the ‘moral hazard risk’ that comes into play when customers feel they don’t need to worry about their choice or stability of their FCMs.”

The CME instead proposed a series of reforms including daily segregation reporting by all FCMs, increased surprise reviews of customer segregated funds and rules giving direct online access to firm bank account balances.

It has expressed openness to holding segregated funds at the clearinghouse or the creation of the third party depository for customer segregated funds, while acknowledging any such switch would need to be vetted further.  Former CFTC Chairman Philip McBride Johnson has recommended the creation of “A Central Customer Funds Repository,” in an article in Futures shortly following the MF Global bankruptcy, as a preferable solution to the creation of an insurance fund.

Chilton’s fellow commissioner Scott O’Malia said regulators should start by implementing technology that would allow regulators to regularly check customer funds. “First and foremost let’s put in a technology solution to ever prevent fraud from creating the necessity of an insurance fund,” O’Malia said, according to Dow Jones & Co.

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