The U.S. Commodity Futures Trading Commission is poised to adopt client-fund safeguards to require more reporting of transfers after the collapse of MF Global Holdings Ltd. and shortfall claims against Peregrine Financial Group Inc., said two people briefed on the matter.
The agency’s five commissioners are voting in private on changes proposed after MF Global’s bankruptcy by the National Futures Association, an industry self-regulator, according to the people who spoke on condition of anonymity yesterday because the rulemaking process isn’t public. The measures would require higher levels of reporting when a broker’s principal approves transfers of customer funds, the people said.
“These new requirements will help begin the process of restoring public confidence in the financial integrity of customer segregated funds,” NFA President Dan Roth said in a May 29 statement describing the changes for so-called futures commission merchants. “Making this information available to the public will give investors a better picture of the financial standing of the FCM with which they are conducting business.”
The CFTC is facing new scrutiny from lawmakers and market participants amid allegations of a $200 million shortfall in customer funds at Peregrine. The agency sued the brokerage over the alleged shortfall less than a year after being scolded for poor oversight following the collapse of MF Global, which left an estimated $1.6 billion fund gap.
Peregrine is under investigation after Chairman and Chief Executive Officer Russell Wasendorf Sr. unsuccessfully attempted suicide. The NFA said the chairman may have falsified bank records after only $5 million was found in an account that was reported to have $225 million on or about June 29.
The CFTC, Securities and Exchange Commission and Justice Department also are investigating the failure of MF Global, which was led by Jon S. Corzine, the former co-chairman of Goldman Sachs Group Inc. and a Democratic senator and governor of New Jersey.
In MF Global’s final days, several large transfers led to the shortfall in customer funds, James W. Giddens, the trustee overseeing the bankruptcy of the firm’s brokerage, said in a June 4 report. On Oct. 26, $615 million was moved from customer accounts to fund proprietary trading. The money wasn’t returned by the end of the business day, throwing the company out of regulatory compliance, he said. The company filed for bankruptcy protection on Oct. 31.
Under the NFA proposal, a futures broker’s chief executive or another designated principal must provide written approval before moving more than 25 percent of funds kept in excess of required levels in customers’ segregated accounts.
The proposal also would require written policies listing the amount of residual funds in a client account that a broker intends to maintain.