Long-derided as unsuitable for sophisticated futures markets, insurance is getting a surge of attention heading into the new year as the industry works to patch itself up after the stunning collapse of brokerage MF Global in 2011.
Three separate efforts by industry leaders, traders and an outspoken regulator are under way to address the issue of offering broad insurance coverage to futures customers for the first time.
The Commodity Customer Coalition (CCC), set up in the aftermath of MF Global's failure to help clients regain their money, has begun circulating a proposal that calls for the industry to create its own insurance company, tentatively named the Commodity Insurance Corp.
Fed up with what they see as authorities' inadequate response to MF Global's collapse, the CCC's founders - traders James Koutoulas and John Roe - discussed the plan in a meeting this week with the chairman of R.J. O'Brien & Associates, the largest independent futures brokerage and clearing firm in the United States. They said they will gauge support from hundreds of other firms in the coming weeks.
Separately, exchange-operator CME Group Inc (CME.O), the National Futures Association (NFA), Futures Industry Association and Institute for Financial Markets said on Friday they will underwrite a study on the cost of insurance.
Expected to be completed in the spring, the study will consider costs for a "number of different scenarios" of insurance programs, NFA President Dan Roth told Reuters.
He declined to comment on the CCC proposal.
More than a year after MF Global collapsed after allegedly misusing customer funds, some $1.6 billion in customer money is still missing. Futures traders have no access to insurance to cover those or future losses stemming from broker insolvency or misappropriation.
As recently as November, the Commodity Futures Trading Commission ignored the idea of an insurance fund when it proposed more than 100 pages of rules it said would enhance protections for futures traders after the failures of MF Global and Peregrine Financial, a smaller brokerage, exposed cracks in industry safeguards. Nowhere in the proposal was there a suggestion that funds in futures accounts be insured.
Instead, the CFTC proposes requiring futures brokers to explicitly tell their customers that their funds are not protected by insurance in the event of a bankruptcy or insolvency of the broker, or if customers funds are fraudulently misappropriated.
Peregrine Financial failed in July after its founder confessed to stealing more than $100 million from customers over nearly 20 years.
Under the CCC plan, an association of futures commission merchants (FCMs), introducing brokers, commodity trading advisors and others would own a "captive insurance company" and sell policies with various limits to customers. Policies would offer protection in the event the failure of an FCM results in a shortfall in customer money.
The move is necessary because the futures industry needs to rebuild customer confidence and cannot obtain reasonably priced insurance coverage from established companies, said Roe, a founder of the CCC.
"Insurers look at us as an unknown quantity," he said. "The only way we're going to get this done is if we do this ourselves."
The plan is a private-sector version of government-mandated insurance for securities traders, which covers losses of up to $500,000.
Speaking about the CCC proposal, R.J. O'Brien Chairman Gerry Corcoran said: "I applaud their efforts, but refrain from commenting on the plan as it was conceptual in nature and no specifics were left with us."
R.J. O'Brien is "open-minded about an insurance program that protects customers," he added.
Antipathy toward a bailout fund in the futures industry runs deep. In November 1986, shaken by traders' losses after a brokerage went bust, the industry considered and then rejected the notion of insuring customer funds in the event of a broker default.
Yet Doug McClelland, who operates a small commodities brokerage in Nebraska, said insurance could help restore confidence among his clients, some of whom lost money in the bankruptcies of MF Global and Peregrine Financial.
"It's bad enough to lose money on a bad trade but to have somebody take it out of your pocket, that's a bitter pill to swallow," he said.
PUBLIC VS. PRIVATE
CFTC Commissioner Bart Chilton has urged Congress to create a government-backed insurance fund for futures customers that would parallel the protection already in place for stock traders.
Created in 1970 to help restore confidence to the securities markets, the Securities Investors Protection Corp (SIPC) has authority to use its funds to pay back securities customers up to $500,000 per account when brokerages fail.
Chilton told Reuters he was "certainly not opposed to a private-sector solution" but thought a government-run program modeled after SIPC made more sense. He expects legislation will be introduced in early 2013.
"Why reinvent the wheel here?" Chilton said. "We have a government system for banking and securities that works well. The easiest thing to do is just do something similar for futures customers."
The CCC wants to set up private-sector insurance before Congress takes action. A government-run fund based on SIPC would be a mistake because it would take too long to return money to customers, said James Koutoulas, who founded the CCC with Roe.
"If the government goes ahead and they implement a (half-baked) solution, then that shuts the door on us," he said.
(editing by Jim Marshall)