Futures industry refortifies
“I was afraid this crop would be a lot worse than anyone ever imagined,” says the Atwood, Illinois, producer. All those stalks standing there, deceptively strong, had cobs that were empty of golden value.
That’s almost a metaphor for the two big brokerage firms that failed in the past year, testing the strength of, and confidence in, a 150-year-old trading system.
As producers finish in their fields, the futures industry is trying to find ways to fortify its system and earn back the confidence of the farmers, ranchers, and grain industry businesses for whom hedging is essential. And today, one year after the crisis of trust began with MF Global’s failure, there are signs that trust is still alive, and reforms and due diligence measures are taking root.
Unprecedented and uncharted territory are the terms industry officials used as they began the cleanup process after MF Global’s demise.
Futures trading had been rooted in the track record that, while money could be lost with poor trading decisions, it was never lost due to system failure.
“Until MF Global, no customer had ever suffered a loss due to improper handling of funds,” CME Group Executive Chairman and President Terrence Duffy told the House Committee on Agriculture in a post-MF Global hearing.
Indeed, even after the landmark failings of big firms like Refco (in 2005) and Lehman (in 2008), the regulated commodity customer accounts were transferred to new clearing firms without disruption. In the MF Global case, disruption occurred because a shortfall was discovered in the until-now-sacrosanct segregated funds.
The sanctity of segregated funds is at the heart of the industry’s trust crisis, and so it has become the focus of most of the proposed reforms.
Working with the National Futures Association (NFA), the Commodity Futures Trading Commission (CFTC), and other industry groups, the CME Group has taken “aggressive steps” to add greater transparency and verifications of segregated funds that are held on behalf of clients, according to Bryan Durkin, CME Group’s chief operating officer.
“Nothing is more important than the confidence of our customers, the confidence they have in the marketplace in general, and the markets that we offer for their risk-management needs.”
To that end, Durkin says the industry has put into place and is in the process of implementing new requirements designed to deter another firm from misusing customer funds. Reforms include:
Daily segregation reporting by all futures commission merchants.
Bimonthly reporting on investment of segregated funds.
Increased surprise reviews of customer segregated funds.
Periodic electronic confirmation of customer segregation balances from firms via an e-confirm system.