The Commodity Futures Trading Commission announced today that it has approved new financial rules submitted by the National Futures Association. The rules are aimed at helping strengthen protection of customer funds, which is a hot topic in the wake of both the MF Global debacle and the newer Peregrine Financial Group mess that came to light this week.
According to the press statement announcing the rules, they require futures commission merchants to strengthen controls over the treatment and monitoring of funds held for customers trading on U.S. contract markets (segregated accounts) and for funds held for foreign futures and forign option customers trading on foreign contracts markets.
The statement says the new NFA rules "are part of an ongoing response to recent markt events, and are the result of coordinated and collaborative efforts by the Commission, self-regulatory organizations and market participants, including the two-day public roundtable hosted by CFTC earlier this year." Three areas of reform are included in the NFA rules.
Part 30 - FCMs must hold sufficient funds in Part 30 secured accounts to meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method representing the total account balance owed to customers. FCMs will no longer be allowed to use the alternative method, which had allowed them to hold a lower amount of funds representing the margin on their foreign futures.
Controls on use of excess segregated and Part 30 secured customer fund.
FCMs must maintain written policies and procedures governing the maintenance of excess funds in customer segregated accounts and Part 30 secured accounts.
Any withdrawals that are in excess of 25% of the excess segregated or Part 30 secured funds that are not for the benefit of customers must be pre-approved in writing by senior management.
FCMs must file notice with NFA of any withdrawal of 25% or more of the excess segregated funds or Part 30 funds that are not for the benefit of customers.
Reporting and recordkeeping
FCMs must file on a daily basis with the NFA segregation and Part 30 secured amount computations.
FCMs must file with te NFA detailed information regarding the depositories holding customer funds and the investments made with customer fund as of the 15th and last business day of each month.
FCMs must file with the NFA additional monthly net capital and leverage information.
The changes will also establish a process for NFA to initiate a Membership Resonsibility Action against an FCM if the NFA believes they may not have sufficient funds to remain in continual compliance with its obligations to maintain a targeted amount of excess segregated and Part 30 secured funds.
How these rules will impact FCMs remains to be seen, but these are tighter controls that if enacted might have stopped the Peregrine mess from unfolding. It is apparent that Peregrine Financial may have been falsifying records for as long as two years.