Futures Market Authorities Prepare To Defend Turf, Weigh Changes

The bodies charged with overseeing U.S. futures brokers are preparing to defend a self-regulatory structure that has come under fire from lawmakers and clients hit by the collapse of MF Global Holdings Ltd. (MFGLQ).

Regulators are weighing far-reaching changes to the way futures brokerages conduct business, and members of Congress on Thursday will probe particulars of MF Global's oversight by the Commodity Futures Trading Commission and exchange operator CME Group Inc. (CME), at a hearing of the House of Representatives' Agriculture Committee.

"Self regulation has served the industry and the country very well for a very long period of time," said Dan Roth, president and chief executive of the National Futures Association, an industry-funded authority that oversees U.S. futures brokers.

In the U.S., the CFTC oversees derivatives exchanges, brokerages and traders at the federal level, formulating rules governing trades, approving exchanges' new contracts and taking action against rule-breakers.

Exchanges are responsible for watching over their member firms, traders and floor brokers, while the NFA supervises fund managers who trade futures. The NFA and CME enforce minimum financial and reporting standards for the brokerage firms that process customers' futures trades, and together oversee nearly all of the 123 futures-clearing firms in the U.S.

In mid-November both CME and NFA, at the direction of the CFTC, initiated audits of all of the futures firms under their oversight, checking customer fund balances, confirming these with outside depositories, and verifying that the money is invested in permitted securities. So far no shortfalls or untoward practices have appeared at other brokerages, NFA's Roth said in an interview.

A spokeswoman for CME, which served as the self-regulatory organization to MF Global, declined to comment on the examinations. "CME Group will work closely with our industry to ensure greater protection of customer funds at the firm level," she said in a statement.

Both Roth and Terry Duffy, executive chairman of CME Group, are slated to appear Thursday before the House Agriculture Committee for a hearing on MF Global's collapse. As much as $1.2 billion in customer money remains unaccounted for five weeks after the firm's bankruptcy filing, stranding farmers, floor traders and fund managers who relied on MF Global to do futures business.

"Where were the regulators?" said Andrew Abraham, a commodity trader who said he had $1 million tied up by MF Global's bankruptcy and has yet to see any money returned. "You need regulators who are professional and do their job, without a conflict of interest."

Investigators parsing MF Global's records have complained of shoddy bookkeeping, but Abraham said the firm's overseers bear some responsibility for not forcing it to straighten up.

"Congress and the regulators do need to ask some questions about the customer protections that were in place, whether those were followed properly, who was responsible for overseeing those, and if they were implemented in a timely way," said Todd Kemp, treasurer for the National Grain and Feed Association, a trade group. "We might need to look at some changes to re-establish confidence among market participants."

Roth said that the NFA supported an "industry-wide examination" of potential reforms to the way futures brokers are monitored.

But he warned that investigators, including forensic accountants working for the trustee and the Federal Bureau of Investigation, have yet to spell out exactly why customer money went missing at MF Global. If fraud occurred, Roth said, "there's no system of regulation that will prevent someone who's bent on breaking the law from breaking the law."

The first area of focus should be any new regulations that would make futures clearing firms less likely to fail, Roth said. When such a firm does become insolvent, a "formalized response mechanism" should be in place to guide exchanges and regulators, he said.

"We've had discussions with CFTC staff and other segments of the industry about the types of issues that need to be addressed," said Roth.

-By Jacob Bunge, Dow Jones Newswires; 312 750 4117; jacob.bunge@dowjones.com

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