UPDATE: Regulators Find No Material Breaches In Review Of Futures Firms
January 25 2012 - 6:10PM
Dow Jones News
U.S. regulators found no "material breaches" at the largest
futures firms, following a review over the past three months after
the collapse of MF Global Holdings Ltd. (MFGLQ) dealt a black eye
to the broader derivatives business.
The audit focused on accounting practices and the protection of
client funds that are central to the sector's self-regulation.
The CFTC found that all customer funds were in place on the date
of the review of each of 70 firms.
"It shows that firms understand our rules about how to treat
customer funds," Commissioner Bart Chilton, a Democrat, said in a
statement.
The CFTC said that it didn't perform an "audit" of the companies
but rather a "limited review," which relied on the records and
documents maintained at the firms.
"Staff did not confirm balances directly with depositories or
other entities holding customer funds," the CFTC said in a
statement.
The Commodity Futures Trading Commission launched the
inspections after the collapse of MF Global exposed a $1.2 billion
shortfall in money kept on deposit with the firm by clients like
ranchers, hedge funds and floor traders at exchanges. Nearly three
months after MF Global's collapse on Oct. 31, the probe led by the
CFTC and Federal Bureau of Investigation has yet to find the
missing money.
The CFTC said 70 futures firms that held customer money were
reviewed. The other 50 firms that are registered with the agency,
but don't hold customer money weren't reviewed.
The review was conducted by staff from the CFTC as well as
exchange-operator CME Group Inc. (CME) and the National Futures
Association, the industry's main self-regulatory body.
CFTC staff reviewed the largest 14 firms while CME and NFA staff
reviewed the others.
The report is seen as one effort by the CFTC to shore up
investor confidence in futures markets after the MF Global
debacle.
"One of the things I felt was ironclad was that my money was
safer with a CME clearinghouse member than with any of the banks in
Chicago," said Ted Fisher, an independent investor who said he has
traded futures since 1976. "That confidence won't come back
easily."
The CFTC-led audit is unusual because of its scope and the
regulators involved. Futures clearing firms' records are usually
inspected by auditors working for CME, which oversees nearly all
U.S. futures trading, or the NFA, the industry's main
self-regulatory body. Those audits take place at least once a year,
though the CFTC occasionally will perform its own
investigations.
The CFTC found that the firms, known as "futures commissions
merchants," held about $166 billion in customer funds altogether.
Such firms handle the trading of asset managers, smaller brokers
and private trading houses. Part of this role includes safeguarding
the assets that customers are required to put up as collateral
against their outstanding trades.
Under federal law, futures firms are required to constantly
separate out their customers' assets as they do business each
day.
CFTC Commissioner Jill Sommers announced the review after she
started leading the investigation into missing customer funds at MF
Global in November. Sommers, a Republican, took over the
investigation after Chairman Gary Gensler recused himself from the
MF Global probe because of his close ties to the firm's former
chief executive, Jon S. Corzine.
Sommers said at the time that the CFTC was looking at firms to
"determine that segregated funds are being properly
maintained."
The audits are among a raft of efforts among the U.S.
futures-trading industry to determine what can be done to better
protect customers from suffering an MF Global-style event. CME and
NFA last week formed a joint committee that will consider ways that
self-regulatory bodies can strengthen oversight of brokers, while
the Futures Industry Association this week put together its own
group of major broker-dealers that will weigh changes to
record-keeping and compliance for their futures-trading
clientele.
"I think what will come out of these efforts is a greater
responsibility for [futures firms] to report client funds data on a
more timely basis and in a more detailed format, so the regulators
will have more information in a better framework than they do now,"
said Ronald Filler, a professor of financial services at New York
Law School, who has served on CME's risk committee.
-By Jamila Trindle, Dow Jones Newswires; 202-862-6684; jamila.trindle@dowjones.com
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