Customer Protection Regulation
|FINAL RULE: Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations Approved at CFTC Open Meeting, December 5, 2011|
|FINAL RULE: CFTC Final Rule: Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management Approved at CFTC Open Meeting, March 20, 2012|
|Proposal Date||Comment Deadline||Final Rule Issue|
|November 14, 2012||February 15, 2012||TBA, 2013|
|Final Rule Issue||Effective Date||Compliance Deadline|
|December 19, 2011||February 17, 2012||June 18, 2012|
|Proposal Date||Final Rule Issue||Effective Date|
|July 19, 2011||April 9, 2012||October 1, 2012|
|Proposal Date||Final Rule Issue||Effective Date|
|July 19, 2011||April 9, 2012||June 1, 2013|
After the financial crisis of 2008 and the passage of the Dodd-Frank Act in 2010, enhancing customer protection has emerged as a major issue. Dodd-Frank contains several provisions intended to restore confidence in the financial markets, including:
- Corporate governance issues such as Business Conduct Standards and Executive compensation;
- Anti-manipulation rules;
- Whistleblower rules; and
- Investment of Customer Funds.
Subsequently, after failures at two futures commission merchants within one year - MF Global and Peregrine Financial - the safety of customer segregated funds has come into question by market participants. The CFTC announced additional customer protection regulations to be forthcoming.
On October 22, 2012, the CFTC released a proposal and request for public comment on a list of changes to its rules in order to enhance protections for futures customers. The amendments are designed to strengthen the safeguards surrounding the holding of money, securities and other property deposited by customers with futures commission merchants (FCMs) and derivatives clearing organizations (DCOs).
John Lothian News Special Report: Residual Interest, February 2013
A rule proposed by the Commodity Futures Trading Commission (CFTC) designed to strengthen safeguards for customer deposits at futures commission merchants (FCMs) is threatening to overhaul the futures brokerage system.
The proposed “residual interest” provision introduced last fall, and discussed in a CFTC roundtable on February 5, would require substantial increases in margin buffers by FCMs.
The meeting led by Robert Wasserman, chief counsel of the CFTC’s Division of Clearing and Risk, included panelists Mike Dawley of Goldman Sachs and FIA chairman and Kim Taylor, CME Clearing president who argued that the increased margin requirements under the proposal are substantial. Dawley said the rule, if passed in its current form, would be “one of the most monumental events” in his 30 years in the industry.
John Lothian News has put together a special report on this critical issue. The deadline for comments on this proposed rule is February 15, 2013.
On October 31, 2011, commodities broker MF Global filed for bankruptcy amid steep losses in its trading book related to European sovereign debt. In the aftermath, it was discovered that the firm had commingled its own money with customer segregated funds. At one point, over $1.2 billion of customer money was reported missing. 
Although the CFTC issued a final rule in December 2011 that amended Regulation 1.25, the investment of customer funds and protection of collateral, the commission had indicated that additional customer protections would be forthcoming. A proposed rule on enhanced customer protections was passed and sent out for public comment on October 22, 2012.
For more information, see these related pages:
- A Layman's Guide to Regulation 1.25
- CFTC Final Rule: Investment of Customer Funds by Futures Commission Merchants and Derivatives Clearing Organizations
On July 9, 2012, non-clearing FCM PFGBest, formerly Peregrine Financial Group, revealed that it had frozen client accounts after its founder, Russell Wasendorf, Sr., had attempted suicide. It was later revealed that the firm had been submitting falsified bank statements to auditors from the National Futures Association (NFA), and that approximately $220 million in customer segregated funds had not been accounted for.
On August 21, 2012, the NFA submitted to the CFTC a list of proposed amendments to its financial requirements of FCMs. The proposed amendments would require FCMs to provide their designated self-regulatory organization ("DSRO") with on-line view-only access to FCM customer segregated/secured amount bank account information. The amendments would also add CFTC Regulation 1.49 to the list of CFTC Regulations, that if violated, constitute a violation of NFA rules.
On January 29, 2013, the NFA released the findings of an investigation conducted by the Berkeley Research Group that audited the NFA's audit procedures on Peregrine from 1995-2012. The independent report includes 21 recommendations covering auditor training, hiring practices, policies and procedures, as well as testing of internal controls at member firms and better identifying of potential risk factors in futures commission merchant operations. BRG reviewed more than 190,000 NFA documents containing over 3 million pages, including 166,000 emails and related attachments.
High Frequency Trading
On May 6, 2010, the Dow Jones Industrial Average plunged nearly 1,000 points in a short period of time, only to recover most of the losses within the hour. This became known in the financial sector as the "Flash Crash." Afterward, the SEC and CFTC formed a joint committee to study emerging regulatory issues. Its conclusions and recommendations were released on February 18, 2011.
On Aug. 1, 2012, the market-making unit of Knight Capital Group suffered “a technology issue” that affected the routing of trades on around 150 stocks on the New York Stock Exchange.  The firm's losses, estimated at $440 million, were attributed to an algorithmic glitch that resulted in millions of erroneous trades in under an hour. The Knight glitch has led to renewed calls for regulation of high frequency trading. For more information, see these related pages:
- High Frequency Trading Regulation
- AT 9000
- Fair and Efficient: A Q&A with Michael Aitken, October 2012
MarketsWiki Questions: Restoring Customer Confidence Series, 2012-2013
Restoring Customer Confidence Video Series Launch
In the aftermath of the MF Global collapse, fraud at Peregrine Financial Group and high profile high-frequency trading shocks, John Lothian News asks – how do you restore customer confidence and bring traders back?
John Lothian News interviewed more than a dozen professionals in the industry to get their ideas and solutions. As these ideas become practice, or as new concepts are adopted by the industry, we will continue to add them to the site.
This video series addresses solutions by category: Protection Fund, Confirmations, Daily Reports, Third-Party Custodians, Ratings, Customer Segregation, Regulatory Changes, HFT Rules. Visit the Restoring Customer Confidence video series page >
- ↑ CFTC Proposes New Regulations and to Amend Existing Regulations to Enhance Protections for Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations. CFTC. Retrieved on October 23, 2012.
- ↑ MF Global files for bankruptcy after European debt bets. The Telegraph. Retrieved on October 31, 2011.
- ↑ Peregrine Financial Group brokerage said to be $220 million short in customer funds. CBS. Retrieved on July 10, 2012.
- ↑ Peregrine fraud investigation finds shortcomings at futures regulator. Crain's Chicago Business. Retrieved on February 1, 2013.
- ↑ Glitches send Dow on wild ride. CNN.Money. Retrieved on May 8, 2010.
- ↑ Knight Capital shares sink after algorithm glitch. MarketWatch. Retrieved on August 1, 2012.