Aug.Senate Ag Discusses MF Global and Peregrine Financial Group
AT TODAY’S SENATE AGRICULTURE SUBCOMMITTEE HEARING, lawmakers heard from the regulators and trustees charged with overseeing and winding down MF Global and Peregrine Financial Group. Much of the discussion was focused on measures the industry and supervisory authorities are currently taking to mitigate customer fraud issues in the futures market, including whether the establishment of an insurance fund similar to those for securities customers and bank depositors is needed to help bolster consumer confidence.
Testimony
In his testimony, Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), discussed the CFTC lawsuit against Peregrine Financial Group and outlined reforms the CFTC has implemented to further protect consumer funds, including restructuring the CFTC regulation of self-regulatory organization (SROs). He said future reforms will include: incorporating the National Futures Association (NFA) rules into CFTC regulations; giving SROs and the CFTC direct electronic access to futures commission merchants’ (FCMs) accounts for customer funds; and providing transparency to customers with positions in the futures market in terms of the location and current ownership of their assets. Gensler also noted that the CFTC will hold a public roundtable on consumer protection in the second week of August. In closing, he called on Congress to increase funding for the CFTC, which continues to operate with limited resources.
In her testimony, CFTC Commissioner Jill Sommers detailed the CFTC’s efforts to work closely with the Securities Investors Protection Corporation (SPIC) in bankruptcy proceedings for MF Global. Sommers described the existing protections in place for customer funds and noted the CFTC’s Division of Enforcement is currently investigating the shortfall of these protections. In closing, Sommers affirmed the CFTC’s commitment to work with Congress in addressing customer protections to restore confidence within the markets.
In his opening statement, James Giddens, Trustee for the Securities Investor Protection Act’s (SIPA) liquidation of MF Global, provided an update on efforts to return assets to former customers of the failed FCM. Giddens provided an overview of additional claims set for distribution to customers, noting that $4.7 billion in lost funds have been returned to date, but a $1.6 billion shortfall remains in segregated property available to return to those customers. Giddens added that litigation regarding a $700 million client claim is progressing between his office and the U.K. Joint Special Administrators, with the expectation that a trial date will begin in April 2013. He also discussed the potential for valid claims to be brought against certain MF Global executives, including CEO Jon Corzine. Finally, Giddens summarized recommendations resulting from his investigation, including: creating a protection fund for futures and commodities customers and enacting legislation explicitly authorizing a trustee’s standing on behalf of customers.
In his opening statement, Ira Bodenstein, Trustee for the Chapter 7 Bankruptcy Estate for Peregrine Financial Group, provided an overview of his role in the Peregrine case, including attempting to estimate any short-fall in customer segregated funds; attempting to effectuate “bulk transfer” of customer positions and property to a solvent commodity broker; and computing estimated and then fully net equity claims for each customer. Bodenstein also discussed the team he has assembled to assist in confirming the validity of information on Peregrine’s books and records to ensure a return of customer funds “as soon as practicable.”
In his opening statement, Louis Freeh, bankruptcy trustee for MF Global Holdings, expressed concern that the competing roles of trustees at varying independent entities will complicate and delay the distribution of assets to MF Global customers. Freeh explained that the entities that once operated within MF Global all began acting independently after MF Global’s bankruptcy, leading to many cases of overlapping trustee fiduciary duties. Despite close cooperation between these trustees, he said overlap increases administrative costs and extends the “length of time necessary for all of the estates to conduct their investigations, to determine the location and value of assets…and ultimately to make distributions to customers and/or creditors.” In closing, he promised that no bonuses will be paid to MF Global executives or employees and that all customers will be “made whole by the SIPA Trustee.”
In his opening statement, Terrence Duffy, Executive Chairman and President of CME Group, discussed industry proposals, presented to the NFA, for enhancing customer protections. The proposals include requiring FCMs to file daily segregation reports and performing more frequent periodic spot checks to monitor FCM compliance with segregation requirements. Duffy also discussed the new electronic confirmation method that the industry is in the process of implementing. Finally, Duffy raised concerns with a number of CFTC proposed rules, including a proposal to implement Core Principe 9, which he warned would make it impossible for U.S. futures exchanges to develop new products and force exchanges to delist hundreds of products, among other things.
In his opening statement, Daniel Roth, President and CEO of the National Futures Association, provided a detailed overview of the events surrounding the Peregrine bankruptcy and the measures being taken by the NFA to enhance customer protections. Roth said a number of initiatives will be presented at NFA’s August Board meeting, including requiring FCMs to provide online, view-only access to bank balances for customer segregated and secured amount accounts to the designated SRO.
In his opening statement, Walter Lukken, President and CEO of the Futures Industry Association (FIA), provided an overview of FIA’s recommendations to enhance customer protections at FCMs. Lukken noted that earlier this year the FIA recommended that FCMs strengthen internal control policies and procedures and maintain appropriate separation of duties among individuals responsible for compliance with customer funds protections. Lukken also voiced FIA’s support for providing regulators with the independent ability to electronically review and confirm customer segregated balances across every FCM at any time as well requiring FCMs to publicly certify that they are in compliance with FIAs recommendations as soon as practicable.
Question and Answer
Chairman Debbie Stabenow (D-Mich.) asked Gensler how quickly the Commission can implement improved protections for customer accounts and whether the legal authority exists to promulgate such rules. Gensler said the CFTC currently has the authority to implement the proposed reforms, noting that additional draft rules are currently in front of the Commissioners with the hope that those rules will be released for public comment in September.
Stabenow asked Giddens to respond to Freeh’s comments that all former MF Global customers and employees will be made whole. Giddens prefaced his response by stating his ultimate goal is to return 100 percent of lost funds, but explained that such a task would prove to be an “uphill battle.” As an example, he referenced how $700 million of those funds are “stuck” overseas as it relates to the litigation proceedings involving U.K. authorities. Giddens later stated that he is “comfortable” saying customer fund distributions will total in the “90 percent range” but reiterated that making customers completely whole will be a difficult process.
Ranking Member Pat Roberts (R-Kan.) asked if the CFTC is currently able to tell whether a FCM is shifting customer money in and out of customer accounts on an intraday basis. Gensler explained that the CFTC does not currently have such monitoring capabilities, but pointed to new measures that would give regulators direct online access to such accounts.
A number of lawmakers, including Stabenow, Sen. Tom Harkin (D-Iowa), and Sen. John Hoeven (R-N.D.), asked about the feasibility of establishing an insurance fund for customers in the futures market. Gensler said he was open to the idea but more analysis is required to fully comprehend the costs and benefits of a fund. Sommers agreed that many details of such a proposal would have to be worked out, including which parties would be responsible for paying the premiums and how those costs would be passed on. She referenced conversations she has had with various producers who offered a mixed reception to the idea of an insurance fund.
Giddens recommended that an insurance fund for commodities customers be studied. He defended his support for a fund by noting how a large majority of MF Global customers have small accounts under $100,000. Giddens said a mechanism that would have provided customers with insurance up to $100,000 would have allowed nearly 98 percent of claimants to be repaid almost immediately in the MF Global case.
Duffy elaborated on the fund proposal during the second panel where he noted that costs for his clients would double if a $1 billion insurance fund was established. He further explained how securities customers and futures customers operate under different payment structures, noting how SIPC clients do not pay for insurance because the dealers assume such costs. He reiterated calls for further study of the proposal but said CME will look into such issues if requested by clients.
Roberts questioned the second panel about the SROs’ ability to monitor unusual intraday activity through the new electronic access measures. Roth said such online access would be helpful in monitoring whether there are intraday account fluctuations which could raise “red flags” with regard to any unlawful activity.
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S SENATE AGRICULTURE SUBCOMMITTEE HEARING, lawmakers heard from the regulators and trustees charged with overseeing and winding down MF Global and Peregrine Financial Group. Much of the discussion was focused on measures the industry and supervisory authorities are currently taking to mitigate customer fraud issues in the futures market, including whether the establishment of an insurance fund similar to those for securities customers and bank depositors is needed to help bolster consumer confidence.
Testimony
In his testimony, Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), discussed the CFTC lawsuit against Peregrine Financial Group and outlined reforms the CFTC has implemented to further protect consumer funds, including restructuring the CFTC regulation of self-regulatory organization (SROs). He said future reforms will include: incorporating the National Futures Association (NFA) rules into CFTC regulations; giving SROs and the CFTC direct electronic access to futures commission merchants’ (FCMs) accounts for customer funds; and providing transparency to customers with positions in the futures market in terms of the location and current ownership of their assets. Gensler also noted that the CFTC will hold a public roundtable on consumer protection in the second week of August. In closing, he called on Congress to increase funding for the CFTC, which continues to operate with limited resources.
In her testimony, CFTC Commissioner Jill Sommers detailed the CFTC’s efforts to work closely with the Securities Investors Protection Corporation (SPIC) in bankruptcy proceedings for MF Global. Sommers described the existing protections in place for customer funds and noted the CFTC’s Division of Enforcement is currently investigating the shortfall of these protections. In closing, Sommers affirmed the CFTC’s commitment to work with Congress in addressing customer protections to restore confidence within the markets.
In his opening statement, James Giddens, Trustee for the Securities Investor Protection Act’s (SIPA) liquidation of MF Global, provided an update on efforts to return assets to former customers of the failed FCM. Giddens provided an overview of additional claims set for distribution to customers, noting that $4.7 billion in lost funds have been returned to date, but a $1.6 billion shortfall remains in segregated property available to return to those customers. Giddens added that litigation regarding a $700 million client claim is progressing between his office and the U.K. Joint Special Administrators, with the expectation that a trial date will begin in April 2013. He also discussed the potential for valid claims to be brought against certain MF Global executives, including CEO Jon Corzine. Finally, Giddens summarized recommendations resulting from his investigation, including: creating a protection fund for futures and commodities customers and enacting legislation explicitly authorizing a trustee’s standing on behalf of customers.
In his opening statement, Ira Bodenstein, Trustee for the Chapter 7 Bankruptcy Estate for Peregrine Financial Group, provided an overview of his role in the Peregrine case, including attempting to estimate any short-fall in customer segregated funds; attempting to effectuate “bulk transfer” of customer positions and property to a solvent commodity broker; and computing estimated and then fully net equity claims for each customer. Bodenstein also discussed the team he has assembled to assist in confirming the validity of information on Peregrine’s books and records to ensure a return of customer funds “as soon as practicable.”
In his opening statement, Louis Freeh, bankruptcy trustee for MF Global Holdings, expressed concern that the competing roles of trustees at varying independent entities will complicate and delay the distribution of assets to MF Global customers. Freeh explained that the entities that once operated within MF Global all began acting independently after MF Global’s bankruptcy, leading to many cases of overlapping trustee fiduciary duties. Despite close cooperation between these trustees, he said overlap increases administrative costs and extends the “length of time necessary for all of the estates to conduct their investigations, to determine the location and value of assets…and ultimately to make distributions to customers and/or creditors.” In closing, he promised that no bonuses will be paid to MF Global executives or employees and that all customers will be “made whole by the SIPA Trustee.”
In his opening statement, Terrence Duffy, Executive Chairman and President of CME Group, discussed industry proposals, presented to the NFA, for enhancing customer protections. The proposals include requiring FCMs to file daily segregation reports and performing more frequent periodic spot checks to monitor FCM compliance with segregation requirements. Duffy also discussed the new electronic confirmation method that the industry is in the process of implementing. Finally, Duffy raised concerns with a number of CFTC proposed rules, including a proposal to implement Core Principe 9, which he warned would make it impossible for U.S. futures exchanges to develop new products and force exchanges to delist hundreds of products, among other things.
In his opening statement, Daniel Roth, President and CEO of the National Futures Association, provided a detailed overview of the events surrounding the Peregrine bankruptcy and the measures being taken by the NFA to enhance customer protections. Roth said a number of initiatives will be presented at NFA’s August Board meeting, including requiring FCMs to provide online, view-only access to bank balances for customer segregated and secured amount accounts to the designated SRO.
In his opening statement, Walter Lukken, President and CEO of the Futures Industry Association (FIA), provided an overview of FIA’s recommendations to enhance customer protections at FCMs. Lukken noted that earlier this year the FIA recommended that FCMs strengthen internal control policies and procedures and maintain appropriate separation of duties among individuals responsible for compliance with customer funds protections. Lukken also voiced FIA’s support for providing regulators with the independent ability to electronically review and confirm customer segregated balances across every FCM at any time as well requiring FCMs to publicly certify that they are in compliance with FIAs recommendations as soon as practicable.
Question and Answer
Chairman Debbie Stabenow (D-Mich.) asked Gensler how quickly the Commission can implement improved protections for customer accounts and whether the legal authority exists to promulgate such rules. Gensler said the CFTC currently has the authority to implement the proposed reforms, noting that additional draft rules are currently in front of the Commissioners with the hope that those rules will be released for public comment in September.
Stabenow asked Giddens to respond to Freeh’s comments that all former MF Global customers and employees will be made whole. Giddens prefaced his response by stating his ultimate goal is to return 100 percent of lost funds, but explained that such a task would prove to be an “uphill battle.” As an example, he referenced how $700 million of those funds are “stuck” overseas as it relates to the litigation proceedings involving U.K. authorities. Giddens later stated that he is “comfortable” saying customer fund distributions will total in the “90 percent range” but reiterated that making customers completely whole will be a difficult process.
Ranking Member Pat Roberts (R-Kan.) asked if the CFTC is currently able to tell whether a FCM is shifting customer money in and out of customer accounts on an intraday basis. Gensler explained that the CFTC does not currently have such monitoring capabilities, but pointed to new measures that would give regulators direct online access to such accounts.
A number of lawmakers, including Stabenow, Sen. Tom Harkin (D-Iowa), and Sen. John Hoeven (R-N.D.), asked about the feasibility of establishing an insurance fund for customers in the futures market. Gensler said he was open to the idea but more analysis is required to fully comprehend the costs and benefits of a fund. Sommers agreed that many details of such a proposal would have to be worked out, including which parties would be responsible for paying the premiums and how those costs would be passed on. She referenced conversations she has had with various producers who offered a mixed reception to the idea of an insurance fund.
Giddens recommended that an insurance fund for commodities customers be studied. He defended his support for a fund by noting how a large majority of MF Global customers have small accounts under $100,000. Giddens said a mechanism that would have provided customers with insurance up to $100,000 would have allowed nearly 98 percent of claimants to be repaid almost immediately in the MF Global case.
Duffy elaborated on the fund proposal during the second panel where he noted that costs for his clients would double if a $1 billion insurance fund was established. He further explained how securities customers and futures customers operate under different payment structures, noting how SIPC clients do not pay for insurance because the dealers assume such costs. He reiterated calls for further study of the proposal but said CME will look into such issues if requested by clients.
Roberts questioned the second panel about the SROs’ ability to monitor unusual intraday activity through the new electronic access measures. Roth said such online access would be helpful in monitoring whether there are intraday account fluctuations which could raise “red flags” with regard to any unlawful activity.
For testimony and a webcast of the hearing, please click here.