No Answers, More Hope

The story that dominated the headlines for anyone in the futures world yesterday was the House Agriculture Committee’s hearing on MF Global. The star in the line-up was easily Jon Corzine, but much as expected, both his written statement and response to interrogation was an exercise in establishing plausible deniability. Others, however, did provide some interesting insight. Click through below to see their written testimony:

Dan Roth

Gerald Corcoran

Terrence Duffy

For us, the most interesting testimony came (surprisingly) from the NFA’s Dan Roth, and for two key reasons. For one, his explanation of how FCMs are regulated and monitored is by far the clearest explanation from any regulatory body involved on their role in the MF Global crisis to date. Perhaps even more interesting were the solutions outlined. Some of them are ones that have been aggressively circulated in the industry. Some of them, such as establishing an emergency fund for situations such as these (even if most of us are hoping it never gets used), we have advocated ourselves. Others, however, were most interesting because they were not reactive to the MF Global crisis, but proactive. This was particularly true in the preventative section:

Gross Margining—Should the CFTC require all clearinghouses to collect margin on a gross rather than net basis?

Commingling of Customer Segregated Funds—FCMs are prohibited from commingling customer funds with the firm’s assets but may commingle funds from different customers in the same segregated account.  Though not an issue in MF Global, this can expose customers to loss due to the default of another customer.  Various alternatives to this approach have been discussed.

Monitoring for Segregation Compliance—Should SROs change the manner in which they monitor Member firms for compliance with segregation requirements?

Should SROs perform unannounced spot-checks to confirm balances to outside sources more frequently?  Should FCMs be required to have an independent CPA conduct unannounced segregation compliance exams annually?

Should SROs periodically test to see if there have been intraday transfers of customer segregated funds that could arouse suspicion?  Should information be made publicly available about how each FCM invests its customer funds?

Mandatory Excess Segregation—Most FCMs deposit some of their own funds as excess customer segregated accounts to act as a buffer in case some customers go into a debit position.  Should FCMs be required to maintain a certain minimum in excess segregated funds?

Internal Controls—Should there be either specified requirements or best practice guidance on the types of internal controls that should be in place for the authorization to transfer segregated customer funds above a certain threshold level?

Third Party Depositories—Some have suggested that customer funds not needed to margin positions at the clearinghouse should be held not by the FCM but by a third party depository. Notice to Regulators—Should an FCM be required to give notice to either its DSRO or the CFTC when the firm makes any transfer of customer segregated funds, including intraday transfers, above a certain threshold?

Certainly food for thought. Overall, we understand some of the disappointment in the hearing’s testimony. We all would have loved for Corzine to say, “Well- ya got me. The money is over here…”

However, in a world where answers are not an option, the confidence that comes from a proactive industry unwilling to tolerate such shenanigans ever again isn’t a bad consolation prize.

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Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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