For customers and investigators, however, PFG is proving to be much uglier than MF Global ever was — largely because MF Global was the result of one impulsive action by a megalomaniac CEO, while PFG was a calculated 20-year fraud.
The double-whammy of MF Global and then PFG has shaken confidence in the industry, and many place blame squarely on the regulators. “Over the last few years, the biggest losses for clients haven’t come from the markets,” says Marella. “They’ve come from the FCMs, and regulators bear that burden.”
The National Futures Association (NFA) has hired Berkeley Research Group and the law firm of Jenner & Block to conduct a forensic review of its auditing practices and has implemented the electronic reporting system offered by Confirmation.com — the one that drove Wasendorf over the brink — and has asked the CFTC for permission to access segregated funds accounts on a view-only basis at will.
While the NFA has come under fire — as the designated self-regulatory organization (DSRO) for PFG — for moving too late on the electronic front, Confirmation.com says that only 15% of audit confirmations anywhere are done electronically, up from 1% three years ago, and that no other regulators have real-time access to customer balances.
Everyone we spoke to welcomes that move, and also called for a change in the way positions are liquidated.
“The accounts were frozen and then liquidated, and we got no word of anything, for weeks,” Ehrhardt says. “Nobody knew what their account balances were, or how they were liquidated. You add that on top of the fact that you don’t even know where your margin is, and you can understand why people were upset.”
Marella says that could be avoided if regulators and legislators could provide agreed-upon ways of liquidating positions in the event of an FCM bankruptcy.
“Jeffries was the clearing FCM, but to Jeffries, PFG was just a few omnibus accounts,” he says. “If PFG had 2,000 longs and 2,500 shorts, to Jeffries, it’s only 500 shorts, so when they were told to liquidate, they just got out of 500, which of course wasn’t a liquidation to a customer with a hedged position. So they’d take off the exposure, then create more exposure that they had to take off. It was a mess — an expensive mess that cost my customers hundreds of thousands of dollars.”
In mid-August, CME Group bosses met with representatives from FCMs and regulators as well as the Futures Industry Association (FIA) and the Customer Commodity Coalition (CCC), which was formed to protect customers in the wake of the MF Global debacle. At the meeting, the CME offered to reconsider its opposition to an insurance fund for the derivatives sector, and even to consider holding customer funds itself, but said both developments were unlikely. A fund, it has long said, will be too expensive, while holding the money itself would present too much of a liability.