Futures Industry Head Seeks Study of Insurance Fund

The chairman of a futures industry trade group said on Thursday that serious consideration should be given to the creation of an insurance fund to protect futures customers, after two major scandals shook confidence in the market.

Michael Dawley, chairman of the Futures Industry Association and a Goldman Sachs managing director, said an organization like the Institute for Financial Markets should evaluate the viability of such a fund.

“It makes sense to study it,” said Dawley, speaking at an emergency meeting of a Commodity Futures Trading Commission advisory group. “I am confident that this industry will direct all of its passion and pride towards a solution that will be meaningful and hopefully enhance and bring back client confidence,” he said.

IFM is a non-profit affiliate of the FIA, which provides data and training on financial issues.

The interest from the FIA gives momentum to a push to create a futures insurance fund similar to the Securities Investor Protection Corp., which guarantees securities investments up to $500,000 in the event a brokerage firm collapses.

Recent calls for such a fund started after MF Global filed for bankruptcy in late October, leaving investigators searching for an estimated $1.6 billion in missing customer funds.

Earlier this month, Peregrine Financial Group, an Iowa-based brokerage, collapsed after regulators discovered that the firm may have misused roughly $200 million of customer money.

After the failure of Peregrine, the CFTC called for an emergency meeting of its Technology Advisory Committee to explore technological fixes to protect customer funds.

“The actions taken by the two firms are a complete and total betrayal of the public trust,” said Scott O’Malia, a CFTC commissioner and chairman of the advisory committee. “An immediate and comprehensive overhaul of customer protection safeguards is required.”

The idea of an insurance fund has gained loud support from Bart Chilton, a Democratic CFTC commissioner.

“It just seems unfair to me that banking customers are protected, securities customers are protected, and futures customers aren’t,” he said on Thursday. Chilton wrote a letter to lawmakers urging the creation of such a fund earlier this week.

A SIPC-like fund for futures customers has its challenges, according to industry experts.

Some, including CME President Terrence Duffy, have said the fund would need to be so big to appeal to futures traders that it might be too expensive to be beneficial.

Dawley, while supportive of exploring the idea of a fund, pointed to the disadvantages of providing insurance for bad actors.

“We have to be careful so that we are not lowering the bar and providing coverage for organizations that are not up to snuff knowing that they have this backstop,” he said.

The panel also discussed technology-based protections that have been floated by industry groups and regulators, with broad consensus for electronic reporting by banks to regulators.

Gary Barnett, director of the CFTC’s swap dealer division, reiterated the agency’s goal of giving itself and self regulatory organizations like CME “24/7 direct, read-only access” to the bank accounts of futures brokers, without their permission.

Chris Hehmeyer, chairman of the board of the National Futures Association, Peregrine’s first-line regulator, said his agency was hoping to establish a “big system” that allows the regulator to compare daily segregated fund reports from the futures brokers with online reports from banks.

He said the NFA would likely move forward on some of its proposals at its August board meeting.

Panelists voiced concerns about the electronic model, such as challenges of verifying certain types of customer accounts. But most agreed that the industry should move quickly toward implementing safeguards where possible.

“It doesn’t have to be a big hairy monster all at once,” said Hehmeyer.