CFTC Technology Advisory Committee Meeting
AT TODAY’S CFTC TECHNOLOGY ADVISORY COMMITTEE (TAC) MEETING, TAC members and industry representatives discussed recent reforms and proposed measures to enhance the protection of customer funds in the futures market.
Commissioner Scott O’Malia, who leads the TAC, invoked the failure of two registered futures commission merchants (FCMs) -MF Global and Peregrine Financial Group – to call for increased transparency, disclosure and independent verification of customer funds, and reform of the bankruptcy code to protect customer money. By noting how the actions taken by the two firms have “undoubtedly undermined investor confidence,” O’Malia called for an immediate and comprehensive overhaul of customer protection safeguards. He stressed that enhancements to current rules announced by the CFTC “fail to close the existing regulatory gap that allows firms to self-report the status, balance and location of customer funds” and called on the industry to develop a technology solution that would be privately funded.
Recently, the CFTC approved new rules that, among other things, will require FCMs to maintain sufficient funds to meet customer obligations under a specific calculation method, as well as maintain written policies related to the maintenance of excess funds in customer segregated accounts. Any withdrawals that represent more than 25 percent of the excess segregated funds or secured funds must also be pre-approved by senior management under certain circumstances.
In addition to these measures, the CFTC is working with the National Futures Association (NFA), which is the self-regulatory organization (SRO) for registered FCMs, on further enhancements. Gary Barnett, Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight, outlined this work, which includes requiring FCMs to report twice a month on the amount of trading of their proprietary capital and how they are maintaining the separation of the firm’s and customer funds. Regulators are also considering requiring brokers to provide risk analyses in conjunction with an analysis of their capital reserves and whether such reserves are sufficient to protect against any losses. The cornerstone of these initiatives involves facilitating direct electronic access for the CFTC and SROs to check FCMs’ accounts at all times. This permission would be obtained once and would not require regulators to seek further permission after that point.
Chris Hehmeyer, Chairman of the Board of Directors of the NFA, said the NFA is working with industry to develop an e-confirmation process related to balances held in banks for FCMs with the ultimate goal of establishing an automated system for confirming segregated funds. He acknowledged that achieving this objective will take time and noted that in the interim, regulators can develop a process whereby individuals at the NFA would conduct daily checks of the balances of FCMs. Hehmeyer added that the recommendations will be presented at the NFA’s board meeting in August.
In response to the proposed initiatives, panelists underscored the fact that every fraud cannot be prevented and raised concern with how time and labor intensive a daily review of customer accounts would be and questioned whether the human capacity existed to conduct such checks. Everyone, however, agreed that the outlined objectives are possible to achieve at some point. A number of panelists also pointed to the difficulty of conducting reviews for non-cash balances, referring to the CFTC’s 30.7 rules as it relates to funds in foreign instruments. Panelists noted that jurisdictional challenges may arise regarding the ability of U.S. regulators to monitor accounts.
With regard to promoting increased customer confidence in the markets and ensuring proper controls are in place, Hehmeyer said the bigger issue is the Congressional mandate for “huge amounts of collateral to come into our industry” with the NFA overseeing this process. He said the industry needs to make sure the “buy side is comfortable with this money in our industry.”
The panelists reiterated that in order to increase customer confidence, more transparency and visibility is needed. One TAC member noted that customers want to know where their margin is at all times and be informed of any associated risks as well as whether the margin undergoes any transformation or reconciliation.
O’Malia called on the TAC members to look more closely into what customer protection reforms the industry is capable of implementing. He said the next TAC meeting will take place on October 30 where members will consider recommendations related to high frequency trading as well review the progress of industry in adopting new measures to protect customer funds.
For documents related to this meeting, please click here.
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AT TODAY’S CFTC TECHNOLOGY ADVISORY COMMITTEE (TAC) MEETING, TAC members and industry representatives discussed recent reforms and proposed measures to enhance the protection of customer funds in the futures market.
Commissioner Scott O’Malia, who leads the TAC, invoked the failure of two registered futures commission merchants (FCMs) -MF Global and Peregrine Financial Group – to call for increased transparency, disclosure and independent verification of customer funds, and reform of the bankruptcy code to protect customer money. By noting how the actions taken by the two firms have “undoubtedly undermined investor confidence,” O’Malia called for an immediate and comprehensive overhaul of customer protection safeguards. He stressed that enhancements to current rules announced by the CFTC “fail to close the existing regulatory gap that allows firms to self-report the status, balance and location of customer funds” and called on the industry to develop a technology solution that would be privately funded.
Recently, the CFTC approved new rules that, among other things, will require FCMs to maintain sufficient funds to meet customer obligations under a specific calculation method, as well as maintain written policies related to the maintenance of excess funds in customer segregated accounts. Any withdrawals that represent more than 25 percent of the excess segregated funds or secured funds must also be pre-approved by senior management under certain circumstances.
In addition to these measures, the CFTC is working with the National Futures Association (NFA), which is the self-regulatory organization (SRO) for registered FCMs, on further enhancements. Gary Barnett, Director of the CFTC’s Division of Swap Dealer and Intermediary Oversight, outlined this work, which includes requiring FCMs to report twice a month on the amount of trading of their proprietary capital and how they are maintaining the separation of the firm’s and customer funds. Regulators are also considering requiring brokers to provide risk analyses in conjunction with an analysis of their capital reserves and whether such reserves are sufficient to protect against any losses. The cornerstone of these initiatives involves facilitating direct electronic access for the CFTC and SROs to check FCMs’ accounts at all times. This permission would be obtained once and would not require regulators to seek further permission after that point.
Chris Hehmeyer, Chairman of the Board of Directors of the NFA, said the NFA is working with industry to develop an e-confirmation process related to balances held in banks for FCMs with the ultimate goal of establishing an automated system for confirming segregated funds. He acknowledged that achieving this objective will take time and noted that in the interim, regulators can develop a process whereby individuals at the NFA would conduct daily checks of the balances of FCMs. Hehmeyer added that the recommendations will be presented at the NFA’s board meeting in August.
In response to the proposed initiatives, panelists underscored the fact that every fraud cannot be prevented and raised concern with how time and labor intensive a daily review of customer accounts would be and questioned whether the human capacity existed to conduct such checks. Everyone, however, agreed that the outlined objectives are possible to achieve at some point. A number of panelists also pointed to the difficulty of conducting reviews for non-cash balances, referring to the CFTC’s 30.7 rules as it relates to funds in foreign instruments. Panelists noted that jurisdictional challenges may arise regarding the ability of U.S. regulators to monitor accounts.
With regard to promoting increased customer confidence in the markets and ensuring proper controls are in place, Hehmeyer said the bigger issue is the Congressional mandate for “huge amounts of collateral to come into our industry” with the NFA overseeing this process. He said the industry needs to make sure the “buy side is comfortable with this money in our industry.”
The panelists reiterated that in order to increase customer confidence, more transparency and visibility is needed. One TAC member noted that customers want to know where their margin is at all times and be informed of any associated risks as well as whether the margin undergoes any transformation or reconciliation.
O’Malia called on the TAC members to look more closely into what customer protection reforms the industry is capable of implementing. He said the next TAC meeting will take place on October 30 where members will consider recommendations related to high frequency trading as well review the progress of industry in adopting new measures to protect customer funds.
For documents related to this meeting, please click here.