MW: MF Global sets up CFTC fight over costs, security
Funds say MF Global shows why investors must have own accounts
By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) — MF Global’s bankruptcy and an estimated $1.2 billion in missing customer funds there is setting up a battle at the Commodity Futures Trading Commission over customer costs and whether investors should have their funds parked in separate bank accounts out of the reach of commodity merchants like the failed firm.
At issue is a provision in the crisis-response Dodd-Frank law that requires the CFTC to change the rules for investor swaps accounts at commodity futures merchants.
The agency has yet to adopt the customer account regulations, but the massive bankruptcy on Oct. 31 of MF Global is driving intense lobbying at the agency over how it should go about it.
Corporate pension funds are pushing the commission to at the very least require that merchants allow investors like themselves the option of putting their swaps money in third-party bank accounts in the name of the investor, in an approach dubbed “full physical segregation.” Agency observers say such an approach for swaps -- and the MF Global failure -- will drive the CFTC to set up similar independent account requirements for futures and options accounts.
Currently, all customer money not passed on to the clearing organization is typically co-mingled in a single account controlled by the futures commission merchant. That setup makes it possible for the merchant to unlawfully misappropriate customer funds, a situation that appears to be a key issue at MF Global.
The CFTC, Securities and Exchange Commission and federal prosecutors are all investigating what happened at MF Global, but regulatory observers argue that the firm tapped into futures customer accounts for its own proprietary trading, driving the default and missing customer funds.
However, other investor groups insist separate accounts would be overly costly for investors, merchants and clearinghouses, in part, due to the costs of a custodian bank setting up individual accounts for each customer.
They are pushing for a less-costly approach known as legal segregation model for customer funds that would require merchants to identify their customers and their positions to clearinghouses. They argue it would drive the CFTC to set up a similar approach for futures accounts, also limiting the likelihood of MF Global fiascos in the coming years.
Making it harder to cheat
Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, a group representing 115 corporate pension funds with $1.5 trillion in assets, said MF Global’s problems put a spotlight on why full physical segregation makes sense for both swaps and futures accounts.
Had such a structure been in place for futures accounts, MF Global wouldn’t have been able to misappropriate funds as it appears it has done, she added.
“The record-keeping would have been a lot better. The money would have been held by a third-party custodian and there wouldn’t have been an opportunity for MF Global to misappropriate it, if that is what happened,” Forbes said.
So far, thousands of former investors at MF Global still have their accounts completely frozen or have received only partial distributions -- four weeks after the firm filed for bankruptcy.
Its previous chief, former Senator Jon Corzine, had been called upon to testify before congressional panels on Dec. 13 and Dec. 15 to discuss what went wrong with investment decisions he made. Corzine has not yet accepted the senate invitation, according to Senate Agriculture Committee spokesman Ben Becker.
