WASHINGTON — A coalition led by the National Grain and Feed Association has submitted a letter to Congress urging lawmakers to assess protections for customer-segregated funds.
The letter was submitted Nov. 30 in connection with the bankruptcy filing a month earlier by MF Global Inc.
The group asked members of the House and Senate agriculture committees to help make sure customer commodity-segregated funds receive top priority in the hierarchy of claims submitted to the MF Global bankruptcy trustee and to ensure the customers are not designated as unsecured creditors.
“Our goals are two-fold — pursue all possible actions that will ensure that assets of MF Global customers will be returned quickly, and make sure this never happens again,” the groups wrote.
The N.G.F.A. said current estimates of the shortfall in customer-segregated accounts range from $600 million to $1 billion.
Longer term, the need to restore confidence in the use of futures markets is paramount the group said.
“Producers and agribusiness firms that rely on exchange-trading to facilitate risk management, as well as lending institutions that support them, have had their confidence shaken,” the groups said. “We always believed that the risk to customer funds when trading on exchanges was virtually zero. Now, we see that is not the case.”
In the letter, the groups raise the possibility of exploring whether responsibility for holding and safeguarding customer funds should be moved to an entity other than exchange clearing firms. Either the exchanges themselves or an independent third party could be considered, they said.
“Weakness in customer protections brought to light by MF Global’s failure have left customers unsure of whether segregated funds will continue to be fully available at other clearing firms,” they said.
The groups also suggested insurance Securities Investor Protection Corp. could be expanded beyond securities to cover commodities as well.
More broadly, the groups asked the congressional committees with oversight of futures trading to dig into issues surrounding the adequacy of protections for customer-segregated accounts.
“Such issues include how frequently customer accounts were audited, by whom, and who was responsible for enforcement, as well as whether requirements were administered in a proper and timely way immediately prior to the MF Global bankruptcy filing,” the groups said. “The committees were asked to examine whether changes are needed in how segregated customer funds are allowed to be invested and whether exchanges may bear legal responsibility for customer funds ‘lost’“ in a bankruptcy and/or through malfeasance by a clearing exchange member.
“The U.S. agricultural sector relies heavily on regulated exchanges for risk management,” the letter said. “The ability of both commercial and producer hedgers to use futures markets depends on lenders agreeing to meet margin calls, which demands full confidence by all lenders in the safety of those funds. We must be confident the system works, that it properly safeguards customer funds and that customers have full confidence in continuing to utilize exchange-traded (risk-management) tools.”
The N.G.F.A. said it sent a nearly identical letter to the Commodity Futures Trading Commission.
Groups in addition to the N.G.F.A. that signed the letter were AgriBank FCB; AgStar Financial Services, ACA; American Farm Bureau Federation; CoBank, ACB; Commerce Bank; Commodity Markets Council; Farm Credit Services of America; Independent Community Bankers of America; KeyBank Agribusiness; National Association of Wheat Growers; National Barley Growers Association; National Chicken Council; National Corn Growers Association; National Pork Producers Council; National Sunflower Association; Pet Food Institute; and U.S. Canola Association.