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Futures SROs Propose 4 Ways to Protect Customer Seg Accounts

In the wake of MF Global, the first proposal would require FCMs to file daily reports on segregated and secure accounts, enabling regulators to track fluctuations in the amount of customer funds maintained by the firm.

A special committee of futures industry SROs has proposed a series of initial recommendations for strengthening the protection of customers segregated funds and secured funds held at the firm level in the wake of MF Global’s bankruptcy.

The special committee, formed in January 2012 in response to the MF Global bankruptcy, includes representatives from CME Group, NFA, InterContinental Exchange, Kansas City Board of Trade and the Minneapolis Grain Exchange, announced their initial recommendations at the Futures Industry Association's (FIA) Boca Raton conference, where the issues surrounding the missing $1.2 billion in customer assets will be a hot discussion topic.

The four initial recommendations include:

* Requiring all futures commission merchants (FCMs) to file daily segregation and secured reports. This will provide SROs with an additional means of monitoring firm compliance with segregation and secured requirements and a risk management tool to track trends or fluctuations in the amount of customer funds firms are holding and the amount of excess segregated and secured funds maintained by the firms.

* Requiring all FCMs to file Segregation Investment Detail Reports, reflecting how customer segregated and secured funds are invested and where those funds are held. These reports would be filed bimonthly and will enhance monitoring of how FCMs are investing customer segregated and secured funds.

* Performing more frequent periodic spot checks to monitor FCM compliance with segregation and secured requirements. FCMs are audited each year by both their DSRO (designated self regulatory organization) and their outside accountant.

• Requiring a principal of the FCM to approve any disbursement of customer segregated and secured funds not made for the benefit of customers and that exceed 25% of the firm's excess segregated or secured funds. The firm would also be required to provide immediate notice to its SROs.

Commenting on the news, NFA President Dan Roth, stated that "The committee believes that these recommendations will provide regulators with better tools to monitor firms for compliance with segregation and secured requirements and strengthen the industry's customer protection regime. These are our initial recommendations. We will continue to work with the CFTC and the industry as we consider additional improvements."

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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User Rank: Apprentice
3/13/2012 | 2:05:59 PM
re: Futures SROs Propose 4 Ways to Protect Customer Seg Accounts
None of this solves the problem. Customer seg funds would still be exposed to losses by other customers (unmet margin calls)-Šand/or losses incurred by the broker.

The real solution is to keep customer accounts in bankruptcy remote accounts (such as bank custody accounts), where the funds would only be used to meet the customer's margin calls.

Easy and inexpensive to do.

Doug Chorna
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