PFGBest One Year Later: New Rules

We’re dedicating today to PFG coverage on the 1 year anniversary (what do you call an anniversary you don’t want – a noniversary?), and we’ll start with the thoughts of Jeff Malec, CEO and founding partner of Attain Capital who says:

“Without hesitation, the futures industry is much improved and much safer in terms of customer funds protection than it was one year ago. But beyond new rules and policies designed to protect customers, the real change has been in the attitude of those in the industry – who simply refuse to let something like PFG happen again. There are people fighting day in and day out for more protection, for criminal charges against those who violate those protections, and for pre-emptive measures to find fraud before it happens. It is those people who have made the industry a safer place.”

But beyond talk about the hard work people have been doing – more than a few former PFG (and MF Global clients, too) want to know what exactly has been put in place since the PFG fraud to move the industry forward. Without further ado, the most important new rules and changes we’ve seen in the past year:

  • Electronic, 3rd Party Verification of Bank Statements during Audits – Six months after the PFGBest scandal, all clearing firms (FCMs)  were forced to comply with Electronic Balance Checking as part of their annual audits. It is pure simplicity itself, with the NFA enlisting a 3rd party firm to verify the FCM bank account balances reported to auditors in the field during their annual onsite audits.
  • Daily Balance Reporting by Banks Holding Customer Funds – Going live February 15th, 2013 – this new rule would have stopped Wasendorf dead in his tracks – requiring FCMs that hold customer segregated funds, secured funds, and cleared swaps (collectively “customer segregated funds”) to instruct the banks they use to hold these funds to report the balances in any accounts on a daily basis to a third party designated by NFA (the NFA selected AlphaMetrix  360.) The rule also states that any bank which wishes to be an acceptable depository for customer segregated funds. CME Group, Inc. has adopted similar requirements for its FCM clearing members.
  • The Berkeley Report, NFA, and 21 Recommendations: There was no louder voice than Attain in calling for changes at the NFA, and whether it was people in the NFA listening to our rants or realists there knowing NFA had made mistakes – the NFA enlisted the Berkeley Research Group to do an audit of the audits of PFG by NFA. The result – 21 specific recommendations (covering things from hiring and training to supervision and understanding of an FCMs business and financial health) to improve NFA’s audit program, which the NFA Board voted to fully implement in January of 2013, and which are currently being implemented. See the full recommendations here: http://www.nfa.futures.org/news/BRG/final_recommendations_report.pdf
  • Customer Advocates Elected to NFA Board of Directors:  For those who believe a change in attitude and culture was needed in addition to new rules, the elections of three rather outspoken customer advocates to the futures regulator board of directors was welcome news. James Koutoulas and John Roe, founders of the Commodity Customer Coalition which fought tirelessly for MF Global customers and then PFG customers, and Attain’s own Jeff Malec were all voted in through contested elections (a rare thing for the NFA Board) on platforms of change, and have been working hard on the board for better customer protections.

And Two Rules implemented before PFG (after MF Global)

  • The MF Rule -  In the wake of the MF Global bankruptcy when it appeared for a minute that customer losses were due to MF Global investing customer funds in foreign sovereign debt, the NFA and CFTC amended rule 1.25 to protect against such behavior in the future, restricting the investments FCMs can make with customer funds to essentially  just U.S. Treasuries.
  • The Corzine Rule - Under this new rule, should an FCM choose to withdraw more than 25% of the funds the FCM deposits in the customer segregated bank account as a safety cushion of sorts, the CEO or another designated top officer will have to sign off on the withdrawal, rendering them liable for any wrongdoing associated with such movements. This eliminates the possibility of plausible deniability as a defense against fraud in the future.

There is more work to be done, such as SIPC like insurance for futures accounts, and changes to the bankruptcy code to further protect futures customers in the wake of an FCM bankruptcy. But for a system which was very solid to begin with, and which now has all of the new rules and changes listed above – there is no doubt in our minds things are much better than they were one year ago.










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The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

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