Category: National Futures Association

CME Chairman Voices Concerns About Brokerage Collateral Ruling

Terrence Duffy, Chairmen of the CME Group, counseled Senators against a pending CFTC ruling regarding collateral set aside by brokerages. Duffy’s presentation before the Senate Committee on Agriculture, Nutrition and Forestry in a hearing to evaluate the CFTC was yesterday, July 17th 2013.

In his testimony, Terrence Duffy took aim at a certain pending CFTC ruling requiring all Futures Commission Merchants (FCMs) to put all residual interest on their funds in a separate account. This money would be used to refund customers if a critical situation, such as MFE Global’s dissolution, were to occur again.

But Duffy doesn’t believe that this would do well to protect customers from losing money; instead, he warned the Senate that this could cause brokerages to be pushed out of the market, decreasing both liquidity and competition within the market. Furthermore, he appealed to the Committee by arguing that these changes would disproportionately impact smaller FCMs with stronger ties to agriculture.

Finally, Duffy reasoned that the proposed ruling would disrupt the ‘current regulatory structure’ of having institutions such as the NFA and CME do risk-audits of FCMs.

According to Bloomberg, the CFTC has not yet determined whether or not the regulation will be passed, and spokesman Steve Adamske did not comment on Duffy’s commentary

Oil Industry Avoids Swaps Rules

Oil industry companies have largely managed to avoid the scrutiny of derivatives trading and registration as swap dealers, according to Reuters. In January of this year, the CFTC required that companies register as dealers if they trade more than $8 billion in swaps a year.

Reuters reports that currently, no large energy companies have have registered as swaps dealers, and these entities are subject to the toughest level of oversight. Major oil company BP told the CFTC it intends to register, but not for several more months. Likewise, Royal Dutch Shell said that the company would register as a dealer when Shell exceeds the threshold.

An anonymous source told Reuters that, “The lack of swap dealer registration by the energy companies has been interesting. They…have kept that close to their vest as to when they will register.”

A successful lobby campaign guaranteed that the majority of large energy companies were able to sidestep the regulatory crackdown on the $650 trillion overall swap market, following the 2008 financial crisis. Although, this campaign might pose an unexpected problem for utility companies that use swaps, since smaller companies have to go through an enormous administrative process to report their own swaps, given that they do not trade with a registered swap dealer. In the mid-2000s, large oil companies started offering swaps products to smaller entities, and would speculate on derivative markets in a similar fashion as investment banks. With the regulatory crackdown on derivatives trading brought on by the financial crisis, many oil traders feared the new rules would harm their business.

While most large banks are now listed as swap dealers, there is not a single oil company in the registry that is kept by the National Futures Association, and only one commodity firm, trading group Cargil Inc. Reuters reports that there remains a lack of clarity about whether certain exotic swap products would count toward the CFTC’s threshold.

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NFA Registers Cargill as Swap Dealer

The National Futures Assocation (NFA) announced yesterday that Cargill Inc is the first major non-financial entity to be registered as a swap dealer. Cargill operates in a range of commodity markets and is based out of Minneapolis.

NFA, CFTC and Swap Dealer Registration

The NFA is the futures industry’s self-regulator. Swap dealers must be members of the NFA, a process that involves an audit. According to CFTC rules, any firm that deals in more than $8 billion in swaps must be registered as a swap dealer.

The new rule mandating registration for crossing the threshold was instated earlier this year. According to Reuters:

Cargill said it had applied to be a swap dealer because services its Cargill Risk Management unit provided had brought it within the definitions of the law.

NFA and CFTC do allow some space for firms that employ swaps for hedging commodities or liabilities; these firms are exempt from rules mandating swap dealer registration.

Another effect of registration: now Cargill must clear its swaps transactions through clearing houses that were instated to curb risk of defaulting.

As it stands, most registered swaps dealers are enormous financial entities – JPMorgan, Bank of America, and Deutsche Bank, for example. Cargill is the first of its kind: a non-financial entity that has crossed the $8 billion dollar swaps threshold.

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NFA Responds to Peregrine Financial Group Audits

The National Futures Association (NFA) announced its intention to implement 21 changes and recommendations to how it manages futures industry firms. The news comes after the Berkeley Research Group (BRG), as part of its independent analysis of NFA’s audits of the Peregrine Financial Group, uncovered countless auditing oversights in the wake of the $200 million financial fraud by futures broker Peregrine Financial Group Inc.

Cedar Falls, Iowa-based Peregrine, fell into bankruptcy in July after the fraud was discovered at the same time as the firm’s CEO and founder, Russell Wasendorf Sr. attempted suicide.

A special committee of the NFA board met on Jan. 29, and recommended that the organization modify its auditor training and hiring practices; update its auditing policies and procedures; and better incorporate information from its own disciplinary reviews and auditing by the Commodity Futures Trading Commission.

The board will also appoint a special committee to supervise the implementation of these recommendations. These changes, according to the BRG, are “designed to improve the operations of NFA audits” based on the results of its analysis.

The BRG also recommended that the NFA organize more testing of internal controls, and take better steps to recognize potential risk factors in futures commission merchant (FCM) operations. An NFA press release from President Dan Roth stated, “Our primary goal is to thoroughly review the BRG report and develop a plan to implement its recommendations.”  Mr. Roth concluded in the press release, “We will present our plan to the board in the near future. We are confident that the actions already taken by NFA and other regulators, along with the recommendations proposed by BRG, will help us to create a stronger regulatory environment and a better industry.”

The Peregrine fraud was uncovered last year as the association was began new changes to their electronic process for reviewing bank confirmation statements regarding customer funds held by futures brokers such as Peregrine. Unlike the Madoff Ponzi scheme, no complaints or attempts at whistleblowing  were made, regarding Waseendorf’s fraud.

NFA Escalates Market Monitoring of Futures Commission Merchants (FCMs)

The National Futures Association’s (NFA) board of directors today announced two new rules that aim at customer protection. The rules were approved at a November 15 meeting.

NFA and Market Monitoring

The first announced rule will “enable NFA to make better use of technology in order to better monitor futures commission merchant (FCM) segregation compliance.” This announcement comes on the heels of a similar move by the CFTC, which will require audio recordings as part of a new approach to market monitoring. The NFA announcement also comes just days after the Australian Securities Investment Commission’s (ASIC) recent deal that would bring HFT technology to market monitoring.

The new technology used by NFA is being referred to a “daily segregation confirmation system.” The issued statement explains:


Earlier this year, as part of NFA’s ongoing effort to further safeguard customer funds, NFA’s Board approved a proposal to develop a daily segregation confirmation system that would require all depositories holding customer segregated and secured amount funds-including banks, clearing FCMs, broker-dealers and money market accounts-to file daily reports reflecting the funds held in segregated and secured amount accounts with each FCM’s designated self-regulatory organization (DSRO). The DSRO would then perform an automated comparison of that information with the daily segregation and secured amount reports filed by the FCMs to identify any material discrepancies.

In November, NFA’s Board approved amendments to Financial Requirements Section 4 in order to implement this new daily confirmation system. The new amendments will require an FCM to instruct its depositories holding segregated, secured amount and cleared swaps customer collateral to report those balances to a third party designated by NFA. The amended rule also states that in order for a depository to be deemed acceptable, it must report the FCM’s customer segregated and secured amount balances and cleared swaps customer collateral balances to a third party designated by NFA.

The daily confirmation system is still being worked out, however, with the first phase, beginning Dec. 31, applying only to banks. Other categories will following in the new year.

Read the statement here.

Derivatives Regulators (CFTC, SEC) Back Customer Protection Rules

Entities that regulate the derivatives industry, like the SEC and CFTC, are proposing a new rule that increases protections for customer funds.

Commodity and Futures Trading Commission (CFTC) Chairman Gary Gensler said yesterday that the CFTC voted 5-0 behind closed doors to endorse the proposal.

“This proposal is about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected,” Gensler said. According to Gensler, the new rule has several component parts.

The proposed rule lays out strategies that enhance the ability of futures brokerages to disclose information about risks specific to certain firms. Also, more controversially, the proposed rule gives derivatives regulators access to brokerages’ bank accounts.

Failure of Derivatives Regulation: MF Global and Peregrine

Perhaps heading off complaints from the derivatives industry, CFTC commissioners conjured up past misdeeds on the part of MF Global and Peregrine Financial in order to explain the need for the proposed rule.

“I believe the events of Peregine this summer highlight that we need to do more,” said Gensler.

“We all learned from both MF and Peregrine that taking people at their word isn’t good enough,” said commissioner Bart Chilton.

Chilton added, “We need electronic access to accounts so that we know customers’ money is there 24-7-365. We can’t have folks taking advantage of customers with Photoshop and a post office box anymore.”

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Wasendorf Pleads Guilty

Peregrine Financial Group CEO Russ Wasendorf Sr. pleaded guilty to four felony counts on Monday in Cedar Rapids, Iowa.

Prosecutors say the discredited CEO will face a minimum of 24 years in prison after pleading guilty to mail fraud, embezzling customer funds, and two counts of making false statements to regulatory agencies.

The 64-year-old attempted suicide in July after learning that regulators would gain access to his bank account. He was arrested days later when it became apparent that he defrauded more than 24,000 customers over a 20-year period.

Peregrine’s customers lost more than $200 million in commodity investments. They are expected to receive only a portion of the money from their accounts. An initial payment is expected that will restore 30 to 40 percent of their funds.

Wasendorf mislead regulators at the National Futures Association by intercepting auditor’s forms and sending back falsified documents. Using this method, he managed to conceal the withdrawal of customer funds, which he used to purchase his $20 million dollar company headquarters.

U.S. District Judge Linda Reade ordered Wasendorf to the Linn County jail on Monday to await sentencing. Prosecutors say he poses a risk of fleeing or committing suicide. Wasendorf has asked instead to live with his pastor in Cedar Rapids until his sentencing hearing.

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NFA Returns Peregrine Fine

In a gesture intended to help Peregrine Financial Group’s former clients and other creditors recover more of their funds, the National Futures Association (NFA) has returned a fine levied on the troubled brokerage in February, a spokesman for the agency said.

The $700,000 fine, part of a settlement related to charges that Peregrine did not properly monitor and report suspicious activity, was unrelated to the alleged fraud that caused the firm to fail. It was returned via wire transfer on Tuesday, and will now be available to court-appointed trustee Ira Bodenstein as he liquidates Peregrine.

Also on Tuesday, prosecutors said that Russell Wassendorf Sr., Peregrine CEO and alleged mastermind of a decades-long fraud scheme that brought down the company, has agreed to plead guilty to mail fraud, making false statements to regulators and embezzling customer funds. According to the plea agreement, Wassendorf could be sentenced to up to 50 years in prison.

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NFA Orders External Audit

In the wake of the Peregrine Financial scandal, the National Futures Association (NFA) has ordered an external review of its operations, and may cut staff bonuses, according to several sources.

The NFA, the designated self-regulatory organization (DSRO) for FCMs such as Peregrine, was widely criticized for failing to detect alleged decades-long fraud at the firm. NFA President and CEO Dan Roth, who has been with the agency since its inception in 1982, is said to have considered resigning in the immediate aftermath of the revelations.

In addition to introducing new rules to better protect customer-segregated funds, the agency has retained Berkeley Research Group, LLC to conduct a thorough review of its auditing practices. The NFA’s board of directors will evaluate Roth’s future and staff bonuses for the 2012 fiscal year upon the audit’s completion.

The review will be overseen by a new subcommittee of the NFA’s board, made up of its public representatives and headed by Todd Petzel, chief investment officer of Offit Capital Advisors LLC.

The NFA is seeking to have the review completed by the end of 2012, ahead of new swap market rules going into effect early next year. The new rules will greatly expand the NFA’s oversight duties over over-the-counter derivatives.

Customer losses at Peregrine are estimated at $215 million. None of that money has yet been recouped.

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Ex-Peregrine CEO Pleads Not Guilty

Former Peregrine Financial Group CEO Russell Wasendorf Sr. pleaded not guilty to 31 counts of making false statements to regulators on Friday, one month after confessing to a decades-long fraud scheme.

Mr. Wasendorf claimed to have embezzled over $100 million, but the ensuing investigations revealed that at least $200 million of customer funds are missing.

If convicted, Mr. Wasendorf will face up to 155 years in prison. However, he may attempt to strike a plea agreement that would reduce his sentence in exchange for his help tracking down the misappropriated money.

The Peregrine scandal, coming months after similar events at MF Global, undermined faith in the security of funds deposited with Futures Commission Merchants (FCMs), and led the CFTC and the NFA to begin introducing new rules intended to shore up confidence. On August 16, the NFA approved amendments to existing rules that will require FCM to provide regulators with view-only access via the internet to account information for each of the FCM’s customer segregated funds accounts at a bank or trust company.

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