UPDATE 1-Broker scandals demand futures industry reform, CME says

Fri Jul 13, 2012 8:31pm EDT

* CME questions whether brokers should hold customer money

* Exchange wants reevaluation after scandal at PFGBest

* Fraud at Iowa brokerage shook confidence after MF Global

By Tom Polansek

CHICAGO, July 13 (Reuters) - Futures exchange operator CME Group questioned on Friday whether brokers should be allowed to hold their customers' collateral, following the disclosure of massive fraud at failed brokerage PFGBest.

CME, which owns the 164-year-old Chicago Board of Trade and offers trading on assets from oil to interest rates, said it was "appalled" by recent violations of customer segregated funds, which are supposed to keep customer money safe even if a brokerage collapses.

The exchange operator made its first public comments on the scandal at PFGBest after Russell Wasendorf Sr., chief executive and founder of the Iowa-based brokerage, was arrested on Friday. He has confessed to a 20-year fraud in which more than $100 million is thought to be missing.

"Without question, the current system in which customer funds are held at the firm level must be reevaluated," CME said in a statement.

A spokeswoman declined additional comment.

The scandal at PFGBest, formally named Peregrine Financial Group, has shaken traders' confidence in the trillion-dollar U.S. futures markets coming less than a year after the collapse of brokerage MF Global last fall.

The prolonged nature of the fraud is sharpening criticism of regulators like the National Futures Association (NFA), the industry group that had first-line responsibility for overseeing non-exchange brokers like PFGBest.

MF Global, by contrast, is believed to have tapped into client funds in a desperate bid to keep itself afloat during its final days. MF Global customers are still missing an estimated $1.6 billion from their accounts.

CME, which regulated MF Global, said "these breaches of trust are completely unacceptable not only to CME Group but also the businesses and individuals who rely on these markets to manage their risk."

John Lothian, a well-known futures industry commentator who writes a daily newsletter and is a former broker, said CME was speaking up to try to restore trust in the markets and could be angling to hold more money at its clearinghouse.

"It's definitely opportunistic of the CME, but right now we need solutions given these two utter failures," he said.

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