Bloomberg News

China System for Protecting Client Cash May Help U.S., NFA Says

March 14, 2012

China’s system for monitoring futures customer money should be considered for the U.S. after MF Global Holdings Inc.’s default left $1.6 billion of client funds unaccounted for, an industry watchdog said.

“I’m very interested in the China system,” Dan Roth, president of the National Futures Association, said today at the Futures Industry Association annual conference in Boca Raton, Florida. One issue in the U.S. is that the NFA can’t get reports from the banks that hold futures customer margin, Roth said. “We don’t have direct authority over the banks, while in China they have direct authority over everything,” he said.

The China Futures Margin Monitoring Center is a third-party watchdog that receives daily reports of how much segregated customer money should be held at a futures broker and compares that to the amount banks and exchanges say the broker should be setting aside, Gary DeWaal, general counsel of Newedge USA said in an interview yesterday. Newedge has experience with the system through a joint venture with a Chinese company, he said.

The CFMMC has been in place since 2008, according to the China Securities Regulatory Commission website. DeWaal, who led a discussion at the conference about how to improve customer protections that included Roth as a panelist, said if the U.S. had a similar system it would have given “an early warning” about the customer-fund loss at MF Global.

MF’s Collapse

MF Global, which filed the eighth-largest U.S. bankruptcy on Oct. 31, often moved money between its own accounts and those of customers in amounts of less than $50 million a day, replacing the cash by day’s end, according to a report by the bankruptcy trustee that’s unwinding the company’s U.S. brokerage.

The sizes of those transfers ballooned in the last week of October, the report shows, when credit-rating downgrades, a record quarterly loss and revelations about its $6.3 billion European debt trade unnerved investors and increased cash demands on the futures broker. Starting Oct. 26, “funds did not return as anticipated,” the trustee said.

Congress, the CFTC, Securities and Exchange Commission and the Justice Department are investigating the disappearance of the customer funds and other events surrounding MF Global’s collapse.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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