U.S. futures regulator in spotlight after latest scandal

Wed Jul 11, 2012 6:49am IST

Related Topics

* Missing funds at PFGBest reignite worries on customer protection

* CFTC chairman points to improved reforms after MF Global

* Reform advocates call for bolder changes

By Alexandra Alper

WASHINGTON, July 10 (Reuters) - A $200 million shortfall in client funds at U.S. brokerage PFGBest has turned the heat up again on the U.S. futures regulator, less than nine months after MF Global's spectacular failure left its customers short more than a billion dollars.

The Commodity Futures Trading Commission (CFTC) filed suit against Iowa-based Peregrine Financial Group Inc and owner PFGBest on Tuesday, a day after the firm told customers their accounts had been frozen after an apparent suicide attempt by its chairman, Russell Wasendorf.

The lawsuit alleges the firm misappropriated customer funds for more than two years and lied to regulators. But industry groups, lawmakers and regulators themselves are asking whether the CFTC is doing enough to police the market and restore confidence in the shaky futures industry.

"It is absolutely imperative that there is accountability in the futures markets so customers can feel safe knowing their money is protected," said Democratic Senator Debbie Stabenow, chairwoman of the agriculture committee, which oversees the CFTC.

"Congress also has a responsibility to assess current customer protections and strengthen them where needed to put a stop to executives misusing customer funds in the future."

On Tuesday, she announced the committee will hold hearings on July 17 and August 1 to question regulators, reform advocates and industry groups about progress on swaps and futures market reforms. Gary Gensler, chairman of the CFTC, is slated to appear on July 17.

SELF-REGULATION

Similar concerns about futures oversight were voiced when MF Global filed for bankruptcy on Oct. 31 after investors and customers became rattled over the firm's multi-billion dollar bet on European sovereign debt and downgrades by credit rating agencies, resulting in a liquidity crunch.

An estimated $1.6 billion in customer funds went missing, lost in MF Global's final days.

In January the CFTC and the National Futures Association (NFA) conducted an industry-wide review of the 70 largest futures commission merchants to reassure futures customers. The CFTC said it found no "material breaches of customer funds protection requirements," leading many to question the thoroughness of the review.

On the sidelines of a CFTC meeting on Tuesday, Gensler was quick to point out that the check was conducted by the NFA and did not constitute a full-blown audit.

The NFA is the industry's front-line regulator.

When asked whether the unnoticed shortfall should raise questions about the "self regulatory" model that allows organizations like the NFA to police futures brokers, Gensler said the CFTC's limited funding made it hard to avoid.

"It's the nature of our funding as well. We rely on the NFA, CME and others to be the first line of oversight of futures commission merchants," Gensler said, using the term for futures brokers.

DEJA VU ALL OVER AGAIN

Gensler also pointed to key reforms put in place by the CFTC since MF Global's demise.

One rule, finalized in December, prohibits futures brokers from conducting "in-house" repurchase transactions and restricts them from investing customer money in foreign sovereign debt.

The rule, which went into effect in February, had been set back because of fierce lobbying by industry representatives, including Jon Corzine, former CEO of MF Global.

New CFTC rules that come into force in November will require margins to be held customer by customer, making it potentially easier in the future for customers to bail out of companies that have MF Global-style disasters.

New rules for swaps, finalized in January, allow brokers to pool customer collateral, but would require them to keep separate records of the cleared swaps of each individual customer and relevant collateral.

The CFTC is looking at applying that model to futures. Current CFTC rules allow futures brokers to commingle the funds of one futures customer with money belonging to others in a single account or accounts.

But many say the current schedule of reforms do not go far enough.

"Futures customers should be protected like banking and security customers are protected," Democratic CFTC Commissioner Bart Chilton said on Monday.

Chilton has said he prefers a tack similar to the one chosen by European regulators, which gives customers the option of varying levels of segregation.

He also supports the creation of a fund for futures customers similar to the Securities Investor Protection Corp, which guarantees customer investments up to $500,000.

In the wake of the MF Global collapse last year, exchange operator CME Group set up an insurance fund that covers farmers and ranchers for up to $25,000 and cooperatives for as much as $100,000 when a clearing member fails.

Many reform advocates, including MF Global trustee James Giddens have pushed for a futures equivalent.

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