Only 5% of respondents had their positions and margin funds transferred to another FCM within two days after the FCM failure. The majority said the time frame was a week or longer. Some 22% had positions closed out without notification.
Interestingly, and sadly, 73% of the respondents had been involved in one or more of the futures commision merchant (FCM) failures named in the Horizon survey, but Birnberg says they found there were major differences between the impact of MF Global and PFG and the other failures, such as Refco or Stotler. “The first difference we found is, it really took a while to get positions moved — that really hadn’t happened before, and this time it happened to a lot of (CTAs and CPOs),” she says.
Futures interviewed regulators on this problem after the MF Global collapse as well as after the PFG failure. The response has been that in both the MF Global and PFG cases, segregated funds were missing. In other failures, for the most part, the segregated funds were whole and were able to be transferred to other viable FCMs according to the rules.
The second difference was the lack of information and guidance from all fronts: The FCMs, the Commodity Futures Trading Commission (CFTC), the futures exchanges and the National Futures Association (NFA), which led to a lot of “frustration and anger,” Birnberg says. “There was this black hole at the start in which no one knew what was going on. No one let [traders] know if positions were moved or not…traders had no idea where they stood.” She believes the lack of communication problem still exists today. Respondents stated the industry hurt itself in the process: 81% stated they didn’t think there had been an industry-wide effort to educate the press and public on what was being done to restore trust and integrity to the futures markets. Another 77% said their FCMs hadn’t offered any ideas or products to help strengthen the protection of customer funds.
60% of respondents had never done a periodic risk assessment to determine the impact of FCM failure, but almost as many perform due diligence on their FCMs yearly.
What surprised Birnberg most was the laxity by CTAs/CPOs in protecting themselves — and their segregated funds — even after the MF Global and PFG failures. Just over 50% responded they used between one to three FCMs and many said they still hadn’t done periodic risk assessment of their FCMs.
“While it’s understandable they can be angry about what happened, there is a need for CTAs/CPOs to take ownership,” Birnberg says, adding that spreading the risk around multiple FCMs is perhaps one of the easiest ways to protect themselves. She also notes that 57% said they had no practical way to verify their customer segregated funds amount at FCMs, something that may have changed now with the NFA’s new setup to electronically obtain daily segregation balances from all depositories (see “Double check“). Most responded they currently use broker statements as a check, which really doesn’t provide the needed information, Birnberg says.