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Felix Shipkevich August 9, 2012

CFTC Commissioner Bart Chilton is expected to propose a fund that would protect up to $250,000 of futures customers’ money in the event of their broker’s collapse.

The move is a response to recent scandals at Peregrine Financial, whose CEO has confessed to fraud spanning two decades, and at MF Global, which declared bankruptcy earlier this year, leaving its customers with a $1.8 billion shortfall.

Those events led to soul-searching at the CFTC on the efficacy of the self-regulatory organization (SRO) model, which sets up entities such as the National Futures Association (NFA) as regulators of first resort. Because the CFTC’s size and budget do not allow it to audit every single futures commission merchant (FCM) on an annual basis, it leaves such tasks to the NFA while overseeing its efforts, focusing on enforcement actions, and, increasingly, creating new rules required by the Dodd-Frank Act.

Chilton’s plan would create an insurance fund, similar to the Securities Investor Protection Corp. (SIPC), which guarantees customer securities investments up to $500,000. However, the plan would require an initial assessment on FCMs of no more than 0.5% of a firm’s annual gross revenue, a figure that may seem reasonable to Peregrine and MF customers but is likely to face opposition from industry groups.

The fund is also unlikely to come up for a vote before Congress in the few months remaining before the presidential election. Assuming the regulatory climate remains favorable after the election, this idea or one like it may one day provide relief to futures customers left holding the bag.

Read more about the proposal.

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