A US Justice Department
investigation over the authorisation to transfer funds from
segregated customer accounts at MF Global Holdings has failed
to reveal much information regarding chief executive Jon
Corzines role. This would not be the case if a recent
National Futures Association (NFA) proposal had been in
proposal would require a CEO, CFO or another financial
principal registered with the NFA to approve in writing any
disbursement of funds from customer accounts that is greater
than 25% of the accounts residual interest (amount in
excess of required collateral).
In the case of another MF Global scenario, it
would be easier to prove liability if the CFTC finalises the
NFA proposal in its current form.
Carol Wooding, associate general counsel at the
NFA said one of the goals was to make sure that an appropriate
person within the firm was aware of the disbursements and will
be ultimately responsible for it. We believe this
requirement will also help to ensure these disbursements are
made only when theyre appropriate, she said.
The amount of residual interest in each segregated
account is not mandated under the proposal, but a futures
commission merchant (FCM) is required to set its own target
amount in accordance with written policies and procedures
designed to reasonably ensure compliance with segregation
requirements. The language under the proposal leaves room for
It means that the person approving the
disbursement has looked at the relevant information and
reasonably believes that the firm remains in compliance with
its segregation requirements, Wooding said.
The proposal also expands FCM financial reporting
requirements to include amount of funds held in customer
accounts, amount of cash held in permitted investments,
identity of depositories and whether depositories are an
affiliate, and net capital, to name a few of the daily,
semi-monthly and monthly disclosures.
Michael Piracci, counsel at Morgan Lewis, said
there would not be much additional compliance burden among FCMs
because a lot of the information required under the NFA reports
is already required in disclosures to both the NFA and
I think with the exception of the
semi-monthly reports, the system - the wires if you will- are
already set up, said Piracci.
The proposal also stated a willingness to make
some of this information available on the NFAs website,
but the specifics of this are still being worked
We are working on a process where a customer
could go to our website, pull up an FCM and access for example
information related to the FCMs monthly capital position,
whether an affiliate of the FCM holds any customer funds and
the firms leverage ratio, said Wooding.
The NFAs proposal would complement a rule
finalised by the CFTC
earlier this year implementing a legally segregated but
operationally comingled (LSOC)
model for the protection of customer collateral.
CFTC Commissioner Scott OMalia criticised
that rule for not addressing the possibility that an
intermediary experiences losses on investment of client funds
and cannot cover it using its own capital.
If enough residual interest is retained as
intended under this proposal, LSOC shortcomings could be
solved. If that is not the case, there will at least be an
individual liable for misuse of customer funds.