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National Grain and Feed Association recommends safeguards on segregated funds

The National Grain and Feed Association, whose members are missing money in the wake of the MF Global bankruptcy, has today issued a long list of recommendations for safeguarding customer funds in the future.

“The demise of MF Global has shaken the confidence of many futures market participants concerning the safety of segregated customer funds,” the NGFA said in letters to the House and Senate agriculture committees and the Commoodity Futures Trading Commission.

“We believe these preliminary recommendations are essential to begin reestablishing confidence among futures market participants and to help safeguard customer funds.”

The NGFA said it plans to complete its evaluation and offer additional potential recommendations by early June.

An estimated $1.6 billion in customer-segregated funds was allegedly misallocated in the days preceding the Oct. 31 bankruptcy filing of MF Global Inc. The amount missed by farmers and National Grain and Feed members is unclear, but MF Global had its origins in agriculture and had many customers in rural America.

In its letters, NGFA said:
  • The CFTC should require daily reporting of segregated fund positions by futures commission merchants (FCMs) to both their Self-Regulatory Organization (SRO) and to the CFTC.
  • The CFTC should require daily reporting of segregated fund investments by FCMs, detailed by maturity and quality, to both their SRO and to the CFTC.
  • The CFTC should conduct a formal review of FCM investment options for customer funds, with a view as to whether the agency should further limit allowable investments only to very safe instruments.
  • The CFTC should require reporting by FCMs to their SRO and to the CFTC of significant changes in investment policies or holdings.
  • FCMs should be required to provide greater transparency to customers of where customer funds are invested, potentially achieved through such means as posting on the CFTC website, FCM websites and/or publication in customer prospectuses.
  • The CFTC and SROs should enhance monitoring of FCM 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 CFTC should require the signature of two authorized principals of an FCM, 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.
  • FCMs should be required to provide immediate notice to their SRO and to the CFTC if the firm moves more than a specified percentage (to be determined by the CFTC) of excess segregated funds to non-customer accounts.
  • FCMs should be required by their SRO 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 SRO examinations should require principals of FCMs to certify that policies and procedures are adequate, effective and being observed by the FCM, the NGFA said. At least annually, SROs should be required by the CFTC to review policies and procedures to determine adequacy and compliance.
  • A rigorous review by the CFTC of capital requirements for FCMs and broker-dealers needs to be conducted, with a view to scrutinizing the current practice of allowing double-counting of required capital when a firm operates as both an FCM and a broker-dealer.

The other options NGFA said it is considering supporting include:
  • “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;
  • 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 – which require proving fraudulent conveyance – from preventing a retrieval of customer funds.

The NGFA’s efforts are being led by its MF Global Task Force, comprised of members from its Risk Management Committee and Finance and Administration Committee, as well as representatives from agribusiness lenders.

The NGFA consists of more than 1,050-member companies from all sectors of the grain elevator, feed and feed ingredient, integrated livestock and poultry, grain processing, biofuels and exporting business that operate about 7,000 facilities nationwide and handle more than 70 percent of all U.S. grains and oilseeds.