At long last, regulators seem to be at least taking one step in the right direction, though they still have a long road ahead.
The MF Global Rule which limits investment choices for client funds and was approved by the CFTC yesterday squarely aims to pacify investors whose confidence has been bruised by the sudden collapse of MF Global.
In so far as the rule increases transparency with customers and into how funds are handled, it is a positive step on the part of regulators, says Matt Simon, senior analyst, TABB Group.
The MF Global rule limits the ability of firms to invest client money in risky foreign sovereign debt, while also banning in-house repurchase agreements, or repos, in which one part of a futures firm swaps customer assets for securities such as municipal bonds or foreign-government bonds held at another part of the firm.
"Client money needs to be in safe hands and this is a clear message," Simon says of the new CFTC rule. By imposing stricter limits on repo agreements and getting rid of potential sovereign debt investment, the CFTC seems to be trying to build back the confidence of the futures customer base. "This is probably a needed step."
In its statement, the CFTC also said it will remove its reliance on credit ratings agencies, making it less easy for firms to invest their client money in certain instruments - a provision originally set out in the Dodd-Frank Financial Act which is a strong stand that major credit rating agencies are not always a reliable source when it comes to investing client funds, Simon points out.
Still, regulators still have a lengthy road ahead of them if they want to fully restore investor confidence, and prevent another MF Global scandal from unfolding at another firm down the line. "Regulators still need to look at audits and the right way to do compliance examinations, among other things," Simon notes.
The MF Global rule itself isn't devoid of potential problems, John Jay, senior analyst at Aite Group, adds.
A rule that is too specific in its scope can cause trouble, he points out. "Sovereign debt could mean a specter of things. What if it refers to German debt, which right now is very safe?"
Meanwhile, regulators still need to explain to the public how MF Global's disgraced CEO, Jon Corzine, was able to lobby the CFTC so powerfully that the regulator, which had voted unanimously to approve the so-called MF Global Rule in 2010, delayed action for over a year.
Lobbying on behalf of the industry and a company is permissible and completely legal, Aite's Jay points out. But "what really gives off a bad appearance is Corzine's proximate activities. It's one thing to lobby against such a rule. But Corzine did something proximate to the action he took. At the end of the day it was the very thing that blew up the company," he notes.
Regulators have notoriously come under investors' fire for years, and more so since the 2008 financial crisis, and the 2009 Madoff scandal.
They have made some progress since then at boosting investor confidence that changes are underway. The wide-reaching Dodd-Frank Act was passed last year, in light of the Madoff scandal regulators have implemented a seemingly successful whistleblower program, and now the MF Global Rule will aim to further limit firms taking undue risk with client money.
But if regulators really want to keep up with the industry they are overseeing, they need to up the ante on their technology. In a statement this week, CFTC Commissioner Scott O'Malia noted that the Commission is "currently overseeing a 21st century market with 20th century tools."
"It is that time of year again when I start to fill out my Christmas list. This year I have some new requests and I am going to ask again for things I didn't get last year," CFTC Commissioner Scott O'Malia said in a statement this week. One of his wishes is that the "Commission continues its early efforts to reorganize itself around technology," he said.
"This year, the Congress appropriated $55 million for technology alone. This funding will allow the Commission's new Office of Data and Technology to facilitate a comprehensive approach to developing advanced technology aimed at automating regulatory functions and improving the Commission's data analysis in support of mission-critical functions under the Commodity Exchange Act. I feel that it would be a missed opportunity if the Commission doesn't capitalize on this targeted investment to focus on developing a strategic plan for technology investment for the next several years," O'Malia added.
O'Malia said he also hopes the Commission will "schedule a series of roundtables to provide market participants an opportunity to fully vet their concerns with staff before they are in that sea of uncertainty between effective dates and implementation dates."
Technology on its own isn't enough. Regulators need to make sure they listen to the industry's concerns on an ongoing basis - and not just after another scandal or crisis - and that they also conscientiously investigate firms, even using old-fashioned procedures.
For example, the Dodd-Frank whistleblower program should ensure that the next time someone tries to lift the lid on another Madoff's criminal activities, he is actually listened to.
But regulators still have a way to go. For instance, they need to make sure there is no way another Corzine could so greatly influence a watchdog as to delay a rule just to protect his own firm's dodgy activities, without anyone raising an eyebrow.
It's no easy task to spot the next fraud before it happens, but it's something regulators are ultimately responsible for doing: prevention of course, is always so much better than a cure.