The National Grain and Feed Association(NGFA) has issued its preliminary recommendations for safeguarding the sanctity of customer funds in the aftermath of the MF Global Inc. bankruptcy. "The demise of MF Global has shaken the confidence of many futures market participants concerning the safety of segregated customer funds," the NGFA said in recent letters to the Senateand House Agriculture Committeesand the Commodity Futures Trading Commission(CFTC). "We believe these preliminary recommendations are essential to begin reestablishing confidence among futures market participants and to help safeguard customer funds."
But the NGFA said that while its initial recommendations will help enhance reporting, transparency and accountability in handling customer funds, they represent only first steps that can and should be implemented quickly
The NGFA said it continues to evaluate 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. Additional potential options being examined by the NGFA include various "full-segregation models" for isolating and safeguarding customer funds, and the costs associated with doing so; the viability and costs associated with extending insurance coverage to commodities accounts, either privately provided or under the type of insurance program currently in place for securities accounts; and potential changes to the U.S. bankruptcy code to prevent segregated customer funds from being swept into liquidation proceedings and to prevent the so-called "safe harbor" provisions of the bankruptcy code – which require proving fraudulent conveyance – from preventing a retrieval of customer funds. The NGFA said it plans to complete its evaluation and offer additional potential recommendations by early June.
The recommendations are in response to the estimated $1.6 billion in customer-segregated funds allegedly misallocated in the days preceding the Oct. 31 bankruptcy filing of MF Global Inc. The NGFA's initial recommendations for addressing the aftermath of the MF Global bankruptcy and its adverse impact on entities with customer-segregated funds include:
- The CFTC should require daily reporting of segregated fund positions by futures commission merchants (FCMs) to both their Self-Regulatory Organization (SRO) and to the CFTC.
- The CFTC should require daily reporting of segregated fund investments by FCMs, detailed by maturity and quality, to both their SRO and to the CFTC.
- The CFTC should conduct a formal review of FCM investment options for customer funds, with a view as to whether the agency should further limit allowable investments only to very safe instruments.
- The CFTC should require reporting by FCMs to their SRO and to the CFTC of significant changes in investment policies or holdings.
- FCMs should be required to provide greater transparency to customers of where customer funds are invested, potentially achieved through such means as posting on the CFTC website, FCM websites and/or publication in customer prospectuses.
- The CFTC and SROs should enhance monitoring of FCM reporting. Both sets of regulators should conduct more detailed and more frequent audits, as well as unannounced spot checks of FCMs.
- To assign accountability and to aid in establishing that fraudulent activity has occurred in the event customer funds are misappropriated, the CFTC should require the signature of two authorized principals of an FCM, such as the chief executive officer, chief financial officer or other senior officers, to move funds out of segregated customer fund accounts to non-customer accounts.
- FCMs should be required to provide immediate notice to their SRO and to the CFTC if the firm moves more than a specified percentage (to be determined by the CFTC) of excess segregated funds to non-customer accounts.
- FCMs 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 FCMs to certify that policies and procedures are adequate, effective and being observed by the FCM, the NGFA said. At least annually, SROs should be required by the CFTC to review policies and procedures to determine adequacy and compliance.
- A rigorous review by the CFTC of capital requirements for FCMs 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 an FCM and a broker-dealer.