WASHINGTON, D.C., U.S. — The National Grain and Feed Association (NGFA) said on July 11 that it was “extremely alarmed” by reports of missing customer funds in the latest incident of a futures commission merchant (FCM) insolvency involving Peregrine Financial Group Inc. (PFG), and said it reaffirmed the need to institute “serious reforms” to help prevent misappropriation of customer funds and to protect customer interests in liquidation proceedings.
While the NGFA said it remained uncertain about the full extent to which commodity customers or NGFA-member companies may be affected by the PRG insolvency and alleged missing customer funds, it “clearly demonstrated” that the MF Global incident was not a one-time problem. “We now see that significant risk to supposedly segregated customer funds still exists,” said the NGFA, the nation’s largest trade association comprising commercial hedgers of grains, oilseeds, feed and feed ingredients, and grain products.
The NGFA earlier this month submitted a series of substantive recommendations to Congress and the Commodity Futures Trading Commission (CFTC) designed to provide greater oversight and enhance customer protections in the event of another MF Global-type liquidation of an FCM. The NGFA’s recommendations focused on policy changes likely to require congressional action, and were targeted at protecting customer assets in the event of an FCM bankruptcy.
The NGFA’s recommendations included amending the U.S. bankruptcy code to, among other things, provide greater and more detailed guidance in liquidation proceedings involving a commodity broker or FCM, and placing customers first-in-line for distribution of funds, ahead of creditors. The NGFA also recommended establishing a new type of voluntary fully segregated customer accounts to shield customer assets from pooled losses if an FCM bankruptcy occurs, and extending insurance coverage to protect against FCM bankruptcies involving commodity accounts.
“We look forward to working with Congress, the CFTC and other stakeholders to achieve these critically needed changes,” the NGFA said.
In addition, the NGFA said it would await a “full explanation” from regulators as to how the alleged missing funds escaped notice, apparently over a long period of time. First reports of the alleged missing customer funds occurred July 9, when the National Futures Association (NFA) determined that an account that was supposed to have $225 million of customer money actually held just $5 million. According to the NFA, a further review of the company’s records found that the firm allegedly had been falsifying records as long ago as 2010, with one account in February 2010 found to contain just $10 million of the $218 million it was supposed to contain. The NFA has said the whereabouts of the customer funds currently is unknown.