Real-Time Monitoring of Futures Brokers' Bank Balances Proposed
July 26, 2012
In the wake of the loss of $100 million of customer funds in the Peregrine Financial Group debacle, commodities industry regulators Thursday unveiled an aggressive vision for monitoring the financial condition of futures commission merchants: continuous real-time checks on balances held in their bank accounts.
The real-time reporting tack, and the technical details necessary for making this possible, were outlined during an emergency meeting of the Technical Advisory Council of the Commodity Futures Trade Commission called by Commissioner Scott O’Malia.
The goal of the discussion: Find technical strategies to prevent commodity investment frauds, like the MF Global case last year, where $1.6 billion of customer money went missing, and the Peregrine case this year, in which $100 million of customer funds disappeared without a trace.
"To state that the meltdown of the two futures commission merchants (FCMs) within the last ten months has shaken public confidence is an understatement,” O’Malia said during prepared comments at the council meeting. “The actions taken by the two firms are a complete and total betrayal of the public trust that have undoubtedly undermined investor confidence so much that an immediate and comprehensive overhaul of customer protection of safeguards is required.”
Fellow CFTC Commission Bart Chilton said regulators need an “Olympic caliber” oversight regime, in which regulators can take “deep data dives” to make sure that customer money is where it is supposed to be “24/7/365.”
“It’s clear that these fraudsters can cost people a lot of money then they put their minds to it,” he said.
The vision for this new regime for protecting customer segregated funds was outlined in part by Gary Barnett, the agency’s Director of the Division of Swap Dealer and Intermediary Oversight.
His division is working on reform in conjunction with the National Futures Association, the futures industry's self-regulatory organization.
The basic approach is to beef up reporting of cash and customer funds, including twice-monthly reports from futures merchants outlining such details as their borrowings, their amount of trading of their own proprietary capital, how they are maintaining separation of company and customer funds and how they are training to effect the separation. Also on the table: Having futures brokers provide analyses of the risks they are facing and the capital reserves they need to maintain to protect against losses of the money in their care, whether their own or that of their customers.
The key element of this new regime though, Barnett said, would be gaining direct access for agencies and self regulatory organizations to an FCM’s custodial and bank accounts at all times. This would be to check the amount of cash on hand and to make sure what is being held for customers is in fact in place. (See "So It Goes. Or Doesn’t.")