By Lene Powell, J.D., Commodity Futures Law Reporter.
The National Futures Association (NFA), the self-regulatory organization for the U.S. futures industry, has proposed several measures to tighten control over customer segregated funds held by commodity futures brokers, known as futures commission merchants (FCMs). Most significantly, the rule would require written approval by the CEO or CFO of withdrawals of more than 25% of the FCM's “residual interest” in customer segregated funds.
The proposed measure is popularly referred to as the “Corzine Rule” after the former CEO of MF Global, a major FCM that suddenly went bankrupt last fall. In the days leading up to the firm’s failure, funds were transferred from customer segregated funds to cover the firm’s proprietary trades. Jon Corzine has stated that he was not aware of the fund transfers.
Under CFTC Rule §1.23, FCMs are permitted to retain a residual financial interest in customer funds in excess of the amount necessary to meet segregation requirements, as long as the residual interest is properly segregated and accounted for. Also known as “excess funds”, these funds may be used to make up any deficiency in a customer’s account if the customer fails to have sufficient funds on deposit with the FCM to meet the customer’s obligations.
The proposed measure would require that if a transfer is made exceeding 25% of the FCM’s residual interest in a customer segregated fund account, the firm's CEO, CFO or other defined principal must pre-approve the transaction in writing. The FCM must also immediately file a written notice with NFA providing details of the transaction, including the reason for the disbursement and the current estimate of the remaining total residual interest in the accounts, along with a representation that the FCM remains in compliance with the segregation requirements.
In addition to the approval and notification requirement, FCMs will be required to have written policies and procedures regarding the maintenance of the firm's residual interest in its customer segregated funds. The policies and procedures must target an amount, either by percentage or dollars, that the FCM seeks to maintain as its residual interest in those accounts, and ensure that the FCM remains in compliance with the applicable segregation requirements.
Futher, FCMs will be required to provide NFA with certain financial and operational information on a monthly or semi-monthly basis. NFA will subsequently make some of the information publicly available on its website in the future.
"These new requirements will help begin the process of restoring public confidence in the financial integrity of customer segregated funds," said Roth. "Making this information available to the public will give investors a better picture of the financial standing of the FCM with which they are conducting business."
The proposed new requirements were approved by NFA's Board of Directors on May 17. NFA has submitted the proposed financial requirements and accompanying interpretive notice to the CFTC for approval.