No Material Breaches Found at Futures Firms


WASHINGTON (Dow Jones) — 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. 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.

Source:  Dow Jones

Posted by Haylie Shipp


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