Following the discovery of a second futures brokerage firm that was apparently using client funds for its own purposes, derivatives marketplace CME Group says that it is considering requiring clearing houses to hold client funds, as it aims to shore up market confidence.
In an open letter, CME Group says that it is “appalled by the recent misuse of segregated funds by two firms, MF Global Inc. and [Peregrine Financial Group Inc.], particularly since there has never been anything like it in the history of the futures industry.”
Last year, MF Global was put into bankruptcy amid allegations that it used client funds to cover proprietary trading losses. A couple of weeks ago, Peregrine Financial was also put into bankruptcy after regulators brought allegations that it was suffering a large shortfall in client funds,too. The allegations in the Peregrine case have not been proven, and there have been no charges brought in the MF Global case.
Yet the CME said Monday that, “Clearly there were serious management transgressions at each firm.”
Still, it also noted that this has become a problem for the industry overall, which requires a solution. “Not protecting customer funds is such a fundamental breach of trust that, without question, the current system in which customer funds are held at the firm level must be re-evaluated,” it says.
The CME says that it’s exploring the concept of having clearing houses or other depositories hold all customer segregated funds, and returning any interest earned on that money back to the futures firms, which, it says, would have the effect of “increasing protections while preserving the operating model for the vast majority of firms who respect and comply by the rules.”
Additionally, it notes that along with the industry’s regulators and self-regulatory organizations, it is implementing a number of new requirements designed to deter another firm from misusing customer funds, including: increased surprise reviews of customer segregated funds, daily segregation reporting, bi-monthly reporting on investment of segregated funds, periodic electronic confirmation of customer segregation balances, requiring direct online access to firm bank accounts, and CEO/CFO signoffs of customer segregated fund distributions.
“While these significant steps will provide further safeguards to the users of our markets, and continue to make the system even stronger. We want you to know that CME Group is committed to making whatever changes are necessary to strengthen customer protections, restore confidence in the futures industry and ensure the effectiveness of these critical markets,” it says.