The Commodity Futures Trading Commission (CFTC) is holding a public roundtable today from 9:30 a.m. EST to 5:00 p.m. EST to discuss customer protection requirements for futures commission merchants (FCMs). I will participate in the third panel on alternative models for property segregation. Agenda and call-in details for those who want to listen remotely are below. If you would like to submit a public comment on these proceedings, please find the instructions at the bottom of this post.
Of note, CFTC Commissioner Chilton plans to discuss a three point outline for customer account insurance. We applaud Commissioner Chilton's efforts in this regard, especially as he was one of the fist to call for an insurance mechanism. The CCC will work with Commissioner Chilton and industry leaders to get an insurance proposal before Congress as soon as it is possible to do so. The brief outline of his plan is posted below.
With respect to Commissioner Chilton's proposal, the CCC would like to nudge it in the direction of the liquidity facility we outlined for the Senate Committee on Agriculture, Nutrition and Forestry. We want to avoid asset liquidation and a claims process. We would rather see the fund focus on account transfer above all, especially with respect to the transfer of open positions to new FCMs on a fully margined basis, rather than a claims process. Should an insolvency result in a large shortfall above the fund’s coverage limits, the CCC would like to see the fund facilitate the transfer of accounts with fund assets up to the coverage limit before initiating a claims process.
We agree that the coverage will have to have limits, but the limits should apply to the shortfall amount, not the account balance as SIPA does. Let’s say the shortfall coverage limit is $100,000 per customer. If you have $500,000 in cash in your futures account and there is a 20% shortfall in customer property at an FCM, you would not be exposed to any loss. Under a SIPA-like limit, you would take a $100,000 loss in the above example as SIPA only covers cash account balances up to $250,000—amounts over that are subject to losses. The Canadian model offers $1M in shortfall coverage. So at MF Global—where the present shortfall is 20% for 4d customers--only accounts with more than a $5M balance would be exposed to any loss. Obviously, the coverage limits could grow as the fund’s assets grow.
The CCC would like to see the fund’s assets capped as a percentage of total segregation--like the FDIC’s reserve ratio--rather than a fixed amount. It is also very important that the fund be able to pursue recoveries in bankruptcy. This renders moot the moral hazard inherent in insuring funds, as there would be a punitive penalty for FCMs which activate the fund's protections.
We look forward to working with Commissioner Chilton and the industry to make account insurance work.
Agenda for the Public Roundtable Discussion:
|9:30 a.m.||First Session – SRO requirements for the examination of FCMs|
|10:30 a.m.||Morning Break|
|10:45 a.m.||First Session (continued) – CFTC oversight of SRO examination and the role of the CPA|
|12:45 p.m.||Lunch Break|
|1:30 p.m.||Second Session – CFTC Staff’s Customer Protection Proposals|
|3:30 p.m.||Third Session– Alternative Models for Segregation|
|5:00 p.m.||Roundtable Concludes|
The roundtable will be held in the Conference Center at the CFTC’s Headquarters at Three Lafayette Centre, 1155 21st Street, NW, Washington, DC, 20581. The discussion will be open to the public. Members of the public may also listen by telephone and should be prepared to provide their first name, last name, and affiliation.
US Toll-Free Number: 866-844-9416
A transcript of the roundtable discussion will be published on the CFTC’s website at: www.cftc.gov.
Members of the public wishing to submit their views on the topics addressed at the roundtable may do so via:
- Paper submission to David Stawick, Secretary, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581; or
- Electronic submission by visiting http://comments.cftc.gov and following the instructions for submitting comments through the CFTC’s website.
All comments must be identified by RIN number: 3038-AD87.
All submissions provided to the CFTC in any electronic form or on paper may be published on the Commission’s website, without review and without removal of personally identifying information.