We’re starting to feel like the perpetual bearers of bad news. The narrative in the post-PFGBest futures world has focused on how to protect clients moving forward. All options are being considered- industry wide insurance, new penalties for misdeeds, and so forth. One of the options we looked into was the idea of having a separate, SIPC or FDIC account set up to hold client funds, with margin being swept to and from the clearing firm on a daily basis. But as was discussed at the CFTC roundtable, that’s not even an option. Via Bloomberg:
Representatives of Och-Ziff Capital Management Group LLC (OZM) and State Street had urgedthe CFTC to allow the use of the separate accounts to protect swaps collateral. Futures clients don’t have the same option under current regulations.
Custody banks keep records, track performance and lend securities for institutional investors including mutual funds, pension funds and hedge funds.
The agency in 2005 banned the use of third-party accounts for the futures markets because of concerns that futures brokers wouldn’t have quick access to the collateral to back trades. “The immediate and unfettered access requirements is intended to prevent potential delay or interruption in securing required margin payments that, in times of significant market disruption, could magnify the impact of such market disruption,” the CFTC said in its 2005 decision.
The decision was supported then by the Futures Industry Association and the National Futures Association, the industry- funded self-regulator. The Investment Company Institute, a Washington-based lobby association representing mutual funds, opposed the change in a letterto the regulator.
State Street’s Cooper said the absence of the third-party accounts makes the futures market an outlier compared to the swaps market, which have the option of the accounts. “Regulators can offer greater protection to customers who seek it while allowing market participants the flexibility to choose the arrangement that best suits their individual business needs,” he said in the statement.
As we discussed in an earlier post, there are certain forms of discrimination in the selection of an FCM that can help provide peace of mind, but it’s not hard to see why we’re so frustrated. If Congress won’t step up and protect the investors via an insurance fund, at least arm them with as many tools as possible to protect themselves.