This belief is a fact confirmed by the Berkeley Research Group report the NFA commissioned to review its procedures (go to http://www.nfa.futures.org/news/BRG-report.html to see a copy of the findings). The NFA stated it would put in place all the recommendations, including enhanced auditor training, and other safeguards, like confirming audit details with the firm’s outside auditor.
Respondents also supported certain industry remedies such as creating an insurance fund, establishing a separate custodial entity to hold customer funds and ensure real-time verification of balances for customers by regulators, strengthening current regulation to prohibit FCMs from using customer segregated funds or suffer severe consequences, and creating regulation and procedures to guarantee that all positions and margin are transferred immediately when bankruptcy is declared.
Birnberg also believes there needs to be guidance for CTAs, especially those that are relatively new to the business.
“These guys love to trade, but it is a business,” she says. “They need to be checking counterparty risk regularly and perform due diligence on their FCMs more than periodically. Only 59% of respondents said they did that, meaning the rest didn’t do any review.”