Futures Account Insurance Getting Traction

As the year draws to a close, it’s hard not to reflect on the tumultuous times experienced in the futures industry. A great deal of progress has been made in enhancing customer protections, but there is still work to be done, particularly in what we view as one of the most significant arenas: insuring client funds against an MF Global/PFG type clearing firm failure.

A wide variety of proposals have been put forth, ranging from a SIPC-styled program to a liquidity facility protection fund. Giving us a little more hope than we’d usually have is the fact that the conversations seem to be progressing much further post-PFG than they did post-MFG. Reuters reports:

Fed up with what they see as authorities’ inadequate response to MF Global’s collapse, the CCC’s founders – traders James Koutoulas and John Roe – discussed the plan in a meeting this week with the chairman of R.J. O’Brien & Associates, the largest independent futures brokerage and clearing firm in the United States. They said they will gauge support from hundreds of other firms in the coming weeks.

Separately, exchange-operator CME Group Inc (CME.O), the National Futures Association (NFA), Futures Industry Association and Institute for Financial Markets said on Friday they will underwrite a study on the cost of insurance.

In other words, we’re moving in the right direction. However, not everyone is on board with the idea of protecting client funds. The CFTC’s response, in particular, would be laughable if they weren’t serious:

As recently as November, the Commodity Futures Trading Commission ignored the idea of an insurance fund when it proposed more than 100 pages of rules it said would enhance protections for futures traders after the failures of MF Global and Peregrine Financial, a smaller brokerage, exposed cracks in industry safeguards. Nowhere in the proposal was there a suggestion that funds in futures accounts be insured.

Instead, the CFTC proposes requiring futures brokers to explicitly tell their customers that their funds are not protected by insurance in the event of a bankruptcy or insolvency of the broker, or if customers funds are fraudulently misappropriated.

As a heads up to the folks at the CFTC – we can say, unequivocally, as one of the firms you regulate, that this “solution” is not acceptable to us or our clients. Try, try again.

Still, the CFTC having their head in the sand on this one might be a blessing in disguise. The article went on to explain:

[Commissioner] Chilton told Reuters he was “certainly not opposed to a private-sector solution” but thought a government-run program modeled after SIPC made more sense. He expects legislation will be introduced in early 2013.

“Why reinvent the wheel here?” Chilton said. “We have a government system for banking and securities that works well. The easiest thing to do is just do something similar for futures customers.”

The CCC wants to set up private-sector insurance before Congress takes action. A government-run fund based on SIPC would be a mistake because it would take too long to return money to customers, said James Koutoulas, who founded the CCC with Roe.

If you’ve ever had to interact with the CFTC for any reason, you’re probably nodding in agreement with Koutoulas at this point. Generally speaking, Attain is in favor of moving forward with a privately offered liquidity facility such as the one the CME uses for its own members to ensure that markets run smoothly. We’ve seen how government agencies handle futures affairs, and we’d rather see some of our own organizing the efforts. Further, if the Congressional dysfunction of the past two years is to continue (which, at this point, is looking pretty likely), the odds of a futures insurance fund getting the attention it deserves are slim to none, and we’re a little impatient.

Bottom line: the wheels are turning, and there’s a small army of futures professionals fighting to get their clients the protection they deserve. Good news, indeed.

One comment

  1. With CME Group handling 3 billion (their website numbers were difficult to read) contracts per year,
    the minimal fee of one dime per contract would provide $300 million per year in insurance. Or 1 penny over 10 years. The $300 million would be more than enough to cover PFG losses.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.