The Commodity Futures Trading Commission (CFTC) has officially closed a regulatory loophole that was utilised by MF Global to maximise how much client money it could use for its own prop trading.
Along with a number of customer funds protection measures, the agency Friday shut down the ‘alternative method’, which had allowed futures commission merchants (FCMs) to hold a lower amount of funds representing the margin on their foreign futures.
The alternative method has been little used recently and earlier this year the CFTC strongly recommended firms dispatch with the practice.
The new rules require FCMs to strengthen controls over the treatment and monitoring of funds held for customers trading on US derivatives markets in segregated accounts and for funds held for foreign futures and foreign option customers trading on foreign derivatives markets.
FCMs must now hold sufficient funds in secured accounts to meet total obligations to customers trading on foreign markets computed under the net liquidating equity method representing the total account balance owed to customers.
FCMs must also now have published polices on how they govern and maintain proprietary funds.
Any withdrawals in excess of 25% of the excess segregated or secured funds that aren’t for the benefit of customers must be pre-approved in writing by senior management, and the FCM must file notice with industry body the National Futures Association (NFA) of any withdrawal of 25% or more of the excess segregated or secured amount funds that are not for the benefit of customers.
The NFA proposed to the CFTC the rules for FCMs.
An estimated US$1.6 billion from client accounts held by MF Global went missing after the firm filed for bankruptcy in October last year; it is alleged that former company CEO Jon Corzine deliberately used client funds to cover the firm’s own prop trading shortfalls. More recently, Russell Wasendorf senior, the owner of FCM Peregrine Financial Group, was accused of fraud by the CFTC, after alleging that he committed fraud by misappropriating customer funds, violating customer fund segregation laws and making false statements in financial documents filed by the firm.