U.S. futures regulator unveils customer fund protection plan

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U.S. futures regulators unveiled a proposal on Tuesday to strengthen protections for customer money, a move designed to bolster confidence in the wake of the high-profile failures of brokerages MF Global and Peregrine Financial Group.

The Commodity Futures Trading Commission's (CFTC) proposal comes nearly one year after futures brokerage MF Global collapsed as investors fled following revelations of heavy bets it made on European sovereign debt.

Investigators are still probing the firm's failure, but they have said it appears that MF Global dipped into its customer money in a desperate effort to combat its liquidity crisis. The fiasco left an estimated $1.6 billion shortfall in customer money.

CFTC Chairman Gary Gensler told the Securities Industry and Financial Markets Association's annual meeting on Tuesday that the agency voted behind closed doors on Monday to put the reforms out for public comment.

The proposal was supposed to be released on Thursday at a public meeting, but the CFTC opted to vote sooner.

"This proposal is about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected," Gensler said. MF Global's alleged misuse of customer money has shaken investor confidence in the futures markets, and led some lawmakers on Capitol Hill to criticize the CFTC for lax oversight.

Then in July, investors in the futures market suffered again after a smaller brokerage, Peregrine Financial Group, filed for bankruptcy in July.

The firm's founder and CEO Russell Wasendorf Sr. confessed to stealing more than $100 million from his customers and tried to commit suicide.

On the sidelines of SIFMA's conference Tuesday, Gensler said the CFTC's proposal contains several elements.

One of the rule's centerpieces, he said, would give regulators at the CFTC and self-regulatory organizations like the National Futures Association direct electronic access to brokerages' bank accounts so they can check for red flags. Such a move would address the lessons learned specifically from the Peregrine case, in which Wasendorf duped regulators by using forged bank statements and a post office box to hide shortfalls in customer money.

"I believe the events of Peregine this summer highlight that we need to do more," Gensler told reporters.

The proposal also lays out strategies for futures brokerages to strengthen their own internal controls and disclose more details to investors about firm-specific risks, among other things.

"We all learned from both MF and Peregrine that taking people at their word isn't good enough," Democratic CFTC Commissioner Bart Chilton said in a statement.

"We need electronic access to accounts so that we know customers' money is there 24-7-365. We can't have folks taking advantage of customers with Photoshop and a post office box anymore."

DODD-FRANK DEADLINES

The CFTC has been trying to address those two incidents while also juggling the enormous task of implementing new rules for the $640 trillion over-the-counter derivatives market required by the 2010 Dodd-Frank Wall Street reform law.

The law requires standard swaps to be traded on regulated platforms and routed through clearing houses, which stand in between parties to guarantee trades.

At Tuesday's conference, Gensler gave industry players some updates on the progress of Dodd-Frank implementation. October 12 represented a key date for the CFTC because it started the clock ticking for compliance with certain rules, such as swap dealer registration.

Gensler said he expects commissioners will begin reviewing draft final rules this month governing swap execution facilities, a new type of trading platform created by Dodd-Frank, and how they will help provide pre-trade price transparency.

"My hope is we will be able to finalize this before the end of the year," Genlser said.



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