The majority of new rules to come out of these crises have centered on ensuring the safety of customer funds. “Customers in the futures market need to know that their funds are safe,” says Karen Wuertz, senior vice president of strategic planning and development at the National Futures Association (NFA).
The NFA has worked closely with the Commodity Futures Trading Commission (CFTC) and the FIA to identify areas of improvement. “We’ve developed a number of new processes and regulatory tools to provide that level of assurance. One of the trends has been a focus on using technology better to perform this surveillance function,” she says. In fact this is what ultimately revealed the PFG fraud.
Following MF Global’s collapse, the FIA assembled a task force of industry leaders to offer specific recommendations. The majority of those recommendations have been enacted by regulators.
Gerald Corcoran, chief executive officer at R.J. O’Brien, serves on the boards of both the NFA and the FIA and saw firsthand how the industry has worked with regulators throughout the process. “The industry and the regulators have worked together to create the new framework that we’re working in today. There’s been a lot of good give and take,” he says. “A crisis brings people together, and this was an absolute crisis of confidence by the users of the marketplace.”
In the aftermath of MF Global, CFTC Commissioner Scott O’Malia hosted a roundtable to discuss ways technology could be used better to monitor firms. At that meeting, the NFA was introduced to Confirmation.com, an electronic, secure clearinghouse for audit confirmations. “Once we became aware of it, [we] thought it made sense to start implementing it,” Wuertz says.
According to Brian Fox, founder of Confirmation.com, his company provides “an electronic confirmation service that validates the parties who are participating in the confirmation process.”
Whereas the paper process for audit confirmations could take four to six weeks to complete, his company allows auditors to verify balances more securely and much more quickly, sometimes in just hours.
This change largely resulted in the uncovering of the fraud at PFG. “Wasendorf had been manipulating the paper process for more than 20 years. Within 24 hours of using our service, the fraud had been uncovered. That’s the big benefit,” Fox says.
Although some have faulted the NFA for failing to catch the fraud sooner, Fox says instead the NFA should be lauded for taking the necessary steps to uncover the deception. “If a police officer makes a big drug bust, we don’t tell him, ‘You should have caught him before,’” he says.
The NFA conducted e-confirmations for all segregated bank accounts maintained by FCMs for which it is the designated self-regulatory organization as of June 29, 2012 and noted no other violations of segregation requirements.