N.G.F.A. issues proposals for safeguarding funds

by Eric Schroeder
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WASHINGTON — The National Grain and Feed Association (N.G.F.A.) has issued what it calls “essential” preliminary recommendations for safeguarding the sanctity of customer funds. The recommendations come in the aftermath of the estimated $1.6 billion in customer-segregated funds that were allegedly misallocated in the days preceding the Oct. 31 bankruptcy filing of MF Global Inc.

“We believe these preliminary recommendations are essential to begin reestablishing confidence among futures market participants and to help safeguard customer funds,” the N.G.F.A. said in letters this week to the Senate and House Agriculture Committees and the Commodity Futures Trading Commission (C.F.T.C).

The preliminary recommendations include:

• The C.F.T.C. should require daily reporting of segregated fund positions by futures commission merchants (F.C.M.s) to both their Self-Regulatory Organization (S.R.O.) and to the C.F.T.C.
• The C.F.T.C. should require daily reporting of segregated fund investments by F.C.M.s, detailed by maturity and quality, to both their S.R.O. and to the C.F.T.C.
• The C.F.T.C. should conduct a formal review of F.C.M. investment options for customer funds, with a view as to whether the agency should further limit allowable investments only to very safe instruments.
• The C.F.T.C. should require reporting by F.C.M.s to their S.R.O. and to the C.F.T.C. of significant changes in investment policies or holdings.
• F.C.M.s should be required to provide greater transparency to customers of where customer funds are invested, potentially achieved through such means as posting on the C.F.T.C. web site, F.C.M. web sites and/or publication in customer prospectuses.
• The C.F.T.C. and S.R.O.s should enhance monitoring of F.C.M. reporting. Both sets of regulators should conduct more detailed and more frequent audits, as well as unannounced spot checks of FCMs.
• To assign accountability and to aid in establishing that fraudulent activity has occurred in the event customer funds are misappropriated, the C.F.T.C. should require the signature of two authorized principals of an F.C.M., such as the chief executive officer, chief financial officer or other senior officers, to move funds out of segregated customer fund accounts to non-customer accounts.
• F.C.M.s should be required to provide immediate notice to their S.R.O. and to the C.F.T.C. if the firm moves more than a specified percentage (to be determined by the C.F.T.C.) of excess segregated funds to non-customer accounts.
• F.C.M.s should be required by their S.R.O. periodically to certify policies and procedures to ensure the safeguarding of customer-segregated accounts and compliance with applicable laws and regulations regarding such accounts. All S.R.O. examinations should require principals of F.C.M.s to certify that policies and procedures are adequate, effective and being observed by the F.C.M., the N.G.F.A. said. At least annually, S.R.O.s should be required by the C.F.T.C. to review policies and procedures to determine adequacy and compliance.

The N.G.F.A. said that while its initial recommendations “will help enhance reporting, transparency and accountability in handling customer funds, they represent only first steps that can and should be implemented quickly.”

The association plans to continue to evaluate more substantive changes designed to protect against a future MF Global-type situation. Among those changes are various “full-segregation models” for isolating and safeguarding customer funds, and the costs associated with doing so; the viability and costs associated with extending insurance coverage to commodities accounts, either privately provided or under the type of insurance program currently in place for securities accounts; and potential changes to the U.S. bankruptcy code to prevent segregated customer funds from being swept into liquidation proceedings and to prevent the so-called “safe harbor” provisions of the bankruptcy code from preventing a retrieval of customer funds.

A full evaluation and other potential recommendations are expected to be unveiled by early June, the N.G.F.A. said. The efforts are being led by the N.G.F.A.’s MF Global Task Force, which is comprised of members from its Risk Management Committee and Finance and Administration Committee, as well as representatives from agribusiness lenders.

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