Futures commission merchant bankruptcies create loss of confidence

Systemic change, more effective regulatory oversight needed, says National Grain and Feed Association

The National Grain and Feed Association has told Congress that the cumulative effect of the MF Global Inc. and Peregrine Financial Group insolvencies and the misappropriation of customer funds has created a “huge loss of confidence” in the adequacy of current rules to protect customer funds, as well as the adequacy of regulatory oversight.

The association said the Peregrine incident, in which more than $200 million in customer funds allegedly were fraudulently misappropriated for a variety of illegitimate purposes over an extended time period, demonstrated that the MF Global incident was not a one-time event and that serious risk to customer funds remains. The “cumulative effect” of the MF Global and Peregrine failures within a relatively short time — and “especially the failure of PFG at a time when regulators presumably were on heightened alert for problems” — has reiterated the need for steps to be taken to “begin restoring confidence and to bolster protections for segregated customer funds,” said the association.

At a hearing conducted Aug. 1 by the Senate Agriculture Committee, Diana Klemme, vice president and director of the Grain Division at Grain Service Corp., said the discovery of long-term fraud and misappropriation of customer funds at Peregrine “removed all doubt” that systemic change and more effective regulatory oversight are needed. “We consider the loss of customer confidence in the system to be (a situation that is) both urgent and unsustainable,” said Klemme. “The financial industry, Congress and our regulators all must recognize that trust and confidence are not easily regained. It will take real change, protection of customer funds, real-time transparency and significantly improved (regulatory) oversight — and not after endless regulatory debate and finger pointing.”

During a separate hearing conducted July 26 by the House Agriculture Committee, John Heck, senior vice president of The Scoular Company and a member of the National Grain and Feed Association’s executive committee, highlighted a series of legislative, regulatory and other policy recommendations submitted by the association in late June to the House and Senate Agriculture Committees, as well as to the Commodity Futures Trading Commission:

  • U.S. bankruptcy code reforms
  • fully segregated customer accounts
  • insurance for commodity futures customer accounts