WASHINGTON (CN) – After failing to catch Peregrine Financial Group’s decades-long pillaging of customer accounts, the National Futures Association has adopted new rules to protect customer funds held by futures brokers.
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The NFA announced Monday that it had retained the law firm Jenner and Block to conduct an internal review of the association’s audit practices and procedures with regard to Pergerine.
Teaming up with the CME Group, which operates the exchanges used by the largest futures brokers, the NFA will reportedly examine the bank accounts of their member firms to ensure that customer funds match expected levels.
The FNA said last week that Peregrine covered up its looting of customer funds by falsifying bank records submitted to its regulators.
Similar raids on customer accounts by MF Global last year highlight the ease with which brokers can dip into what are supposed to be segregated and protected customer funds when facing a liquidity crunch.
The Commodity Futures Trading Commission, which oversees the NFA, approved rule changes to tighten reporting requirements and access limits its 4,200 member firms and 55,000 registered associates have to customer accounts.
Members must now hold sufficient customer funds to meet their total obligations to customers trading on foreign futures markets. In the past, futures firms could hold a much lower amount of cash covering just the margin on the customer’s foreign futures trades.
Part of the way futures firms operate is to use cash in excess of their minimum customer balances to meet margin calls and invest in the markets. The new rules require a firm’s senior management to approve in writing any withdrawals of 25 percent or more against excess customer cash and to report the withdrawal to the NFA.
Futures commission merchants, the formal name for futures brokers, will now have to file daily computations of segregated customer funds against the merchant’s proprietary funds.
In addition to just showing where customer funds are, brokers must also file detailed information on the investments made with customer funds as of the 15th and last business day of each month.
The FNA submitted the new rules to the CFTC for approval on May 29. In a letter accompanying the rules, NFA general counsel Thomas Sexton said that the demise of MF Global had “dealt a severe blow to the public’s confidence in the financial integrity of our futures markets.”
“Reestablishing the public’s confidence is essential to our futures market and all of us involved in the regulatory process have to work to restore that confidence and that effort must begin with identifying and implementing regulatory changes to try to prevent such insolvencies from occurring,” Sexton said.
The rule changes emerged from an NFA-convened committee comprising representatives from the CME Group, the InterContinental Exchange, the Kansas City Board of Trade and the Minneapolis Grain Exchange.