The story that dominated the headlines for anyone in the futures world yesterday was the House Agriculture Committee’s hearing on MF Global. The star in the line-up was easily Jon Corzine, but much as expected, both his written statement and response to interrogation was an exercise in establishing plausible deniability. Others, however, did provide some interesting insight. Click through below to see their written testimony:
For us, the most interesting testimony came (surprisingly) from the NFA’s Dan Roth, and for two key reasons. For one, his explanation of how FCMs are regulated and monitored is by far the clearest explanation from any regulatory body involved on their role in the MF Global crisis to date. Perhaps even more interesting were the solutions outlined. Some of them are ones that have been aggressively circulated in the industry. Some of them, such as establishing an emergency fund for situations such as these (even if most of us are hoping it never gets used), we have advocated ourselves. Others, however, were most interesting because they were not reactive to the MF Global crisis, but proactive. This was particularly true in the preventative section:
Gross Margining—Should the CFTC require all clearinghouses to collect margin on a gross rather than net basis?
Commingling of Customer Segregated Funds—FCMs are prohibited from commingling customer funds with the firm’s assets but may commingle funds from different customers in the same segregated account. Though not an issue in MF Global, this can expose customers to loss due to the default of another customer. Various alternatives to this approach have been discussed.
Monitoring for Segregation Compliance—Should SROs change the manner in which they monitor Member firms for compliance with segregation requirements?
Should SROs perform unannounced spot-checks to confirm balances to outside sources more frequently? Should FCMs be required to have an independent CPA conduct unannounced segregation compliance exams annually?
Should SROs periodically test to see if there have been intraday transfers of customer segregated funds that could arouse suspicion? Should information be made publicly available about how each FCM invests its customer funds?
Mandatory Excess Segregation—Most FCMs deposit some of their own funds as excess customer segregated accounts to act as a buffer in case some customers go into a debit position. Should FCMs be required to maintain a certain minimum in excess segregated funds?
Internal Controls—Should there be either specified requirements or best practice guidance on the types of internal controls that should be in place for the authorization to transfer segregated customer funds above a certain threshold level?
Third Party Depositories—Some have suggested that customer funds not needed to margin positions at the clearinghouse should be held not by the FCM but by a third party depository. Notice to Regulators—Should an FCM be required to give notice to either its DSRO or the CFTC when the firm makes any transfer of customer segregated funds, including intraday transfers, above a certain threshold?
Certainly food for thought. Overall, we understand some of the disappointment in the hearing’s testimony. We all would have loved for Corzine to say, “Well- ya got me. The money is over here…”
However, in a world where answers are not an option, the confidence that comes from a proactive industry unwilling to tolerate such shenanigans ever again isn’t a bad consolation prize.