In testimony to a Senate Committee, the CFTC’s chairman, Gary Gensler, acknowledged a failure to protect the customers of Peregrine. The CFTC delegated a number of number of oversight responsibilities to the NFA, including responsibility for conducting annual audits of it’s over 4,000 dues paying member organizations. For years, the organization depended on paper copies of bank statements to conduct its annual responsibilities. It was apparently only when the NFA started to require access to Peregrine’s electronic banking records that the rug was pulled from under Wasendorf’s feet.
So what can the CFTC do to prevent such future cases of blatant fraud -- not to mention the losses -- in relation to cases like MF Global? It was reported that during a recent industry roundtable, CFTC Commissioner Scott O’Malia, who chairs the Commission’s Technology Advisory Board, had said that it would only be through robust surveillance automation and analytics that this problem can ultimately be solved. To this end, he was also reported to say that while progress has been made in IT investments, he still believes much more investment is needed in data mining capabilities. In other words, while the data is there, knowing what to do with it, and specifically how to mine it to identify exceptions and patterns of bad behaviors, is yet to be solved.
[Regrets? Some Senators Have a Few About Elizabeth Warren]
On this basis, it is clearly too soon to declare victory. Other changes going through or being considered include: first, requiring brokers to give access to all Futures customers to how their assets are held, similar to how mutual funds and securities accounts operate; second, the so-called “Corzine rule” that requires firms to obtain written approval before transferring large amounts of customer cash; and third, giving the CFTC power to access brokers’ accounts without asking permission. Many analysts believe, however, that while such rules will add overhead to many good actors, they will be far from fraud proof.
Meanwhile, there seems to be no rush to introduce insurance protection to this market. If investors do conclude that they absolutely need to be trading futures, there is probably no substitute for the old tried and trusted risk management techniques for investors and their trusted advisors: diversify your brokers and conduct rigorous due diligence on all your potential service providers.
