Association evaluating more substantive changes
“The demise of MF Global has shaken the confidence of many futures market participants concerning the safety of segregated customer funds,” said the association. “We believe these preliminary recommendations are essential to begin reestablishing confidence among futures market participants and to help safeguard customer funds.”
The association’s initial recommendations for addressing the aftermath of the MF Global bankruptcy and its adverse impact on entities with customer-segregated funds are:
- The Commodity Futures Trading Commission should require daily reporting of segregated fund positions by futures commission merchants to both their Self-Regulatory Organization, SRO, and to the CFTC.
- The commission should require daily reporting of segregated fund investments by futures commission merchants, detailed by maturity and quality, to both their SRO and to the commission.
- The commission should conduct a formal review of futures commission merchant investment options for customer funds, with a view as to whether the agency should further limit allowable investments only to very safe instruments.
- The commission should require reporting by futures commission merchants to their SRO and to the commission of significant changes in investment policies or holdings.
- Futures commission merchants should be required to provide greater transparency to customers of where customer funds are invested, potentially achieved through such means as posting on the Commodity Futures Trading Commission website, futures commission merchant websites and/or publication in customer prospectuses.
- The commission and SROs should enhance monitoring of futures commission merchant reporting. Both sets of regulators should conduct more detailed and more frequent audits, as well as unannounced spot checks of futures commission merchants.
- To assign accountability and to aid in establishing that fraudulent activity has occurred in the event customer funds are misappropriated, the commission should require the signature of two authorized principals of a futures commission merchant, such as the CEO, chief financial officer or other senior officers, to move funds out of segregated customer fund accounts to non-customer accounts.
- Futures commission merchants should be required to provide immediate notice to their SRO and to the commission if the firm moves more than a specified percentage (to be determined by the commission) of excess segregated funds to non-customer accounts.
- Futures commission merchants should be required by their SRO periodically to certify policies and procedures to ensure the safeguarding of customer-segregated accounts and compliance with applicable laws and regulations regarding such accounts. All SRO examinations should require principals of futures commission merchants to certify that policies and procedures are adequate, effective and being observed by the futures commission merchant. At least annually, SROs should be required by the commission to review policies and procedures to determine adequacy and compliance.
- A rigorous review by the commission of capital requirements for futures commission merchants and broker-dealers needs to be conducted, with a view to scrutinizing the current practice of allowing double-counting of required capital when a firm operates as both a futures commission merchant and a broker-dealer.
The National Grain and Feed Association said it is evaluating more substantive changes designed to protect against a future MF Global-type situation and the adverse impact it has had on those with customer-segregated funds.