The security of futures commission merchant (FCM) client segregated funds will likely be heightened as officials from the National Futures Association (NFA) plan to file a proposed rule that would provide designated self-regulatory organisations (DSROs) with Internet-based view-only access to those account held at banks or trust companies without prior approval as early as this week.
“This is on a fast track, and we want to get this to the US Commodity Futures Trading Commission (CFTC) as soon as possible, but I don’t know what day that would be,” said an NFA spokesperson.
If the CFTC approves the proposal and it is implemented, the NFA plans to develop a program that will alert regulators to discrepancies in segregated and secured accounts by comparing the account balances reported by the FCMs to daily segregated and secured account reports generated by the FCMs and depositories holding those accounts.
This is the latest rules proposal developed by the Special SRO Committee, which formed in response to the collapse of MF Global in 2011.
The committee, which consists of representatives from the NFA, CME Group, the InterContinentalExchange, Minneapolis Grain Exchange and Kansas City Board of Trade, has made several suggestions that the NFA approved and submitted to the CFTC for review and potential approval.
“They’ve done a lot of research about whether banks would be able to provide this online view-only access and I believe they’ve gotten to the point where the committee is satisfied that it could be done,” said NFA spokesman.
Other recent initiatives geared to protect FCM clients include the public roundtable the CFTC held earlier this month to discuss what it and other members of the futures industry could do to further protect customer assets.
Roundtable chairman Gary Barnett, director of the CFTC’s Swaps Dealers and Intermediary Oversight division, took time during the all-day event to ask the participating buy-side representatives what information FCMs could disclose to increase trust.
Rule of Thum
Bill Thum, a principal at Vanguard and who represented the Investment Company Institute (ICI), suggested that FCMs provide a greater window into the health of their firms. “We feel that the FCMs that we use to trade perform really well in these areas,” he said. “Absent that information, it’s difficult to make a decision except for what you read in the press,” he added.
Thum acknowledged that not all investors have the same level of business connections and internal expertise as Vanguard to acquire and analyse this data properly. “[H]aving an agreed upon meaningful set of data points reported on a consistent basis from the FCMs made available to all customers would be a huge step forward,” he added. “Having these data points will level the playing field for firms and FCMs.”
In a letter submitted to the CFTC by the Federal Home Loan (FHL) Banks after a similar public CFTC roundtable held in March 2012, the banks suggested that adjusted net capital, net capital requirements, excess net capital reports once submitted to the CFTC should be available on the regulator’s website for FCM clients.
Participating sell-side representatives agreed that such information would be beneficial to FCM clients but expressed concerns about providing such data.
“This is confidential information and we want to make sure that we are not crossing any confidential issues,” explained Walter Lukken, president and CEO of the Futures Industry Association.
Bill Tirrell, managing director at Bank of America Merrill Lynch and one of the representatives from the Securities Industry and Financial Market Association’s capital committee, also expressed fears that providing the data to an uneducated consumer could have serious knock-on effects to the health of FCMs. “In today’s world you just need a little sniff of blood in the water you can have a very solid institution having problems very quickly.”
Customer education is an important part, but the lack of it should not be an excuse not for providing the data, responded Warren Davis, counsel at Sutherland Asbill & Brennan representing the 12 Federal Home Loan Banks. “The data available on a regular basis so that FCMs aren’t doing end-of-the-month transactions to make their capital look better. It’s valuable to have it on a daily basis where you can look at trends and see if this money is for real.”
One FCM that picked up the disclosure ball is Vision Financial Markets, which started posting three months of CFTC 1-FR-FCM reports, but without the income statement portion, to its website after MF Global’s meltdown, according to Vision president and CEO Howard Rothman.
After posting the reports, Vision stopped receiving as many phone call inquiring about the firm’s financial structure, reported Rothman. Firm officials also noticed after the Peregrine Financial incident that the the number of hits on that portion of its website went up dramatically.
“We also tracked the monies coming in and going out of the firm and noticed that there’s been less than the average amount leaving the firm while more than average money coming in,” added Rothman. “It might sound like a big deal to implement but once it’s done, you might realize that the industry should have done this long ago."