WASHINGTON — Gerald F. Corcoran, chairman and chief executive officer of R.J. O’Brien & Associates (R.J.O.), offered testimony on behalf of the Commodity Markets Council (C.M.C.) and R.J.O. at a U.S. House Committee on Agriculture hearing this morning regarding an examination of the MF Global bankruptcy.
Headquartered in Chicago, R.J.O. is the nation’s oldest and largest independent futures brokerage and clearing firm. It also is a member of Washington-based C.M.C., a trade association that brings together commodity exchanges with their industry counterparts.
As part of his testimony, Mr. Corcoran emphasized that trust in the system has been “severely impaired” and that it is in the best interest of the industry and its customers for quick, but thoughtful action to restore that confidence.
“…while the investigation continues into the causes of the MF Global bankruptcy and the whereabouts of segregated assets, I am certain, very certain of this: we cannot let this event destroy the long-term trust and confidence upon which market participants rely,” he said. “This is an industry that is vitally important not only to the interests of the agricultural community, but to the world.”
Speaking on behalf of R.J.O. and C.M.C., Mr. Corcoran provided suggestions on how best to improve the industry’s customer collateral management process by ensuring the adequate maintenance of customer collateral levels.
“While this point does not directly relate to the MF Global situation, it is worth considering in the context of the financial stability of F.C.M.s (future commission merchant),” he said. “Significant losses by a customer of an F.C.M. can also result in catastrophic losses to the F.C.M. itself. … An idea we offer for deliberation is to require accounts that exceed certain margin thresholds on an intra-day basis to fund their account through direct wire transfer, thereby ensuring intra-day margin calls are met.”
Mr. Corcoran suggested ways to improve the F.C.M.’s net capital treatment, including evaluating the “double counting” of funds to satisfy capital requirements by entities dually registered as F.C.M.s and broker-dealers.
In his testimony, Mr. Corcoran urged regulators to look at enhancing monitoring and reporting requirements with respect to F.C.M. customer segregation practices. He noted F.C.M.s already are required to prepare customer segregation reports on a daily basis but do not share them with regulators that often.
To this end, he suggested regulatory agencies require the submission of these daily reports to the Commodity Futures Trading Commission, the National Futures Association or other Designated Self-Regulatory Organization.
During the presentation, Mr. Corcoran put forth a proposal on behalf of R.J.O. in which all F.C.M.s would adopt the same “agency” only model as R.J.O.
“Although proprietary trading by F.C.M.s may contribute to the liquidity of the futures markets, it should not be at the expense of customer protection,” he said. “Therefore, we at R.J.O. suggest that those F.C.M.s who want to conduct proprietary trading utilize other F.C.M.s or create a separately capitalized special purpose F.C.M. for this activity. Doing so will require the same oversight afforded to customer accounts, including proper margining at all times. Simply put, an F.C.M. that is restricted from trading for its own account would not place its customers at risk due to losses from proprietary trading.”
Looking specifically at the impact of MF Global’s bankruptcy filing and default on R.J.O., Mr. Corcoran said the firm worked closely with CME Group and other domestic exchanges to provide a home for a substantial number of MF Global accounts and brokers.
“In a matter of a few days, we assumed a bulk transfer of 20,000 accounts without incident, and our shareholders provided an infusion of approximately $50 million of capital to ensure that we would be sufficiently capitalized for this unexpected event,” he explained. “At the same time, we worked very hard to ensure that our long-standing clients continued to receive the outstanding service to which they are accustomed. Our management and staff worked literally around the clock for 25 days straight in a massive effort that involved coordination of systems, processes and people, and sometimes working with incomplete data and rapidly changing circumstances.
“We fully recognized that the clients of MF Global had just experienced a traumatic event, and we did everything we could to provide vehicles for addressing their questions and providing reassurances as soon as we had answers.”