The last year has unfortunately seen a swathe of financial scandals, from the collapse of MF Global to the insider trading guilty verdict for former Goldman Sachs board member Raj Gupta, to the weird case of Peregrine Financial's sudden downfall.
Peregrine has offices just a few blocks from NFA's headquarters in Chicago, the Wall Street Journal notes. The firm filed for bankruptcy in July after suicide attempt by Russell Wasendorf Sr., the firm's founder and CEO.
Regulators have estimated about $215 million is missing from a Peregrine bank account dedicated to holding client funds.
Now, the National Futures Association, or NFA, which oversees parts of the derivatives markets and is in charge of auditing brokerages like Peregrine, has ordered an external review of its operations and has retained the services of Berkeley Research Group. According to a Wall Street Journal source, it is also considering dropping some staff bonuses.
In reviewing its staffing practices, the NFA follows in the footsteps of the SEC, which was much criticized in the aftermath of the financial crisis for having staff that did not understand the complexities of the financial markets.
One former SEC employee who now works for another regulator confirmed during a panel discussion at the recent SIFMA conference that the SEC and other regulators were ill-prepared for the financial crisis.
"Firms and regulators didn't know who owed how much money, who was trading in what. You never knew who valued [derivatives] or how," he said. "There was also the problem of how firms could disclose the valuation of their income when their holdings change every day, every minute."
On the heels of the crisis, the CFTC recognized the urgent need to ramp up its technology, created a data office and, in October 2011, hired Srinivas Bangarbale, the former head of application development at the SEC, as its new chief data officer.
One year earlier, the SEC appointed Tom Bayer as its CIO; he reports to Jeff Heslop, who was named the agency's first-ever chief operating officer in 2010.
The NFA's president and CEO Dan Roth considered resigning after the revelations of the Peregrine fraud, though he didn't formally offer to resign, the WSJ reports.
From the WSJ:
NFA directors determined at the time that it was premature to evaluate his future ahead of the external review. Decisions on bonuses for the 2012 fiscal year, which ended June 30, will also be deferred until that time, the people said.
The Journal notes that the NFA's top 13 officials in 2010 together collected $353,300 in bonuses and incentives, according to documents filed with the Internal Revenue Service.
"Bonuses represented about 7.7% of the approximate $4.6 million in combined compensation collected by those officials that year," the WSJ says.
The WSJ also notes that Berkeley's financial institutions practice includes market experts that helped examine the SEC's failure to uncover the mother of all fraud schemes, Bernard Madoff's $65 billion dollar Ponzi scheme.
While the SEC has hired quants and other financial and technology experts in the aftermath of the financial crisis, many feel that regulators will always be a step behind the firms they regulate – regardless of whether they punish staff for not doing their job properly or, more importantly, hire new staff.
They simply do not have the budget to hire enough highly talented people, experts say.
StreamBase CEO Mark Palmer recently confirmed that regulators are seriously lagging behind the firms they are trying to regulate in terms of technology staff levels. "There are 30 quants optimizing execution strategies using [StreamBase's real-time analytics solution] LiveView at one broker-dealer," he says. "So just one broker-dealer is outgunning the [CFTC] by 10."
Chuck Fulkerson, chief knowledge officer at the Online Trading Academy, agrees that regulators need more financial experts. "But the biggest problem with the regulators is that they can’t hire the true financial experts because they can’t pay the best financial experts," Fulkerson says.
"When you have people making seven or eight figure trading salaries, they are not going to go to the SEC and work for a low six figure salary," he adds.
