Is There A SIPC In The Futures?


By Donald L. Horwitz - MarketsReformWiki Contributing Editor

Managing Director, Oyster Consulting, LLC


Not to be too blunt, but the collapse of MF Global is a disaster for the futures industry. This is the same industry that has been able to stand before Congress every time there has been a market crash (1987, 1994, 2008, to mention a few) and say proudly that the customer segregation system works well. Now, however, that is not necessarily the case. And, more importantly, this turn of events is happening just as the regulatory agencies, Congress and the industry are trying to implement the final set of rule changes mandated by the Dodd-Frank Act of 2010.

Why is this collapse such a problem, you may ask? After all this was not the kind of systemic event that the country and the financial system faced in 2008 when Lehman, Bear Stearns, and AIG failed, and Merrill Lynch was rescued by Bank of America. While a nice sized and respectable firm, MF Global was not a Morgan Stanley or Goldman Sachs.

The real issue facing the industry is not what happened to the customer funds that were required to be set aside in a segregated account at a bank, (although clearly that detail is critical to the innocent clients affected by the shortfall) but how did it happen?

The segregation provisions of the Commodity Exchange Act and the regulations promulgated thereunder by the CFTC, govern the holding, investing and use of these funds so that if a futures commission merchant (FCM) does run into a solvency issue, at least the customer funds are safe. Moreover, the CFTC and the self-regulator for the firm (in this case the CME Group) are required to periodically audit firms for compliance with these rules. If the segregation computation is incorrect, alarm bells go off and the firm must immediately come back into compliance. The firm could also be tagged with fines and penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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