After the twin scandals of MF Global and Peregrine Financial rocked the futures industry in 2011 and 2012, the National Futures Association underwent a review, not only of its internal procedures, but also of its rules. In Part Two of this two-part John Lothian News exclusive, NFA CEO Dan Roth summarizes the changes made to the agency’s rules to restore customer confidence.
Much of the rulemakings addressed by the NFA center on segregated funds – funds owned by customers that are placed on deposit with a futures commission merchant to cover margin on customer positions.
“The most important and effective rule change we made has to do with the daily confirmation of seg balances,” says Roth. “Now we confirm every seg balance from every depository every day.” “We get a report from the FCMs daily saying ‘this is how much they are holding in customer segregated funds and where they are holding them, and that same day we get a confirmation from the bank, from the clearing house confirming that balance, so we know every day if there is any kind of discrepancy. That was a huge step forward regarding customer protection.”
Roth says the another rule change has to do with excess customer balances, or what the CFTC calls “residual interest.” The NFA’s rule is a direct response to the MF Global bankruptcy, in which customer segregated funds were used by the firm to cover margin on its proprietary trades. Under the rule, which is often referred to as the “Corzine Rule,” if any FCM draws down its excess seg by more than 25 percent in one day, the designated self-regulatory organization must be notified immediately, and an authorized principal of the FCM must sign off on the drawdown.
“We didn’t want to have a repeat of the situation in which, after the seg money was missing, the principals of the firm shrug and say “well I didn’t know.”
Another rule change stemming from the MF Global bankruptcy requires FCMs to be more transparent in terms of how and where they invest customer funds.
Roth ends with an explanation of the difference between the NFA’s residual interest rule with that of the CFTC, which has more to do with customers incurring large debits that could bring a firm down. “I’m sure the commission had other concerns, but it had nothing to do, as far as I can make out, with either MF Global or Peregrine.”