On November 15, the Chicago Mercantile Exchange Group, Futures Industry Association, Institute for Financial Markets, and National Futures Association released a study on the economic feasibility of adopting an insurance regime for the United States futures industry. The study assessed the economic impacts of four proposals for providing customer asset protection insurance (CAPI) for losses suffered by customers of under-segregated futures commission merchants (FCMs). The study analyzed both private, voluntary CAPI and government-mandated, universal CAPI proposals.
The study evaluated three private, voluntary CAPI scenarios, summarily rejecting two of those alternatives based on cost. The remaining scenario would provide CAPI to customers of FCMs that elect to participate in a group insurance plan offered by an FCM captive insurance company, which the study calls the Futures Industry Customer Asset Protection Insurance Company (FICAP). FICAP, which would be funded by member contributions and partially backed by reinsurance, would provide $300 million of initial coverage, with the first $50 million in losses covered by participating FCMs, and the remaining $250 million covered by reinsurance. The study estimated costs of such a program to be between $18 and $27 million per year, but noted that the final cost would be dependent on underwriting, the number of participating FCMs, and negotiations between FCMs and the insurance companies. The study concluded that there is a willingness and interest by reinsurers to offer CAPI through a FICAP program.
The study also analyzed a fourth scenario involving a government-mandated and universal CAPI coverage plan for all US futures customers. Modeled after the Securities Investor Protection Corporation, a Futures Investor and Customer Protection Corporation (FICPC) would provide up to $250,000 to all customers of every US FCM to cover losses arising from the failure of one or more under-segregated FCMs. FICPC would be funded by mandatory FCM payments until it reached a target funding level of $2.5 billion. The study determined it would take approximately 54 years to reach this target level. The study concluded that a FICPC fund would be significantly under-funded in meeting its target level, and that the only way to offer credible assurance to futures customers that their losses would be covered would be to provide a taxpayer-backed government backstop.
The study is available here.