Aug.CFTC Staff Roundtable on Additional Customer Protections

AT TODAY’S CFTC STAFF ROUNDTABLE, staff and industry representatives, including SIFMA, discussed additional measures regulators and market participants can take to enhance customer protections in the futures market.

 Commissioner Bart Chilton released his Futures Investor and Customer Protection Act proposal, which would extend Securities Investor Protection (SIPC) protections to futures customers. The measure would establish a Futures Investor and Customer Protection Corporation (FICPC) fund that would provide customers with insurance up to $250,000. The fund would be capitalized by assessments on futures commission merchants (FCMs) of no greater than 0.5 percent of the FCM’s previous year gross revenue specific to futures. The FICPC would be controlled by a three-member Board of Directors, all of whom would be subject to Senate confirmation.

 The panelists discussed requirements for self-regulatory organizations (SROs) when conducting examinations of FCMs, customer protection proposals, and alternative models for segregation. Representatives from the National Futures Association (NFA), which is the SRO for registered FCMs, said its objective in examinations is to “achieve reasonable assurance of compliance” with NFA and CFTC rules as well as ensuring all balances in financial statements are properly stated. The representative added his belief that NFA’s goal was not to “guarantee compliance.”

Panelists added that examiners who oversee multiple firms are in the best position to understand the different processes and controls utilized by those firms and to ultimately leverage that information to ensure all industry participants are held to high standards of best practice. Panelist discussions also addressed the extent to which examiners look for fraudulent activity. The NFA representative responded that looking for fraud was the NFA’s job and noted that recent initiatives to provide regulators with online, view-only access to segregated and secured amount bank accounts would significantly enhance examiners’ ability to check the accuracy of FCM statements. He added that the NFA Board of Directors is planning to meet next week to consider the proposals to move toward more automation.

With regard to customer protection proposals, CFTC staff asked what kind of information the buy side needs to ensure a working level of trust with FCMs. Panelists suggested that reports outlining FCM compliance with segregation requirements and net capital levels be publicly posted on the CFTC website. Panelists also stressed the need to continue educating customers about how to use such disclosures. The NFA representative noted that new customer protection rules would allow SROs to determine and disclose whether or not FCMs are holding money in their affiliates.

During discussion of alternative segregation models, a number of panelists referenced Chilton’s proposed insurance fund and agreed that insurance-like protections in the futures market should be given serious consideration. One panelist suggested a number of ways to implement this system; including rolling the fund into SIPC or having a combination of a small fund coupled with private insurance. CFTC staff referenced panelists’ appreciation of the costs associated with an insurance fund and asked if any relevant studies on the issue were available. The participants did not point to any specific studies but reiterated that such a proposal would have broad bipartisan support in Congress. One panelist added that Congressional action on a proposed bill establishing an insurance fund could be taken up during the lame duck session.

Another panelist raised concern with the proposal, noting how futures and securities customers operate under different structures. This panelist suggested the creation of a liquidity facility where, in the event of an FCM failure, the fund would be used to port customers immediately to new brokerages. In addition, one panelist said consideration should be given to reform of the bankruptcy code, including ringfencing FCMs and broker-dealers into separate corporate entities.

For a transcript of the meeting conducted via phone, please click here.