* CFTC has dispatched team to monitor Knight's futures
* CME, which was MF Global's regulator, 'monitoring' Knight
* Knight bought Penson's FCM, with $411 mln in client funds,
* CFTC's Sommers: no parallels with MF Global, Peregrine
By Ann Saphir and Alexandra Alper
CHICAGO/WASHINGTON, Aug 2 Knight Capital Group
Inc's newly acquired futures brokerage came under
stepped up regulatory scrutiny on Thursday after a $440 million
trading loss wiped out much of the firm's capital, raising
concern over the safety of its customer funds.
Confidence in the futures industry's ability to safeguard
customer funds has been shaken after two financially pressed
futures brokers in less than a year have been accused of
improperly raiding customer accounts for as much as a
combined$1.8 billion, despite regulatory oversight.
Commodity Futures Trading Commission staff is monitoring
Knight's futures brokerage, with special attention to its
capital and segregated funds, a person familiar with the matter
CFTC and Securities and Exchange Commission staff also
participated in a phone call on Wednesday to discuss the
situation at Knight, according to another person familiar with
CME Group Inc, the future's brokerage's first-line
regulator, is also "monitoring" the embattled trading firm, a
spokeswoman said, without providing any details.
Misfiring technology at Knight, a large New York Stock
Exchange market maker, caused a rush of orders on Wednesday for
dozens of stocks, roiling prices and spooking investors.
While the glitch did not impact futures markets, regulators
want to make sure the estimated $411 million in customer funds,
that were part of Knight's purchase in May of floundering
futures brokerage Penson Financial Services, remain unscathed.
That amount is slightly more than Peregrine Financial Group
reported having when its chief executive last month confessed to
stealing from customer accounts for years, in part to keep his
Knight said on Thursday it is "actively pursuing its
strategic and financing alternatives to strengthen its capital
Regulators say Peregrine's CEO misappropriated more than
$200 million of customer money. The October failure of much
larger MF Global resulted in a customer asset shortfall of $1.6
billion, the bankruptcy trustee has said.
Jill Sommers, a Republican commissioner at the CFTC, said
she did not see any parallels between MF Global, Peregrine and
the situation at Knight.
"It isn't like we found out that Knight was stealing money,"
Sommers said. "This isn't a ratings downgrade, this isn't a
liquidity crisis. This was just a trading loss."
Not all observers were equally sanguine.
"Those at Penson should be a little worried," said James
Koutoulas, the lead lawyer for Commodity Customer Coalition, an
advocacy group for former customers of MF Global and Peregrine
Financial. "We would hope at the very least that the customer
funds would be intact. If we saw a shortfall, it would be very
damaging to the industry."
Spokesmen for Knight Capital did not immediately respond to
requests for comment.
Sommers noted that the CFTC has access to an electronic
system with futures brokers' customer segregation and capital
information, which allows the agency to keep tabs on firms like
Knight. But she said she favors commission plans to allow
regulators direct electronic access to customer segregation
balances from the bank itself.
CFTC Commissioner O'Malia agreed, saying that regulators
must be more proactive in tackling fraud with better technology.
"Since money can move at the speed of the click of a mouse,
so must surveillance," he said.
FROM MF GLOBAL TO KNIGHT
Knight bought Penson's accounts on May 31 for $5 million,
plus a cut of future revenue, according to an SEC filing. Penson
had $411 million in customer funds as of that day, according to
the most recent report from the CFTC.
It was one of a dozen or so independent future brokers that
are only a fraction the size of the Wall street broker-dealers
that dominate the industry.
Customers of the ailing Penson brokerage, some of whom came
to Penson after MF Global's collapse, had welcomed the Knight
deal, but are once again anxious.
"They thought Knight bought them out and they were all going
to be fine," said a former Penson employee who left the company
before the takeover. She said five former clients had called her
on Thursday, and one of them is moving their business elsewhere.