So, what do we do next?

There’s no way around it: the recent scandals at MFGlobal and PFGBest have rocked confidence in the futures industry. Some of the issues of concern to investors are being addressed. For instance, the passing of the so-called “MFGlobal” or “Corzine” rule, which limits the ways in which a clearing firm may gain interest on the funds they hold for clients, was a step in the right direction.  The requirement that clearing firms verify segregated account balances electronically from here on out helps remove the P.O. Box fraud seen at PFGBest.

These developments are promising, but it cannot be denied that our faith in the ability of the regulators to do what one firm alone cannot is fractured. There’s no sugar coating things like that.

Still, as we mentioned in our newsletter this Monday, we continue to be surprised by the resilience of the investor spirit, with client conversations moving from what we’re doing to fight for the return of their hard-earned funds to how they can best engage the managed futures space moving forward.

And it makes sense. Despite the concerns we face today, there are also much larger concerns regarding the fragility of the global economy at this juncture, and managed futures, with its strong history of crisis performance, can be a desirable diversifier in investment portfolios for sophisticated clients. Past performance is not necessarily indicative of future results, but we have to say, we admire the level-headed approach that many of our clients have embraced.

So, the question becomes- where do we go from here?

We believe that the investigation of the NFA and the implementation of necessary reforms are very important moving forward, but for investors that are unsatisfied with waiting for the government to step up to the plate, there are certain steps that can be taken now to help protect their investments without shutting themselves out of the market. We’ve received dozens of inquiries requesting insight into this matter precisely, and here’s what we’re saying.

Initially, working with a firm with multiple clearing relationships in place, and splitting assets between those clearing firms, can help keep you active in the market should problems arise at one of the clearing firms with whom you hold funds. Part of the PFGBest crisis has been investors forced to the sideline, watching markets move in ways that might benefited the managed futures programs they were involved in prior.

The issue then becomes how to have as much faith as possible in those multiple clearing firms you may split your assets across. In the past, consumers have relied on regulatory bodies to reflect on the health and security of FCMs across that industry, but in a world where that ability has been called into question, it becomes necessary to consider other factors in your decision making process. What might investors consider in their FCM selection process?

• Public v. Private-
  Their stock price, while not necessarily reflective of responsible handling of client funds, can serve as the canary in the coal mine for financial complications at the company. In the vein of, “better safe than sorry,” paying attention to such indicators can provide early warning of potential headaches on the horizon, giving you the opportunity to transfer business before issues arise. For instance, MFGlobal experienced a precipitous decline in their stock price ahead of their bankruptcy and subsequent abuse of clients. One case does not a trend make, of course, and determining where your “line in the sand” might be on price declines can be tricky, but it’s something to consider. To be fair, not all publicly traded firms will take your business; in fact, there are some that refuse to work with smaller clients at all, preferring to work with clients with tens of millions of dollars. However, there are a few which accept individual investors with whom we work.

• Size of the Independent Auditor–
  Another potential requirement might be to only select FCMs which use large, well-known auditing firms in their annual certified audits. This, as we explained last week, is not necessarily a guarantee of flawless execution; there are smaller auditors that are just as competent, if not more so, than some of the titans, who have, admittedly, dropped the ball in cases such as Enron and MFGlobal. That being said, and as the Sentinel case highlighted, auditors can and will be held liable if their errors result in hardship for investors. If the FCM you’re clearing with were to encounter an issue that impacted your funds, and the auditor was small, your ability to recoup losses via a lawsuit would be diminished, whereas larger firms with deeper pockets and larger insurance policies may be easier to hold accountable. These safety nets are the kinds of things clients are looking for now.

• Designated Self-Regulatory Organization (DSRO)–
  Until a full investigation takes place, we know some investors are refusing to work with FCMs whose DSRO is the NFA, instead giving preference to those firms audited by the CME. You know where we stand on the question of NFA; we are, after all, calling for Congress to investigate them. While some point to the CME’s role in the MFGlobal case as a rebuttal to this factor, remember that the pilfering of funds at MFGlobal really took place in the final hours of the firm’s existence; the PFGBest fraud spanned 20 years without NFA detection. Food for thought.

These are things to think about moving forward. We believe each aspect has its merits, and, used in combination, form a great starting place for investors as they make their FCM selections.

That being said, Attain is working diligently to try and find ways to provide further protection for clients, independent of government action or which FCM is chosen. For instance, we’re in the process of outlining  a way to protect as large a portion of client capital as possible via SIPC or FDIC insurance- something not currently offered to commodity clients in segregated accounts. We’re talking with several FCMs and third-party administration service providers who usually work on the hedge fund side of things about ways to allow clients to only put the required margin for their active positions with the FCMs, while keeping the rest of their funds in a secure, SIPC or FDIC protected account, sweeping excess margin back in on a daily or weekly basis. This initiative is still being developed, but we’re working hard on making it a reality for our clients as quickly as possible.

We’ve made it pretty clear that we’re outraged over the regulatory shortcomings made apparent in the PFGBest scandal (and ask you to sign our petition if you haven’t already), but equally frustrating is the fact that investors who are seeking to diversify and fortify their portfolios by accessing the futures markets are missing out on the opportunity due to real and perceived issues with fund security.  Following some of the guidelines other investors are taking may help ease some of those concerns,  and allow investors to re-engage markets  in preparation of the possible upcoming crisis.

**As a side note, we have received many calls from former retail trading clients of PFG (people who trade their own accounts via an online platform). While we don’t traditionally work with retail business, we can point you in the direction of some good firms and brokers who handle such accounts, so please give us a call if needed to discuss where you should go from here.