CHICAGO May 1 Large banks in the United States are testing programs that would add protections for funds posted by clients to back derivatives trades, to help avoid the types of losses clients suffered when MF Global collapsed, a regulator said on Tuesday.
MF Global's failure in October left clients with large losses after the bank dipped into a pool of client funds and used the money for its own purposes as clients fled the firm and counterparties pulled back exposures on concern about the bank's exposure to risky European debt.
The client money was held to back futures positions on exchanges, for which MF Global acted as the clearing agent and managed the collateral backing the positions.
The Futures Industry Association, a trade organization, and banks are now testing various programs, including the possibility of funds being posted directly with clearing agents or banks building more robust protections that control access to the client funds, said Gary Barnett, director of the Commodities Futures Trading Commission.
Barnett was speaking at the annual meeting of the International Swaps and Derivatives Association, the trade group for privately traded derivatives, in Chicago.
The FIA and banks with the largest clearing arms, however, have said they view full segregation of the funds as being unachievable, and are exploring other alternatives that offer additional protections, he added.
"Most efforts are going in that direction," Barnett said.
This may include enforcing greater separation of the duties of a bank's front-, middle- and back-office staff.
Regulators may also require greater reporting from banks on the fund segregation and may require that banks make additional disclosures to clients about how the funds are being segregated and risks associated with the process, Barnett said.