Now What? U.S. Senate Ag Committee On MF Global And Peregrine Aftermath

The Agriculture Committee of the U.S. Senate convened a hearing August 1 to examine how consumer protections may be expanded “to prevent future misuse of customer funds in the futures markets” in the wake of the recent meltdowns at both MF Global and the Peregrine Financial Group.

The witnesses included Gary Gensler, chairman of the Commodity Futures Trading Commission, the Hon. Louis Freeh, chapter 11 Trustee of MF Global Holdings, Ira Bodenstein, chapter 7 Trustee of Peregrine Financial, and Walt Lukken, president and CEO of the Futures Industry Association.

Here is a précis of the testimony of each of those four. Note that Freeh didn’t attend the hearing, although he did submit testimony for the record.

Gary Gensler
Gensler laid out the existing system. Peregrine is a registered futures commission merchant (FCM). The National Futures Association is responsible for its front-line oversight. This is as true for FCMs as it is for introducing brokers, commodity pool operators, and commodity trading advisers. As Gensler said, this is “the way out oversight system has been set up for decades.”

It is the responsibility of the NFA to conduct periodic audits of the FCMs. Customer funds, which are to be held in segregated and secured accounts. The NFA had audited Peregrine in May 2011 [ck] and was doing so again in July 2012. As a consequence, the NFA reported on July 9 that Peregrine seemed to be missing at least $215 million in its customers’ money, and Wassendorf on that day tried to kill himself. He also prepared a statement acknowledging that [MORE].

The CFTC in turn oversees the NFA, “examining them for the performance of their duties.” The CFTC brought an enforcement action against Peregrine in 2000, on the ground that the firm had broken net capital rules, It was ordered “to pay a civil penalty and to take steps to improve its financial controls, including retaining a second independent public accounting firm.”

It now appears that much more was wrong at Peregrine even in 2000 than was contemplated in that enforcement action.

Gensler alluded to the fact that the NFA approved new rules last month. Gensler said that these, must be incorporated into the CFTC’s own regulations “so that the CFTC can directly enforce these important reforms.”

Also, as part of a broader program of modernization, SROs and the CFTC must get direct electronic access to the bank and custodial accounts of FCMs, and they must be able to obtain this data without asking permission of the FCM.