This article originally appeared in NYT’s Dealbook.
BY BEN PROTESS
Lawmakers are considering new policies aimed at preventing a repeat of the MF Global debacle, in which the futures brokerage firm misused an estimated $1.2 billion in customer money as it collapsed.
The Senate Agriculture Committee’s decision to explore potential regulatory changes follows pleas from farmers, cattle ranchers and other futures industry customers who seek stronger protections for their money. As an initial step, the committee’s chairwoman, Senator Debbie Stabenow, sent roughly 20 letters on Wednesday to some of the industry’s biggest players, seeking suggestions for new policies.
“The MF Global bankruptcy has raised questions about the regulatory framework that protects these markets,” Ms. Stabenow, Democrat of Michigan, said in the letter.
The committee, however, is in the early stages of its examination and has not agreed to introduce legislation.
“I would appreciate your evaluation of current policies and any recommendations you would like to make to this committee on changes that would create stronger, safer markets and provide customers with greater protection,” Ms. Stabenow said.
She sent letters to consumer advocacy groups, including Americans for Financial Reform and the Commodity Customer Coalition, a group of MF Global clients hurt by the firm’s collapse. The committee also sought input from the Futures Industry Association, an influential trade group, and the CME Group, the for-profit exchange that polices brokerage firms.
Also on Wednesday, the CME Group and its fellow “self-regulatory organizations” announced the formation of a committee to explore new safeguards for customer money. The committee plans to meet in the next two weeks, with the aim of rolling out policy recommendations by April.
“Self-regulation has served the futures industry and its customers very well for a very long time,” Daniel Roth, president of the National Futures Association, a self-regulatory group, said in a statement. “However, the MF Global bankruptcy has dealt a severe blow to the public’s confidence in the financial integrity of our futures markets,” he said, adding that regulators must “take the necessary steps to enhance customer protection, particularly in the area of segregated funds.”
The disappearance of $1.2 billion in MF Global customer cash sent federal regulators, led by the Commodity Futures Trading Commission, searching for the money. The Federal Bureau of Investigation and federal prosecutors in Chicago and New York are also exploring potential criminal wrongdoing.
But more than two months after the firm filed for bankruptcy, MF Global customers are still without nearly a third of the cash. The shortfall has weighed on the broad range of clients, including hedge funds and farmers, some of whom are growing weary of trading in the futures industry.
Ms. Stabenow said she was seeking to avert long-term damage to the futures industry, which allows farmers to hedge against wild swings in the cost of their crops. The committee, which first delved into the MF Global fiasco last month at a Congressional hearing, will focus on drafting a regulatory shakeup to help wronged customers recoup their cash and “prevent situations like the MF Global bankruptcy from happening,” she said.
A range of potential proposals has already circulated around Washington, including ideas that would force brokerage firms to adopt tougher internal controls and notify regulators when they move around large sums of customer money.
For now, the futures industry is barred from mixing customer money with the company’s cash, though firms are allowed to invest client money much like a bank does.
But MF Global violated those rules, prompting calls for tighter restrictions on the investment of customer money.
Late last year, after the downfall of MF Global, the Commodity Futures Trading Commission adopted new rules curtailing the type of investments suitable for client money. But the agency still permits firms to invest customer money in certificates of deposit and money market mutual funds.
Some customers and regulators have urged Congress to ban the investment of customer money altogether, save for in United States Treasury securities, which offer the government’s seal of approval. Lawmakers may also consider legislation that would require brokerage firms to keep customers updated regularly on the whereabouts of their money.
“Ensuring the integrity of the market is paramount,” Ms. Stabenow said.