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In the wake of the MF Global situation, industry groups are developing proposals to enhance investor protections.

In a notice to members on April 2, the CMEGroup announced proposed changes that include daily reporting of customer segregation levels. Currently the exchange allows for monthly reporting except when a brokerage is on heightened watch, as MF Global was during its final days of existence. The derivatives exchange also recommended that brokerage firm chief executive officer, chief financial officer or other designated representative provide written approval for any wire transfer exceeding 25% of total firm capital.  In the final weeks of MF Global’s existence, near 100% of firm capital was wire transferred out of customer segregated accounts to various counterparties.  At the same time, MF Global customers who requested wire transfers were sent checks during which ultimately bounced.

The National Futures Association (NFA) is the other industry self-regulatory organization, a non-profit organization that is financed through a transactional fee on every trade.  The NFA requires FCMs it regulates to provide daily segregation reports through its Windjammer online system.  Key proposals for consideration coming out of the NFA include limits on transactions occurring from a customer to a non-customer account, limits on commingling customer accounts and a minimum requirement for brokerage firm excess funds.

In Congressional testimony on March 28, NFA president Daniel Roth announced four primary recommendations coming from the regulator and various futures exchanges:

• Requiring all Futures Commission Merchants ("FCMs") to file daily reports concerning their segregated and secured funds. This will provide SROs with an additional means of monitoring firm compliance with segregation and secure amount requirements and a risk management tool to track trends or fluctuations in the amount of customer funds firms are holding and the amount of excess segregated and secured funds maintained by the firms.
• Requiring all FCMs to file Segregation Investment Detail Reports reflecting how customer segregated and secured funds are invested and where those funds are held. These reports would be filed bimonthly and will enhance monitoring of how FCMs are investing customer segregated and secured funds.
• Performing more frequent periodic spot checks to monitor FCM compliance with segregation and secured requirements. FCMs are already audited each year by both their Designated Self-Regulatory Organization and their outside accountant. Supplementing those audits with periodic, surprise testing focused on segregation requirements will increase regulatory scrutiny in this most critical area.
• Requiring a principal of the FCM to approve any disbursements of customer segregated or secured funds not made for the benefit of customers and that exceed 25% of the firm's excess segregated or secured funds. The firm would also be required to provide immediate notice to its SROs.

In testimony, Mr. Roth anticipated some of the measures being adopted within a week while others may require rulemaking.

For full details, visit: http://www.nfa.futures.org/news/newsTestimony.asp?ArticleID=4005