This article originally appeared as a Reuters dispatch.
(Reuters) – Four months after U.S. futures broker MF Global collapsed, roughly $1.6 billion in customer money is still missing, trading volumes are down, and the futures industry is looking for ways to restore confidence.
The U.S. Commodity Futures Trading Commission is due to hold a roundtable in Washington DC on Wednesday and Thursday to discuss how to better protect customer funds. Here are some of the more notable regulatory fixes currently under discussion:
* Make MF Global customers whole: Arguing that the industry will stay flat on its back unless all MF Global customers get every cent of their money back, two new members of the National Futures Association board proposed a novel solution: assess a fee on NFA members, and use the proceeds to secure a loan to cover the shortfall. The NFA is a quasi-regulatory agency funded by the industry and responsible for registering all futures brokers and overseeing some of them. The proposal, first floated in the weeks after MF Global’s October 31 bankruptcy, drew immediate criticism from insiders who said it would create “moral hazard.” But the two board members stuck with it, and this month formally asked the NFA board to study the possibility. NFA’s president and chairman both declined to discuss the proposal with Reuters, and it’s unclear whether it will gain traction.
* Neutralize the “Corzine defense”: Jon Corzine, the former Goldman Sachs banker who ran MF Global as its CEO until shortly after the bankruptcy, told lawmakers that he was unaware of any large transfers of customer money that could have resulted in the giant shortfall of funds. The NFA is considering a rule that would force the top executives of futures brokerages to sign off on or otherwise take “personal responsibility” for transfers of excess customer funds over a certain set amount, according to NFA’s Dan Driscoll.
* More frequent reporting, spot checks: Exchanges, led by CME Group Inc and along with NFA, are looking at a number of less-controversial changes, including forcing clearing members to make daily reports on where they hold customers’ funds and conducting more frequent spot checks on brokers, NFA’s Driscoll told Reuters.
* Impose circuit breakers: Exchange executives are also considering setting thresholds for customer fund transfers that automatically trigger increased oversight by the regulator. In the days before MF Global’s collapse, employees made at least four transfers of more than $150 million of customer money into other accounts, reports have suggested. Some executives are wary of setting explicit thresholds for fear that brokers could still game the system, Commodity Customer Coalition co-founder John Roe said. The coalition advocates on behalf of former MF Global customers. If exchanges do not ultimately propose such a rule, Roe told Reuters, the Coalition will propose one to Congress.
* Customer “escape pods”: New CFTC rules in force in November will require margins to be held customer by customer, making it potentially easier in the future for customers to bail out of companies that have MF Global-style disasters. The CFTC is also looking at applying its new model for protecting collateral in cleared swaps – known as legal segregation, operational commingling – to futures trading. This model is aimed at keeping customer funds protected if another customer defaults, even if the broker defaults as well.
* Default fire drills: Another Dodd-Frank rule newly requires clearinghouses to conduct default management drills. Fire drills would force clearinghouses to work out in advance how they would transfer or liquidate positions at a defaulting firm, reducing confusion for customers and possibly speeding the post-default process.
* Impose stiff penalties: In 2007, about $600 million in segregated funds went missing when brokerage Sentinel Management collapsed, but no one has gone to jail or otherwise been punished for improperly mixing customer and house funds. “Before you start proposing new rules, make sure you adequately enforce existing ones,” Sentinel trustee Fred Grede told Reuters. Commodity Customer Coalition’s Roe said his organization will ask Congress to impose stiffer penalties as a deterrent against not only executives but also mid-level managers involved in any improper transfers of customer funds.
* Separate futures brokers from broker dealers: MF Global was mainly a futures broker but was also registered as a broker dealer, but when it filed for bankruptcy it was handled as a broker dealer bankruptcy. The Commodity Customer Coalition will ask Congress to force futures brokers to remain legally separate from broker dealer affiliates to make bankruptcies less complicated for futures customers.
* Change bankruptcy law: Some futures advocates argue that bankruptcy law and the Commodity Exchange Act are at odds over where customers stand in line in a bankruptcy, and want to ask Congress to change bankruptcy laws to allow futures customers of bankrupt futures brokers to jump to the head of the pay-me-back line. Any such effort could take years and face fierce lobbying against it.
* Hold customer margins at clearinghouses: The missing MF Global customer money was held at the brokerage, and some experts say it would be safer to keep customer margins at the clearinghouse and away from brokers altogether. Such a change would upend broker business models, which traditionally rely on income from interest on customer funds parked in their accounts.
(Reporting by Ann Saphir in Chicago; editing by Matthew Lewis)