Regulator urges client choice on fund segregation
WASHINGTON (Reuters) - Derivatives customers should be able to choose whether to fully segregate their funds for added protection or to opt for less stringent safeguards in place now, a regulator plans to say on Wednesday.
Bart Chilton, a commissioner at the Commodity Futures Trading Commission, will urge regulators to let derivatives clients select complete segregation of their funds, with excess margin deposited in a separate account under custody of a clearing organization.
"We should allow customer money to literally be off-limits to a firm," according to remarks prepared for delivery at the OpRisk conference in London.
"If that means that a firm may charge the customer extra, since the firm may not use their customers' funds, so be it."
The issue of fund segregation has received fresh scrutiny since the chaotic final days of bankrupt brokerage MF Global, when up to $1.6 billion in customer money went missing.
MF Global filed for bankruptcy on October 31, after investors and customers became rattled over the firm's $6.3 billion bet on European sovereign debt and downgrades by credit rating agencies, resulting in a liquidity crunch.
The bankruptcy and the missing funds have been the focus of congressional hearings and are under investigation by federal agencies, including the FBI and the CFTC.
None of the firm's employees have been formally accused of wrongdoing.
Current CFTC rules allow futures brokers to commingle the funds of one futures customer with money belonging to others in a single account or accounts.
New rules for swaps, finalized in January and mandated by the 2010 Dodd-Frank reform law, allow brokers to pool customer collateral, but would require them to keep separate records of the cleared swaps of each individual customer and relevant collateral.
Chilton said he would prefer a tack similar to the one chosen by European regulators, which gives customers the option of varying levels of segregation.
(Reporting By Alexandra Alper; Editing by Kim Coghill)
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