For years, the futures industry had an impeccable reputation for safeguarding customer funds deposited at FCMs. Now, within a very short time frame, we are dealing with a shortfall in customer segregated funds at two FCMs, and their ensuing bankruptcies. Customers at both firms suffered real harm, the type of harm that all regulators attempt to prevent.
The MF Global and Peregrine Financial Group customer losses are a painful reminder that regulators must continuously improve our surveillance, audit and fraud detection techniques to keep pace with changing technology and an ever-more-complicated financial marketplace. We know that we can never completely eliminate fraud, but we must continue to adopt rules and surveillance techniques to try to reduce the opportunity for fraud as much as possible. That is why the process of refining and improving regulatory protections is ongoing and constant.
After the MF Global bankruptcy, NFA and CME Group in conjunction with the IntercontinentalExchange, the Kansas City Board of Trade and the Minneapolis Grain Exchange announced the formation of a joint committee to review what steps self- regulatory organizations (SRO) could take to strengthen safeguards for customer segregated funds held at the firm level. The SRO committee's most significant recommendation—one that will greatly enhance customer protection—is the confirmation of customer segregated and secured amount funds on a daily basis.
NFA's Board of Directors agreed that NFA, in conjunction with CME Group, would develop a daily electronic segregation confirmation process. This new process requires all depositories holding customer segregated and secured amount funds to file daily reports with each FCM's designated self-regulatory organization reflecting the balances held in those accounts. The segregation confirmation system performs an automated comparison of that information with the daily reports filed by the FCMs and generates immediate alerts for any material discrepancies.
By December 31, 2012, the first stage of this system—limited to daily confirmations from bank depositories for cash and securities balances—was operational. NFA is currently receiving daily account balances from all fifteen banks holding customer funds for the FCMs for which NFA is the DSRO. These fifteen banks are reporting balances for over 180 accounts, which hold approximately 95% of the customer funds held at banks for the FCMs for which NFA is the DSRO. FCMs have until February 15, 2013 to ensure that any bank holding customer funds complies with the daily electronic reporting requirements.
The second phase of the system, which will be ready in 2013, will include daily confirmations from all non-bank depositories for customer segregated and secured amount funds. Depositories that are unable to report FCMs' customer segregated and secured amount balances on a daily basis will not be considered acceptable.
In early 2012, NFA had already begun to make better use of technology to improve its audit confirmation procedures. NFA moved to an electronic confirmation process during FCM examinations in order to verify segregated funds balances during annual audits. The daily segregation confirmation system goes well beyond the annual electronic confirmation process and will further safeguard customer funds.
Tom Sexton
