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Grain industry alarmed by Peregrine failure to segregate customer funds

The National Grain and Feed Association said this week that it is was “extremely alarmed” by reports that the Peregrine Financial Group Inc. failed to segregate customer funds, and said it would work with Congress and the Commodity Futures Trading Commission on new regulations to avoid the problem in the future.

NFGA, the nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed and feed ingredients, and grain products, said it is uncertain about the full extent to which member companies may be affected by the PRG insolvency and alleged missing customer funds.

But the case “clearly demonstrated” that the earlier MF Global incident was not a one-time problem, the group suggested. “We now see that significant risk to supposedly segregated customer funds still exists,” said the NGFA.

The group noted that it had earlier this month submitted a series of recommendations to Congress and the CFTC designed to provide greater oversight and enhance customer protections in the event of another MF Global-type liquidation of an FCM.

The NGFA’s recommendations included amending the U.S. bankruptcy code to, among other things, provide greater and more detailed guidance in liquidation proceedings involving a commodity broker or FCM, and placing customers first-in-line for distribution of funds, ahead of creditors.

The NGFA also recommended establishing a new type of voluntary, fully segregated customer accounts to shield customer assets from pooled losses if an FCM bankruptcy occurs, and extending insurance coverage to protect against FCM bankruptcies involving commodity accounts.

“We look forward to working with Congress, the CFTC and other stakeholders to achieve these critically needed changes,” the NGFA said.

In addition, the NGFA said it would await a “full explanation” from regulators as to how the alleged missing funds escaped notice, apparently over a long period of time.

First allegations of missing customer funds occurred July 9, when the National Futures Association determined that an account that was supposed to have $225 million of customer money actually held just $5 million.

According to the NFA, a further review of the company’s records found that the firm allegedly had been falsifying records as long ago as 2010, with one account in February 2010 found to contain just $10 million of the $218 million it was supposed to contain. The NFA has said the whereabouts of the customer funds currently is unknown.

The CFTC on July 10 filed a complaint in the U.S. District Court for the Northern District of Illinois against PFG and its owner, alleging that they committed fraud by allegedly misappropriating customer funds, violating customer fund segregation laws and making false statements in financial statements filed with the agency.

Senate Agriculture Committee Chairman Debbie Stabenow, D-Mich., has scheduled a hearing on the matter for Tuesday.