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Opalesque Futures Intelligence

Auditing of FCMs Enhanced by NFA, CMEGroup, AlphaMetrix Technology Pact

Friday, June 28, 2013

By Mark Melin

The National Futures Association (NFA) and the Chicago Mercantile Exchange (CMEGroup) both recently announced alliances with AlphaMetrix to enhance confirmation of investor assets on deposit at Futures Commission Merchants, the brokerage firms responsible for handling assets in the regulated derivatives industry. With this technical integration, the industry's self regulatory organizations will be able to identify and monitor in real time account balances in depositories holding customer segregated funds, a hot issue in MF Global and the PFG fraud.

AlphaMetrix offers a leading technical platform that provides professional asset managers the ability to gain detailed degrees of transparency into a fund's operations.

The managed futures direct account structure has been unique in alternative investing. Regulated by the NFA, CFTC and CMEGroup, investors can view significant trade transaction details - even peering into daily trade positions, all fees and margin to equity visibility.For a risk manager such transparency to the daily operations of the investment enables them to watch for style drift and overall exposure to position risk limits, a key component to active portfolio management regimes. It is this technical feature that regulators will now use to take their auditing one step further - confirming actual bank balances at FCMs.

"This confirmation of bank balances enhances the existing auditing process, where each registered managed futures CTA offering investments to the public undergo an NFA audit that targets the CTA's reported performance, fee calculations and business operations."

Performance that appears in marketing materials and that which is reported to the various managed futures databases is spot checked for accuracy. Audits of CTAs typically occur within the first three years of existence and then occur again depending on perceived need.

Stung by both MF Global and PFG instances, a situation where customer assets went missing from segregated account structure, regulators have moved aggressively to restore confidence. In the PFG situation false bank records were being provided to regulators, according to press reports and court documents (see related article below).

This article was published in Opalesque Futures Intelligence.
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