Washington Explores Insurance, Other Protection for Futures Customers

U.S. regulators and futures industry players said on Thursday that there is no perfect solution to safeguard customer money in the wake of two major brokerage scandals, but added that policymakers should move quickly on some important fixes.

Bart Chilton, a Democratic commissioner at the Commodity Futures Trading Commission, kicked off the reforms dialogue by revealing a plan that would create an insurance fund for futures accounts.

The plan, which would require congressional action, would give futures customers up to $250,000 in protection and be modeled after a similar industry fund for securities customers.

It would be one measure that regulators hope could restore some confidence in the markets after futures brokerages MF Global Holdings Ltd and Peregrine Financial Group collapsed in recent months, leaving customers with roughly a $1.8 billion shortfall.

At the roundtable held at the CFTC, experts debated other fixes, including boosting auditing standards, new liquidity requirements and alternative segregation models. But there was no broad consensus on a reform agenda.

“I don’t think what any of us ever want to do is try to come up with some magic bullet,” said Dan Driscoll, executive vice president of the National Futures Association, an industry regulator that has come under harsh criticism for not catching fraud at Peregrine sooner.

But he said regulators and industry groups should ask: “What is it that keeps us from sleeping well at night? Is there anything we’re missing?”

CFTC officials are already drafting rules that would give regulators and customers direct access to brokers’ bank accounts without requiring permission from banks.

The measure has attracted widespread support after Peregrine CEO Russell Wasendorf Sr. confessed he concealed a two decade-long fraud by doctoring bank statements to make regulators think his firm had nearly twice the assets it did.

He was arrested last month and the Department of Justice and the CFTC are investigating the fraud.

Regulators are also reexamining the “self regulatory model,” which allows self-regulatory organizations such as the NFA to help government agencies oversee the industry.

INSUFFICIENT PAYBACK?

A futures fund could be modeled on the Securities Investor Protection Corp., which guarantees customer securities investments up to $500,000 in the event a brokerage firm collapses.

Under Chilton’s proposal, a futures fund would raise up to $2.5 billion, through an initial assessment on futures brokerages of no more than 0.5 percent of a firm’s annual gross revenue. A board would then set annual assessments, with a possible discount for firms serving end-user customers.

But even small assessments have raised concerns among some industry representatives.

Speaking at a U.S. Senate committee hearing on MF Global and Peregrine’s collapse earlier this month, CME Group Inc. President Terrence Duffy said raising money for such a fund might be too costly to the industry to be appealing.

And even if futures brokerages were willing to pitch in, customers might still be dissatisfied by the ultimate payback.

“Ask the folks that were investing with Mr. Madoff when he took $50 billion and SIPC gave them $2.5 billion in return,” he said, referring to infamous Ponzi schemer Bernard Madoff.

Chilton disagreed.

“Ask those that lost money on MF Global or Peregrine if they wish they’d have had insurance. Of course they would,” he said in an email.

Any measure creating such a fund would likely face an uphill battle in a divided Congress, but some lawmakers say the idea is worth exploring further.

“It is a serious and important proposal that warrants careful consideration,” Democratic Senator Tom Harkin said on Thursday in a statement.

Still, he noted there are “valid questions to be asked concerning an insurance fund.”