From the November 01, 2012 issue of Futures Magazine • Subscribe!

Dan Roth: Working on rebuilding confidence

Q & A

FM: For several years the types of investments in which FCMs could park customer money have grown. Those investments recently have been restricted under Rule 1.25. Did that go far enough?  Should the industry look at the concept of the “float”? Is it proper for brokers to earn interest on excess customer finds?

DR: FCMs are profit-making ventures and they have to be able to earn a reasonable return on their investment. To the extent that you restrict their ability to make money by investing customer seg funds, that may be the appropriate thing to do, but it will increase fees and may ultimately further reduce the number of FCMs. When you further reduce the number of FCMs you reduce competition, increase fees and concentrate systemic risk.

FM: How has the relationship between the NFA and CFTC changed since MF Global? Have your individual roles and how you communicate change?

DR: Nothing has changed. There is not a day that goes by where we are not in contact with the CFTC — regulatory issues, enforcement issues, etc. I can say one thing is changing, it is the manner in which the CFTC performs it oversight for SROs because even before MF Global they moved away from annual enforcement reviews. 

FM: When you first began to look at additional responsibilities in the OTC swaps world, the record of futures SROs appeared strong. Have the problems at MF Global and PFG forced you to alter your approach to regulating swaps? Where are you in regard to preparing for these additional responsibilities?

DR: Our regulatory role in respect to swaps falls into several different categories: The first is the registration process. We have been focusing on hiring the staff and training our other staff and preparing modules for our staff to follow regarding the submissions and preparing to review them when they come in December. 

FM: You have said these failures have been more about enforcement than not having appropriate regulations. Have enforcement procedures improved?

DR: What I said was you can have all the rules that you want, but at the end of the day it comes down to enforcing them. Writing rules is not a cure for anything if you are not enforcing them. Fraud is fraud.  It is not like there was not a rule saying you can’t steal customer seg funds. There are three components to any enforcement program: You have to have good rules on the books, you have to be able to detect violations of those rules and when you detect those violations you have to take appropriate enforcement action. The breakdown here was in detecting the rule violations, and we used standard audit practices including written bank confirmations that did not detect the fraud that was going on in Peregrine. That is why we have moved toward the daily confirmation process of seg balances. It wasn’t failure of the rules; it was failure to detect violations of the rules.

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