* Missing funds at PFGBest reignite worries on customer
* CFTC chairman points to improved reforms after MF Global
* Reform advocates call for bolder changes
By Alexandra Alper
WASHINGTON, July 10 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
"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.
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
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
"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.