By Liz Moyer
The collapse of Peregrine Financial Group Inc. has rippled through a network of smaller brokerages that fed the firm retail orders, highlighting the circuitous route investor money can take through the financial system.
PFG, a futures commission merchant that filed to liquidate in bankruptcy Tuesday after regulators sounded alarms about potential fraud, used a network of introducing brokers around the country, according to the National Futures Association, which is PFG's regulator.
As is typical in the futures trading world, introducing brokers accept orders to buy or sell futures for customers and pass those orders on to a futures merchant like PFG. Introducing brokers don't hold customer funds.
There are 1,352 introducing brokers that are members of NFA. They are either independent and work with several futures firms at a time or they are so-called guaranteed introducing brokers, which have contracts to work with one futures merchant.
PFG worked with 113 guaranteed introducing brokers as of last year, according to a case filed by the NFA in February that criticized the firm's oversight of that network.
A spokesman for the NFA said the regulator is working with PFG's guaranteed introducing brokers to find new futures merchants to do their trades. Until they can find a new futures merchant, trading through these firms has come to a standstill, traders said.
Meanwhile, PFG's clearing firm, Jefferies Group Inc. (JEF), is holding $125 million of PFG-related cash in segregated accounts until regulators tell it how to distribute the funds, the firm said Wednesday.
J.P. Morgan Chase & Co. (JPM) also holds PFG-related funds in segregated accounts, according to a source familiar with the matter.
The PFG scandal comes just months after MF Global Holdings Ltd.'s collapse, when more than $1 billion of customer funds went missing. In PFG's case, some $215 million of funds are alleged to be missing. The firm reported to the Commodity Futures Trading Commission in June that it had $397 million in accounts required to be segregated for customers.
Traders said the back-to-back scandals will be detrimental to futures trading. "Confidence in the market is just shot," said Chuck Kowalski, a futures trader who runs a commentary website called commoditiesstreetjournal.com.
Earlier this week, Citigroup Inc. (C) rolled out an online monitoring service allowing customers to track their funds held in segregated accounts. The service, under development since the spring, "opens the hood" on that aspect of the business, says Christopher Perkins, global head of over the counter clearing at Citi.
Citi created the product in response to customer concerns after the collapse of MF Global, Mr. Perkins said.
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