Bring Back the Self in Self Regulation – New Rules for FCM's

With the MF Global debacle getting more coverage than its worth US regulators were put to shame with another multi-million

With the MF Global debacle getting more coverage than its worth US regulators were put to shame with another multi-million facade with PFG Best filing for bankruptcy with a black hole in their customer funds. The Iowa based derivates firm saw more than $200 million missing from clients money.

Alarm bells were ringing across the CFTC and NFA as emergency meetings were called after the incident was reported, the latest expedition in ir-regularity has resulted in a new set of legislation which adds an extra bit of ‘big brother’ to the board room.

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The US financial markets regulators have concluded that FCM’s will have to show and document how clients segregated funds are actually segregated. The new rulings will be instated from 1st September 2012.

Twenty eleven was a bleak year for US regulators as futures giant MF Global filed for bankruptcy on 31st October 2011, due to the sheer size of MF the market suffered immensely as overall efficiency, confidence and transparency were being questioned.

The regulatory wound didn’t stop there, across the atlantic the UK’s FSA was under the limelight as AIM listed spread betting firm WorldSpreads filed for bankruptcy after a ‘black hole’ of nearly £13.1 million ($20.45 million) was found in client funds. Nearly 80% of client funds went missing, sources close to the firm and Forex Magnates say that some of the funds were used to fund overseas expansion projects, Worldspreads had a physical presence across Europe and in Southern Africa.

Like the NFA/ CFTC the UK regulator had to fight back and on top of  the added cost to regulated firms increasing; a new approach to how firms should be regulated was being discussed.

The FSA commented that it would “strengthen its intensive regulatory and supervisory approach for firms holding client money and safe custody assets and increase it’s knowledge and oversight of the UK market”. It also warned it would increase the visits it paid to firms holding client assets and could look at the legislative framework governing the area.

Furthermore, the FSA has taken the matter seriously and addressed 5 crucial points in response to MF and WolrdSpreads in their next year business plan wich is believed to be the last before the regulator is split into the Prudential Regulation Authority and the Financial Conduct Authority.

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The FSA said it would focus on five main areas:
• Delivering the regulatory reform programme.
• Continuing to influence the international and European policy agenda.
• Delivering financial stability by maintaining ongoing supervision of firms.
• Delivering market confidence and credible deterrence.
• Delivering on the principal FSA initiatives to improve consumer protection and early product intervention.

Major regulators across the globe have been reviewing the MF Global bankruptcy and the overall governing of OTC products.

In Australia, ASIC (financial regulator) has criticised broker dealers operating in OTC CFD trading for their lack of adherence to client money rules. The Australian financial watchdog is half-way through its year-long (June 2012) review of client money handling and reconciliation practices, and has discovered non-compliance by 14 out of the 40 issuers of over-the-counter contracts for difference and margin FX derivatives that are in review. UK brokers including CMC and IG dominate the Australian CFD market.

In July 2010, ASIC released a new regulatory guide on client money relating to dealing in OTC derivatives. The guide provides an overview of the statutory client money provisions and in particular, the specific provisions that relate to derivatives.

ASIC’s expectations for good practice include feedback on performing daily client money reconciliations, ensuring there is an appropriate segregation of duties and that the reconciliation is signed off by senior management, and documenting policies for dealing with variances.

In Singapore, the Monetary Authority of Singapore (MAS) has firm rules in place for firms dealing in exchange traded instruments and leveraged OTC products, brokers must follow strict segregated funds rules. An extract from a MAS regulated broker’s documentation shows the importance of segregated funds.

“Client Money Rules” means the provisions of Part III of the Securities and Futures (Licensing and Conduct of Business) Regulations (“SFR”) relating to client money applicable to capital markets services licence holders carrying out activities regulated under the Securities and Futures Act, Chapter 289 of Singapore (“SFA”).

The 2008 (Lehman Brothers) crisis saw one of the worlds largest and most reputable firms collapse, the event is still being reviewed to determine what caused the biggest fall. The UK’s supreme court has been revisiting events just before the collapse and evidence shows that funds that should have been in segregated accounts were secretly transferred out of the UK entity just before the collapse.

The financial regulators are trusted and respected institutions and play a key role in ensuring the efficient processing of capital markets, the concern for both retail and institutional investors will stay strong until regulators can ensure that if rules are made then they should do damn well to ensure they are followed, the quest continues to enforce self-regulation..

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