In the aftermath of the MF Global collapse, several Congressional hearings have been held and industry members are making initial suggestions to prevent another catastrophic event from impacting the once-thought untouchable segregated customer funds.
U.S. commodity markets have shrunk almost 9% since MF Global's collapse as farmers, investors and traders close out positions, according to a Reuters analysis of data that suggests there may be lasting effects from the industry's most disruptive broker failure ever.
While several different factors likely figured into the decline - including the seasonal year-end closure of trading books - the study provides the first evidence to show that smaller-scale traders who were MF Global's core customers may have been effectively frozen out of the markets.
Speaking at the National Grain and Feed Association's annual meeting in mid-December, Chicago Mercantile Exchange (CME) Group chief operating officer Bryan Durkin recognized that producers and lenders must have confidence in futures' markets ability to manage price risk for the system to work for grain hedgers, and that confidence was "dealt a blow by the violations committed by MF Global."
Durkin says as MF Global's primary exchange operator, and one of its regulators, CME Group has faced a lot of questions following MF Global's failure about how a shortfall in customer funds occurred, about the security of its clearing operation, and its ability to return customer funds to their owners and restore confidence.
"For a very long time – about 150 years – farmers and agribusiness never worried about the safety of their money when hedging on futures exchanges. The fact is the system continued to work at the clearing house, where $2.5 billion of your money was held," Durkin says. "But given what did not work at the firm level of MF Global, many of you are now awaiting the return of funds."
Durkin says, "Moving forward, we intend to work with regulators and industry leaders on ways to strengthen protection of customer funds at the firm level, and prevent a repeat of this episode.
Going forward, we will continue to work with industry groups like the NGFA to evaluate the lessons of this experience, and ensure that, in the future, there are greater protections for customer funds at the firm level."
Industry groups have tried not to make quick judgments or recommendations, but have begun circulating some ideas that warrant review as ways to help restore confidence to the futures market.
For instance, NGFA has questioned whether it would be more appropriate to vest responsibility for holding and safeguarding customer funds in an entity other than exchanges' clearing firms – such as the exchange itself or some other independent third party.
NGFA questions whether the commodity exchanges themselves should bear "some responsibility for customer funds lost as a result of a bankruptcy and/or malfeasance by a clearing member of the exchange."
The North American Millers Association wrote a letter to Congress calling for the U.S. Commodity Futures Trading Commission to immediately enact rules requiring customer segregated funds be kept in escrow accounts, in cash or very liquid government-backed instruments.
NAMA called for the creation of an industry insurance fund to cover commodity futures contracts. NGFA also questioned whether insurance provided through the Securities Investor Protection Corp. (SIPC) should be expanded to provide coverage for commodities, as well as securities. The National Pork Producers Council also recommended extending to commodities exchange customers insurance similar to that provided to securities investors through the SIPC.
Many groups are questioning the regulatory oversight leading up to the event. NGFA called for a review of how frequently MF Global customer accounts were audited, by whom and who was responsible for enforcement. They want to know if regulations were administered in a proper and timely way immediately prior to the bankruptcy filing. NAMA also called for a complete review of CFTC audit procedures.
NPPC offered a number of possible ways to prevent customer futures accounts from being compromised. These include imposing stiffer criminal and/or civil penalties for misuse of customer accounts. The group also said requirements should be put into place for financial tests and additional audits of brokers and dealers by governmental and non-governmental entities.