MF Global client funds: how new NFA proposal would work

Author: | Published: 25 Jun 2012
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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 Corzine’s role. This would not be the case if a recent National Futures Association (NFA) proposal had been in effect.

The 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 account’s 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 they’re 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 case-specific analysis.

“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 CFTC.

“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 NFA’s website, but the specifics of this are still being worked out.

“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 FCM’s monthly capital position, whether an affiliate of the FCM holds any customer funds and the firm’s leverage ratio,” said Wooding.

The NFA’s 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 O’Malia 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.