JPMorgan to house client collateral in bank after futures losses

Aug. 14 (Bloomberg) -- JPMorgan Chase & Co. will allow futures and swaps customers to house excess collateral in a separate bank account as it seeks to reassure investors after losses at MF Global Holdings Ltd. and Peregrine Financial Group Inc.

The new service will allow clients to automatically aggregate excess margin at JPMorgan Chase Bank N.A., the firm’s insured deposit-taking unit, Emily Portney, head of agency clearing, collateral and execution at the New York-based bank, said in a telephone interview.

“It’s certainly in response to client queries and more emphasis on safekeeping of client money,” she said. “The key is safety, operational efficiency and more choice for clients” in how their funds are protected and invested, Portney said.

Futures brokerage customers at MF Global are still missing $1.6 billion in segregated funds after the firm filed for bankruptcy in October after bets on European sovereign debt, credit ratings downgrades and the worst quarterly loss in the company’s history unnerved investors. About $220 million in segregated client money is unaccounted for at Peregrine after its founder and Chief Executive Officer Russell Wasendorf Sr. was arrested July 13 after a suicide attempt and a signed confession that he had defrauded customers for 20 years.

Excess Funds

In both cases, the excess customer money held at the brokerages is what disappeared. The customer funds held by CME Group Inc. in the MF Global case and at Jefferies Group Inc. in the Peregrine situation were protected.

Investors who trade futures or clear swaps often leave extra collateral in their accounts to have it available if needed for a margin call. This money exceeds what the clearinghouse and the brokerage demand to keep the trades active.

The JPMorgan service will draw unneeded money and securities from however many clearing brokers an investor uses, Portney said. “It’s clearing broker agnostic,” she said.

The collapse of Lehman Brothers Holdings Inc. in 2008 prompted many derivatives users to spread their clearing business among several banks or broker-dealers to lessen the risk of having to move all their accounts at once or open a new one in a time of stress.

Depository Account

The new collateral treatment will also allow investors to choose how to invest their excess margin because it’s held in a depository bank account that the client will control, Portney said.

CME Group, the world’s largest futures market, said last month it’s considering a plan to hold all customer funds at clearinghouses or other depositories in response to MF Global and Peregrine. The exchange operator and clearinghouse owner said any interest earned by the customer money would be returned to the futures brokerages to maintain a key feature of how the firms earn revenue, according to a letter to customers from Executive Chairman Terrence Duffy and Chief Executive Officer Phupinder Gill.

Duffy, testifying before Congress after the idea was announced, said it “will be controversial and perhaps have disruptive consequences.” He later said the proposal wasn’t meant to disrupt how the futures industry works.

JPMorgan has combined clearing services across securities, swaps and futures along with collateral management solutions and agency execution under one unit. Previously, several different parts of the bank had responsibility for the various asset classes and products, Portney said.

The move is meant to help customers on both the buy side and sell side deal with new requirements introduced by the Dodd- Frank Act in the U.S. and similar regulations being developed in Europe, she said.

Bloomberg News

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