MF Global Collapse Prompts Clash Over Collateral Rules for Swaps

CME Group Inc. sparred with the Vanguard Group Inc. and other derivatives buyers over whether U.S. regulators should extend collateral-protection rules designed for the swaps market to the futures industry following the collapse of MF Global Holdings Ltd.

Speaking yesterday at the opening of a two-day roundtable organized by the U.S. Commodity Futures Trading Commission, derivatives buyers including Tudor Investment Corp. and Fidelity Investments urged the commission to add the new collateral-segregation standards to the futures market.

“We know it’s going to cost more. We know it might increase margining. There are a bunch of buy-side participants who are willing to pay more,” said John Torell, Tudor’s chief financial officer.

Tim Doar, managing director at CME, the world largest futures exchange, said the agency shouldn’t “rush to judgment” with regulatory changes.

The CFTC, Securities and Exchange Commission and Justice Department are investigating the collapse of MF Global. The New York-based broker filed for bankruptcy last year and the trustee overseeing the liquidation has estimated a $1.6-billion gap between customer claims and the amount available to pay them.

The CFTC voted 4-1 in January to adopt final Dodd-Frank Act regulations for the swaps market that would protect clients’ collateral if their broker defaults, while also allowing the customer funds to be pooled before a bankruptcy. Regulators should not move too quickly to put “a single customer protection standard in place for these diverse markets,” Doar said at the roundtable.

Oversight Recommendations

CFTC Chairman Gary Gensler has asked the agency’s staff to develop recommendations for oversight of the futures markets’ system of self regulation. The roundtable is an early step toward possible regulatory changes. “There will be significant public input” on any changes to be proposed by the CFTC, Gensler told lawmakers yesterday at a House Agriculture Committee hearing.

The review of regulatory ideas stemming from the MFGlobal collapse may lead to recommendations for changes requiring congressional action, according to a Jan. 26 letter from Jill E. Sommers, a Republican commissioner, to Senator Pat Roberts, a Kansas Republican. Sommers is overseeing the agency’s work on the collapse of MF Global.

The Futures Industry Association, a Washington-based trade group, recommended more rigorous reporting and internal controls for brokerages following the MF Global collapse. Brokerages should be required to submit daily reports of how much customer money must be held separate from the firm’s own money to their self-designated regulator, often a clearinghouse the firm uses, the association said in a statement yesterday.

The group, which represents the banks, brokerages and asset managers active in the exchange-traded derivatives market, also recommended that firms file twice-monthly accounts of how customer money is being invested.

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