For those of you paying attention, the CFTC is hosting a roundtable today on regulatory reform. The CCC has details up for those interested in listening in here.
The biggest revelation here is the introduction of a plan for SIPC-style coverage for futures investors from Commissioner Bart Chilton. Here’s the comment we contributed on the CFTC website. We encourage you to submit your own here.
We have written extensively on the reforms we believe necessary to fortify the health of the futures industry moving forward, and would like to bring them to your attention for today’s discussion.
1. Extend SIPC protection to futures investors.
We understand that this element is already being discussed today, but we want to highlight the significance of such a measure. Every day, we speak with an investor who says they will not enter the futures markets without protections similar to those offered to securities investors. Generally speaking, we agree with the plan presented by the CCC, especially on the inclusion of a liquidity facility in order to get funds moved quickly, and a method for paying back customers. We also agree that the limits should apply to the shortfall amount, not the account balance.
Where we disagree is on the size and scope of the fund. We don’t believe the industry will go for an industry-wide solution. The HFT firms using futures aren’t going to want to pay any extra fees, nor will more institutional FCMs like Goldman Sachs.
Our tweak to Roe’s plan would be for the protection to be voluntary. This would greatly reduce the size – with maybe only 10% to 20% of all segregated funds opting into such protection. The smaller individual investors utilizing the futures markets would be the ones who would choose to do it, and they would be the ones who would be willing to pay for it.
2. Establish regulation outlining standard operating procedures in the wake of an FCM bankruptcy.
Part of the reason that the MFGlobal situation was so chaotic, and that PFGBest clients are still flapping in the wind, was the result of poor planning. With MFGlobal, positions were stuck in limbo. There was no infrastructure for facilitating an orderly transfer of accounts, which led to an ad-hoc distribution among arbitrarily selected FCMs without the transfer of legal documents- including those necessary for a CTA to trade on behalf of a client. Without any stipulations regarding timeframe, the process was drawn out to the detriment of all parties involved- a problem echoed in the current PFGBest fund dispersal hold up.
In the wake of both the Refco and Sentinel scandals, one would think that remedies would already have been put into place for such administrative Bermuda Triangles, but unfortunately, that did not occur. In order to prevent such a disorderly dissemination from occurring again, we suggest that new regulations be developed; outlining exactly what is to happen in the event of an FCM going bankrupt. The old plan seemed to be to wait for a suitor to step up and take on all of the accounts. This is simply inadequate today. Coming up with standard operating procedures outlining the immediate impact on open positions, where the client funds are to be transferred to and within what timeframe, and so forth would help avoid the confusion we’ve seen to date.
3. Establish regulation under which language must be added to all creditor agreements for any registered FCM in which those creditors agree to the assignment of the customer segregated accounts as the primary lien holder on all assets of the company.
Under current provisions, segregated accounts are given what is, in our minds, inadequate protection during the bankruptcy process. True, their accounts cannot be tapped to meet outstanding financial obligations of the bankrupted FCM, but there’s also no guarantee of those funds being made whole in the event of a shortfall, nor protection from a too big to fail bank like JP Morgan sending in armies of attorneys arguing that their claim should take precedence over the customers. While clients may, after a pro-rata distribution, file a claim with the Trustee in an attempt to get their missing money back, it appears that there are back door methods for big creditors like JP Morgan Chase and those who held MF Global bonds to get in front of the customers in the claims process.
In our minds, segregated account holders should absolutely come first in the claims process. Unlike the creditors and bold holders, who knowingly accepted the risk of default when they handed over their money, MFGlobal clients were paying MF Global to hold their funds- not lose them. With this in mind, we believe that the law must designate segregated accounts as the primary creditor if an FCM goes belly up, ensuring that, should there be a shortfall in client segregated funds, available assets of the bankrupt FCM will be tapped to make those accounts whole before any other creditor gets their day in court.
4. Establish enhanced accountability standards for the National Futures Association.
The PFGBest situation has highlighted glaring deficiencies within the National Futures Association (NFA) – deficiencies which have yet to be answered. We, along with many in the industry and Senators on the Senate Agriculture Committee, have demanded explanation for missed red flags and transparently insufficient auditing procedures, but have received no answers.
The NFA, as a quasi-governmental agency, enjoys very little liability for their action or inaction under the pretense of facilitation of their purpose. After all, if there’s the risk of them getting sued for every member responsibility action, it becomes difficult for them to do their job. However, despite this luxury, they are not held to any of the other standards we assign to governmental agencies – including transparency.
While the House Committee on Agriculture called for us to, in essence, clean up our own mess, we cannot do that without the transparency necessary to compel accountability. The PFGBest case has highlighted incompetency, but in its wake, allegations raised cast serious doubt on their hiring policies, consistency in application of the rules, and responsiveness to members. As Commissioner Chilton said himself today, “The regulators should be held accountable.”
To remedy this, we would argue that the CFTC should compel heightened transparency to facilitate this accountability, including, but not limited to:
- Requiring release of board meeting minutes as a matter of public record
- Requiring release of materials used in member responsibility action formation as a matter of public record
- Requiring quarterly public meetings with the NFA leadership and board with an open questioning period
- Institution of a “vote of no confidence” stipulation in the bylaws, allowing for the industry to unseat the NFA president by membership vote should 10% of the membership base call for consideration
These are trying times, and we thank you for your drive to protect clients. We hope you will take these proposals into consideration.
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