November 16, 2011 / 5:16 PM / 6 years ago

UPDATE 1-CFTC official seeks more protection of customer accts

* CFTC must take quick action after MFG collapse- O'Malia
     * MF Global should act as "teachable moment" for CFTC
     * Regulators still looking for missing $600 mln in funds
     * Gensler looks to vote on use of customer funds Dec. 5

     By Christopher Doering
     WASHINGTON, Nov 16 (Reuters) - A U.S. futures regulator on
Wednesday pushed for immediate action to bolster protection of
customer funds in order to restore confidence in the futures
brokerage industry in the wake of the collapse of MF Global.
    Scott O'Malia, a commissioner at the U.S. Commodity Futures
Trading Commission, backed a requirement that intermediaries
like MF Global should hire a third party, such as an
independent reviewer, to make sure customers funds are kept
separate from the firm's own money.
    O'Malia said the CFTC must act quickly to show that rules
on segregating accounts work and that the unraveling of MF
Global was an isolated incident.
    However, he warned about going too far with reforms without
full knowledge of what happened at the failed brokerage.
    "Many have said that the failure of MF Global was not
systemic and that we are lucky. I don't view it in the same
light," O' Malia said in a statement laying out the next steps
in dealing with the aftermath of the MF Global bankruptcy.
    MF Global filed for bankruptcy on Oct. 31 after risky
trades on European debt triggered its collapse.
    Roughly $600 million is missing in customer accounts that
the company's brokerage was supposed to keep separate from its
own. The CFTC is among the authorities investigating whether MF
Global may have improperly mixed that money with its own
    O'Malia said the CFTC must ensure that all intermediaries
are in compliance with segregation requirements. The agency
also must reconsider rules it is crafting to implement the
Dodd-Frank financial reform law.
     The CFTC said last week it would do an audit of all
clearing futures commission merchants to ensure customer funds
were properly segregated.
    In the three-page statement, O'Malia said it's too early to
hail a proposal that would limit investments of segregated
customer funds "as the solution to the MF Global problem."
    Gary Gensler, the CFTC's chairman, said on Wednesday he
hoped the agency could vote at its rule-making meeting on Dec.
5 on a rule that would prohibit how brokerage firms can invest
customer funds. The rule needs support from at least three of
of five agency commissioners to pass.
    "It is critical that the CFTC finish a rule that will
enhance customer protections regarding where clearinghouses and
futures commission merchants can invest customer funds,"
Gensler said in prepared remarks before the University of
Chicago Law School.
    In the past, the U.S. futures regulator was encouraged by
MF Global and its former chief, Jon Corzine, to delay work on
the rule.
    In his open letter, O'Malia also questioned a plan that
would have the CFTC intervene in insolvency proceedings to
facilitate transfer of customer positions and collateral in the
face of a shortfall.
    "The Commission has not actively intervened in such a
manner in MF Global, and so it is questionable whether the
Commission would so intervene in the future," O'Malia said.
    In light of MF Global's demise, O'Malia said the CFTC
should ensure that clearing organizations are able to diversify
their membership without introducing risk.
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