The top U.S. derivatives regulator discussed proposals to bolster protections for customer funds after the collapse of MF Global Holdings Ltd. and Peregrine Financial Group Inc. spurred calls for an overhaul of rules.
The Commodity Futures Trading Commission held a roundtable meeting in Washington today following a proposal last year to increase auditing standards and disclosure of brokerage risks to clients. Participants discussed efforts to oversee self- regulatory organizations, including the CME Group (CME) Inc., and their duties to monitor futures brokers.
“We want to ensure we are doing anything and everything to protect customer funds,” Bart Chilton, one of three Democrats on the commission, said today. “We have implemented some things already and have proposals out for public comment.”
The meeting, the third roundtable in the last year on the topic, was scheduled 15 months after MF Global filed for bankruptcy and reported a $1.6-billion shortfall in customer funds. The shortfall and the collapse of Peregrine less than a year later prompted scrutiny of the CFTC and self-regulatory organizations in Congress and the futures industry.
The CFTC on Oct. 23 proposed a series of disclosure requirements for futures brokers to give customers greater accounting of their funds. The proposals also would require heightened disclosure by brokers about how client collateral is held at custodial banks such as JPMorgan Chase & Co. (JPM), State Street Corp. (STT) and Bank of New York Mellon Corp. Standards for auditors of brokerages would also be increased under the rule.
Futures brokerages should provide the public access to daily reports on the segregation of customer funds, reports on their balance sheet leverage, and other information, said William Thum, principal at Valley Forge, Pennsylvania-based Vanguard Group Inc. “The information can’t be withheld altogether or be withheld long after it is valuable,” Thum said at the meeting.
The reports should provide more frequent information about the leverage of brokers, said James Koutoulas, chief executive officer of Typhon Capital Management LLC and president of the Commodity Customer Coalition that has advocated for stronger protections following MF Global. “Any sophisticated investor can look at monthly numbers and get somewhat of an idea but you really need to look at an intra-month basis,” Koutoulas said.
Russell Wasendorf Sr., founder of now-bankrupt Peregrine, as sentenced on Jan. 31 to 50 years in prison for what prosecutors said was the theft of more than $215 million from the commodities firm’s customers.
James W. Giddens, the trustee overseeing the bankruptcy of the brokerage subsidiary of MF Global, has been working to narrow the shortfall in customer funds.
MF Global Inc., the U.S. brokerage subsidiary, won approval from a bankruptcy judge on Jan. 31 for a settlement with U.K. affiliate MF Global UK Ltd. Including a settlement with the broker’s parent, MF Global Holdings Ltd. (MFGLQ), domestic futures customers can expect a 93 percent recovery of funds, Giddens said in a court filing.
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