A U.S. futures regulator this week urged Congress to boost protections for futures customer funds, weeks after the revelation of a $200 million shortfall at bankrupt futures brokerage Peregrine Financial Group renewed calls for tougher safeguards.
Bart Chilton, a Democratic Commissioner at the Commodity Futures Trading Commission (CFTC), asked top lawmakers to create a futures customer insurance fund to backstop customer losses if a brokerage fails.
"I respectfully urge you to approve a futures customer insurance fund," Chilton said in a letter to Senators Debbie Stabenow, Pat Roberts and Congressmen Frank Lucas and Collin Peterson, who head the Senate and House agriculture committees that oversee the CFTC. "While such a fund may not have been needed in the past, it is apparent that one is needed now."
Some lawmakers have expressed interest in the creation of such a fund. However, in a presidential election year, it is unclear whether a bill to create it could get enough votes to pass the Democratic-led Senate and the Republican-led House.
And futures industry experts say that to appeal to futures traders, the fund would need to be so big that it might be too costly to be beneficial.
Calls to bolster futures customer protection have reached a fever pitch since the collapse of PFG earlier this month, with the futures industry still jittery after the failure of MF Global only nine months ago.
PFG CEO Russell Wasendorf Sr. was arrested earlier this month after he confessed to doctoring bank statements to make regulators think his futures brokerage had nearly twice the assets it did, leaving customers with an estimated shortfall of over $200 million.
The fraud, which he says spanned two decades, is now being probed by the Department of Justice and the CFTC, which brought a lawsuit against the firm earlier this month.
A futures fund might be modeled on the Securities Investor Protection Corporation, which guarantees customer securities investments up to $500,000 in the event a brokerage firm collapses.
It could also take a cue from the Federal Deposit Insurance Corporation (FDIC) which currently guarantees banking customer funds up to $250,000 per insured bank.
MF Global Trustee James Giddens recommended the creation of a similar fund in a report to the U.S. Bankruptcy Court in Manhattan in June.
MF Global filed for bankruptcy on Oct. 31, after investors and customers became rattled over the firm's $6.3 billion bet on European sovereign debt.
Up to $1.6 billion in missing customer funds were lost in the firm's final days.
But futures industry representatives point to significant drawbacks in the fund model.
Speaking at a Senate Agriculture panel in December on MF Global's collapse, Chicago Mercantile Exchange President Terrence Duffy highlighted the hefty cost:
"You're talking about trying to have an insurance system that would be in the hundreds of trillions of dollars of notional value to insure. The premiums would be so astronomical, it would never, ever meet the payout of what it could be."
In February, CME launched a $100 million fund to protect farmers and ranchers who use the exchange for up to $25,000 and cooperatives for up to $100,000 when a clearing member fails.
Farmers and ranchers said the plan amounted to "window dressing."
The CFTC, and industry "self regulatory organizations" like CME and NFA have trumpeted other fixes.
CME has proposed that all customer money to be held at clearinghouses or other depositories in order to keep it out of the hands of brokers where it might be misused.
On the same day Wasserdorf was arrested, the CFTC approved a measure known as the "Corzine rule," which would require top executives at futures brokers to sign off on major withdrawals from customer accounts, among other changes.
At a hearing last week, CFTC Chairman Gary Gensler called for a system that would allow regulators and customers direct automated access to broker bank accounts, echoing ideas that will be discussed at a meeting of the CFTC's Technology Advisory Committee on Thursday.