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

Dan Roth: Working on rebuilding confidence

Q & A

FM: Given what happened at PFG was there an appropriate amount of urgency in the industry’s and NFA’s reaction?

DR: From our perspective there was a sense of urgency on the part of all regulators: The CFTC (Commodity Futures Trading Commission) and the SROs, which is why within a matter of weeks after MF Global we formed these committees and both of those committees had their recommendation of rule changes ready in March. Relatively speaking, that was a rapid response. Everyone felt a tremendous sense of urgency.

FM: What about after PFG?

DR: Before PFG happened, the SRO committee began looking at ways to make greater use of technology to monitor firms for seg compliance, which is where the idea of the online, view only access for regulators to customer seg bank accounts came up. We were developing that rule before PFG happened. Once PFG happened we took that initial concept and went further and said we have to be able to confirm all seg balances on a daily basis. … We started using the e-confirmation process as part of the annual audit process and that is what uncovered the fraud at Peregrine. So number 1, using the e-comfirmation process; number 2, moving beyond the confirmation process out of the annual audit and making sure SROs have the authority to go in and check at any given time; number 3, developing the system so that all seg depositories — bank, broker/dealers, money market accounts — will report to regulators on a daily basis the funds that they are holding on behalf of FCM customers so we can compare that information with the daily reports we are getting from the FCMs to identify any discrepancies. If there is a depository that won’t file that information with regulators, it is an unacceptable seg depository.

FM: Will this process be automated?

DR: Both accumulation of data and the analysis of data will be automated.

FM: Why wasn’t the PFG fraud caught during the spot audits of FCMs following the MF Global bankruptcy?

DR: The CFTC directed the SROs to go in and perform examinations of certain FCMs for seg compliance. We specifically asked the CFTC whether they wanted those examinations to confirm balances to outside sources and they told us “no.” The directions we were given by the CFTC to conduct those examinations did not include confirmation of balances to outside sources.

FM: In May 2011 US Bank had reported only $7.2 million in its PFG customer segregated account and later altered that number to $221 million. Why was the PFG fraud not discovered at this point?

DR: We should have followed up on that; we could have uncovered this fraud a year earlier.

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