N.G.F.A. urges improved customer protection in C.F.T.C. reauthorization
by Jay Sjerven
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WASHINGTON — The National Grain and Feed Association urged Congress to enhance protection for futures market customers when considering legislation to reauthorize the Commodity Futures Trading Commission (C.F.T.C.).
In a statement submitted to the Senate Committee on Agriculture, Nutrition and Forestry, the N.G.F.A. suggested several potential improvements important to the grain, feed, processing and export industry.
Pointing to the collapse of MF Global nearly two years ago, the N.G.F.A. noted that former futures customers still have not received 11% of their supposedly safe segregated funds that were held by the futures commission merchant (F.C.M.).
“Consequently, we believe that a primary focus of the (C.F.T.C.) reauthorization process must continue to be enhancing customer protections with the twin goals of preventing similar occurrences in the future and providing protection to customers in the event of another F.C.M. insolvency,” the N.G.F.A. statement to the Senate agriculture committee said.
To accomplish this, the N.G.F.A. recommended a series of reforms to the U.S. Bankruptcy Code. The N.G.F.A. said reauthorization must clarify the principle that customers come first when prioritizing claims and distributing funds when a F.C.M. fails. The N.G.F.A. said Congress must strengthen and clarify the C.F.T.C.’s authority to administer F.C.M. insolvencies, including the ability to appoint its own trustee to represent the interests of futures commodity customers.
The N.G.F.A. urged removing existing so-called “safe harbor” protections for any transactions involving the misappropriation of a F.C.M.’s customer property, regardless of the intent behind the transfer. The current bankruptcy code denies such protection only when it can be proved that the F.C.M. intended to defraud customers or creditors.
The N.G.F.A. statement advocated harmonizing C.F.T.C. rules and the bankruptcy code concerning the liquidation process for a commodity futures broker, and it called for authorizing the formation of customer committees specifically to represent futures market customer interests.
The N.G.F.A. said other potential customer protection enhancements may include creating insurance coverage in the event of F.C.M. insolvencies. It said it was awaiting results of a Futures Industry Association analysis of such products and their costs, as well as the outcome of an on-line survey of commodity futures customers’ interest and input on such products.
“It is important to note that the solution on insurance to protect customers is not necessarily a government or legislated solution,” the N.G.F.A. said. “It may be that some form of privately provided product is more cost-effective and appropriate.”
In addition, the N.G.F.A. recommended establishment of a pilot program to test the concept of introducing an optional, fully segregated F.C.M. account structure for futures market customers.
“Creation of a fully segregated account structure necessarily would result in some additional costs that likely would be borne by customers utilizing such accounts,” the N.G.F.A. said. “A pilot program involving a limited number of commodity futures customers, F.C.M.s, lenders and regulators would be useful for testing the mechanics and identifying the viability and true costs of a full-segregation structure.”
The N.G.F.A. letter also expressed increasing industry concerns about the impacts of high-frequency trading on agricultural futures markets. With the caveat that administrative action by the C.F.T.C. may prove to be a more appropriate way to oversee high-frequency trading activities, the N.G.F.A. suggested Congress review whether high-frequency traders should be required to register with the C.F.T.C., some form of margining should be required, even if no positions are held by high-frequency traders at a day’s end, and whether other measures would help ensure high-frequency trading does not disrupt the hedging utility of futures markets.