CFTC to Adopt Client-Funds Rule

Futures brokers say the rule would tie up capital and lead to higher costs for customers.

The top U.S. derivatives regulator will vote today to adopt rules to improve protections for customer funds two years after MF Global Holdings Inc. collapsed amid claims the brokerage illegally financed investments by borrowing from client accounts.

The Commodity Futures Trading Commission (CFTC) was criticized for poor oversight of MF Global and Peregrine Financial Group Inc., whose founder last year admitted stealing more than $100 million from customers. Regulatory exams over the years failed to detect the embezzlement at Peregrine, which happened over almost 20 years.

The CFTC’s rule, proposed in October 2012, would give regulators electronic oversight of futures brokers’ bank accounts to more closely monitor customer funds. It also would require heightened disclosure of how client collateral is held and tougher auditing standards.

“We put a lot of effort into changing our examination approach,” Gary Barnett, the CFTC’s director of swap dealer and intermediary oversight, said Oct. 28 at a conference in New York sponsored by the Securities Industry and Financial Markets Association. “The meeting will hopefully bring closure to our efforts to update and enhance our customer-protection rules for” commodities brokers.

Futures brokers have objected to a measure in the CFTC’s proposal requiring them to set aside additional funds to cover customers’ collateral deficits. The CFTC said the change is meant to prevent brokerages from using end-of-day balancing to “obscure a shortfall.”

Brokerages say the change would tie up additional capital and would probably lead to higher costs for clients. Some say it would be especially detrimental to small and mid-sized brokers that serve farmers and ranchers.

MF Global, which filed the eighth-largest U.S. bankruptcy in October 2011, is returning money to customers who faced a $1.6 billion shortfall as part of the firm’s liquidation. Wrong-way $6.3 billion trades on bonds of some of Europe’s most-indebted nations helped destroy the firm and its brokerage unit.

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