The largest U.S. grain trade group was stunned by the latest scandal to hit the futures industry when Iowa-based brokerage PFGBest collapsed after regulators accused the firm of misappropriating customer funds.
"Even though we don't know at this point the scope of Peregrine's agricultural customers or their grain customers, it is troubling to have another failure this soon after MF Global at a time when presumably there was enhanced oversight by regulators," Todd Kemp, vice president of marketing for the National Grain and Feed Association, said.
NGFA members, who include more than 1,000 grain elevators, food processors and exporters, are still reeling from the collapse of giant broker MF Global just nine months ago when $1.6 billion in segregated customer funds disappeared, hitting dozens of large farm-related businesses with massive losses.
Peregrine Financial Group, PFGBest's regulated unit, filed for bankruptcy on Tuesday in Chicago after regulators accused it of misappropriating customer funds for more than two years.
The Commodity Futures Trading Commission (CFTC), which along with industry regulators had given a clean bill of health to dozens of brokers following spot checks in January, alleged that Peregrine Financial Group and its owner, Russell Wasendorf Sr, had defrauded customers and lied to regulators in order to hide a shortfall that now exceeds $200 million.
Kemp said even if the potential losses among its members from accounts at PFGBest ended up as a fraction of the losses at MF Global, the latest scandal eroded confidence in the futures markets and regulators and signaled a need for further scrutiny and change.
"We issued some preliminary recommendations back in April and more recently some recommendations to the CFTC and the Congress for some policy changes that we think are more important now than ever to enhance customer protections both before and after a bankruptcy or a liquidation situation," Kemp said.
Those proposed changes included daily public reporting of segregated fund investments and other improved market transparency measures; more detailed and frequent audits of brokers; and rigorous review of capital requirements for qualifying brokers.
"We are really looking forward to a full explanation from the regulators about just what happens and how apparently it happens over a fairly long period of time before detected," Kemp said.
Diana Klemme, vice president of Grain Service Corp in Atlanta, which serves many agricultural hedgers in the futures markets, said the PFGBest news is exactly what the grain business did not need at a time confidence in the markets was beginning to rebuild after the MF Global fiasco.