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Tougher Rules coming for Futures Firms

In response to the collapse of MF Global Holdings Ltd., futures firms are going to be restricted by a federal agency in regards to how they treat their clients’ cash. MF Global was led by Jon Corzine, who was at the forefront of the collapse. Firms will be subject to rule changes instituted by Chairman Gary Gensler of the CFTC, the Commodity Futures Trading Commission.

The proposed limits by the agency include one major wish that internal repurchase agreements will be banned. These are also known as repos, where a single part of a futures firm swaps a customer’s assets for securities. An example of this could be municipal bonds or foreign bonds that are being held at another area of the futures firm.

“There’s an inherent conflict of interest between affiliates doing such transactions,” CFTC Chairman Gary Gensler said. “I think customer money really has to be protected for the customers.”

Rule 1.25 is the rule of the CFTC that is targeted by the proposed changes. The rule regulates any investments made by futures firms using a customer’s cash. Changes to rule 1.25 were proposed in 2010, with Gensler pushing for those changes, but there was a lack of support from the remaining four commissioners.

A renewed urgency occurred when hundreds of millions of dollars went missing from MF Global right before it filed for bankruptcy. The money that went missing belonged to the firm’s clients. Sources claim that since the MF Global collapse occurred, their stance on the proposed rule changes for 1.25 has changed.

Should the rule changes be approved, the futures merchants will have to invest customers’ cash through a third party such as a bank. Futures merchants are those who process trades based on clients’ behalf.

In the week leading up to the company’s bankruptcy filing, those close to the investigation claim that MF Global took customer funds from the futures accounts mysteriously to shift them to their broker accounts. In the company’s final days, all of the money went missing, which was anywhere from $600 million to $1.2 billion.

Corzine has been subpoenaed to testify at the December 8 hearing by the United States House Agricultural Committee. The chairman of the committee, Frank Lucas, said the following about the investigation, “it is the committee’s responsibility to shed light on the facts and circumstances surrounding the bankruptcy and efforts to find missing customer funds.”

MF Global hit bankruptcy because of a $6.3 billion bet on government bonds from Europe that plunged in value as the European debt crisis increased. A financial tool known as the repo-to-maturity tool was used to fund the trade. This occurs when a futures firm borrows money and then pledges securities as collateral for the trade.

Jim Vassallo: Jim is a freelance writer based out of the suburbs of Philadelphia in New Jersey. Jim earned his Bachelor of Arts degree in Communications and minor in Journalism from Rowan University in 2008. While in school he was the Assistant Sports Director at WGLS for two years and the Sports Director for one year. He also covered the football, baseball, softball and both basketball teams for the school newspaper 'The Whit.' Jim lives in New Jersey with his wife Nicole, son Tony and dog Phoebe.

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